VAT, Business and Sales Tax Changes for the eCommerce industry in 2022
The growth of eCommerce, the ease of shopping increasing, and so many different ways to buy as well as the kinds of items to market, the government is becoming more and more from the equation when it comes to collecting tax on transactions. Since the past couple of years, authorities across the globe have modernized legislation to accommodate the changing market.
This means that the process of negotiating taxes has become increasingly complicated for merchants. By 2022, even more significant modifications are in place and, depending on which country or regions you work in and reside in, could influence how you run your business.
For U.S. businesses, crossing state lines doesn't differ much than crossing country borders. Actually, in many ways it can be much more complicated in comparison to, say, a business within one EU country selling its products to customers in different EU countries.
Our friends from Avalara demonstrate in their guide to tax changes in 2022 it's not a small amount to discuss about this subject.
To make it easier to begin We'll present a general overview of eight upcoming tax changes for businesses within the U.S., the U.K. and the EU and a host of others countries and regions. These are the most important ones that affect those in the U.S., and the remainder are for other nations.
1. Nexus laws -- where your company is situated
If you are a U.S. businesses, you must pay taxes on sales to customers from states in which you are considered to have the nexus. It was once a simple. It was possible to be considered a nexus within one state when it was where your workplace, warehouse or any other physical presence was situated. However, now that there are so many workers working remotely, many states claim your business has a connection if it has employees within their boundaries.
This means that you could be present in several states, even though all of your operations are in the same. Beyond an actual presence, a state may be able to consider you to have connection to their territory if you sell over a certain dollar amount or make more than a certain amount of transactions with customers within their state.
This is complicated by the fact that certain items are exempt from sales taxes and the rules for exemption are distinct in every state.
Additionally, as a result of the South Dakota vs Wayfair 2018 court decision, states can now collect out-of-state sales taxes in order to purchase products within their respective states. This was done to allow brick and mortar firms to be on a more even playing field with online businesses. The logistics can become nightmarish.
It is further complicated in some states in which different counties have different rates for sales tax.
Online businesses should research each state -- and possibly county -- that deems you to possess a physical or economic presence in that area and calculate the sales tax you owe.
Find out more information about changes in sales tax.
2. Variations in sales tax rates as well as boundaries and rules
Knowing what obligations you have to pay to each state is hard enough. But what happens when things change?
The government is regularly updating its tax rates for sales. Certain items which used to be taxed are now exempt from taxation in certain areas, such as diapers as well as feminine hygiene products. Others items that weren't taxed until recently items that are single-use, like plastic bags.
Then there are the periodic rate adjustments like sales tax holidays, or tax reprieves that may have been enacted in the course of the COVID-19 epidemic. Customers love them, but they make proper tax accounting a challenge for business.
In addition to the tax rates changing, you have to be aware of the boundaries between the taxing authorities. There are cities that cross two states. Some cities span two counties. The house that is across the street has an additional sales tax. These boundaries may shift.
S Find out more about this, and more industry tax-related changes for 2022.
3. Where customers buy and the method they use to pay
What happens when a buyer purchases online, but wants the item delivered to the shop for pick-up or delivery, but their home is located in an entirely different tax district than the company? This is called Buy Online, Pick up in Store (BOPIS). The online sales tax may differ from that of the place that the purchase will be delivered.
It is essential to keep track of every purchase made by a customer so that you can be sure to remit the correct tax to the right country, city or state.
For example, should you take the tax on sales on the purchase price upfront or distribute it among each of the payments? If you collect it in advance, the buyer doesn't have to pay in equal installments. If you distribute it over time, what happens if the taxes on sales change prior to all payments are made? Do you need to pay the updated amount to any remaining installments? And what about any BNPL costs from your service supplier? And, what happens if they returned the item prior to the payment was made, but you have already paid your taxes to the government?
Every state, nation and county will manage these scenarios differently.
4. Sales tax sourcing
There are three kinds of methods for sourcing that are used by U.S. states to determine who is responsible for sales tax:
- Destination sourcing: based on location of the buyer
- Source of origin: Based on geographical location of the seller
- Mixed sourcing: a blend of both
Prior to the advent of internet-based eCommerce the majority of businesses used origin-based sourcing since it was the most simple and most sensible. But now, with so much interstate and international commerce, the lines have blurred and there's an abundance of tax revenues not being collected from online transactions.
In this regard, many states are switching to destination sourcing. That means you pay taxes based on the location of the purchaser. For small-sized businesses, if you sell products nationwide in the US You may need to keep track of orders made by buyers in all 50 states.
5. Digital monitoring of business sales transactions
Across much of Europe and Latin America, and the rest of the world, nations are developing methods to track all transactions in business so they can get the right amount of sales tax as well as VAT.
With the volume of international commerce in the EU, among and within the EU and Britain, in between Europe and South Korea and other Asian nations, in addition to Canada as well as Latin America, various forms of electronic invoice are fast becoming standard.
83 countries already have at least one type of electronic invoice or reporting law in place, and more are working to implement the issue. The types of monitoring for digital transactions include:
- Real-time reporting: transactions reporting in real time as it takes place
- Standard Audit File for Tax (SAF-T) allows for tax authorities to obtain tax-related information
- E-invoicing: governments approve each invoice before the customer can see it
- Invoicing for four days: Not as strict as real time However, it's the same concept
All of these systems are designed to facilitate compliance in addition to reducing errors and minimize tax avoidance. These systems also help audits become easier and quicker.
L learn more information about the ways that countries use electronic invoices for control of sales tax .
So if your business conducts international trade, you'll need to comply with each nation's accounting and tax reporting system.
Brexit serves as a good illustration of how this could function.
Britain is currently implementing a program called Making Tax Digital, which is applicable to all businesses in the U.K. as well as the ones selling to it such as any in the EU. The new system is also applicable to entrepreneurs who work for themselves U.K. businesses and landlords.
And EU businesses that sell to customers living in Britain will have to charge them VAT. For smaller purchases under 150 euros, businesses would use an Import One-Stop Shop (IOSS) the electronic registration platform that helps meet VAT regulations.
In the case of those EU firms that are selling to countries within the EU They would utilize this One-Stop Shop (OSS) system which is similar to IOSS, but only to conduct business inside the EU.
Accessing and working with each of these platforms will require businesses to spend some money upfront, but they will be able to more easily conduct business with consumers across the many EU countries.
The U.S. has yet to adopt a system of electronic billing or reportage.
6. The Harmonized System
The Harmonized System began in 1988, but with so much online commerce, it has become an integral part of international business activity.
Harmonized System Harmonized System is a method that allows for the coding and tracking of products in every industry every whenever they pass through the international boundary. This makes it simpler to monitor sales volumes across borders . This will ensure that precise taxes on sales and VAT will be collected on items as well as services.
The codes are revised every five years. Then, in 2022, the seventh edition will come out.
The use of HS codes could become complex very quickly because the different nations do not update their codes instantly. Some take years. This means that you could sell the same item across two different countries and will have to use two different codes.
What happens if a product is classified incorrectly with the wrong code? Taxes could be assessed at the wrong rate which could result in fines and delays, issues at the border, as well as upset customers. Learn more on the Harmonized System and related global tax concerns.
7. Eliminating taxation minimum obligations
In particular, particularly in the U.K. and EU nations the previous minimum standards for the VAT regime are beginning to disappear.
In the case of imports entering the U.K. In the past, there was to have been a PS135 minimum order amount before VAT applied. That's on its way out along with the low-value consignment stock relief which was applicable for items that fell under PS15. VAT on both must now be collected on the spot by the purchaser at the time of check-out.
At present, there are no modifications regarding the policy for sums above this threshold.
When imports are made into the EU A similar minimum of EUR150 was used to apply, and that too is going away. IOSS customers will be required to collect VAT at the time of sale for all purchases less than that sum.
And many other nations -- including Canada, India, Malaysia and China have been working on similar types of tax changes.
8. Tax issues that are not taxed for 2022 and beyond
Problems with supply
The issue of shortages in labor and supply can affect tax planning.
As an example, with the numerous items being bought that are then returned, how will you deal with the tax collection? Should you alter tax returns for taxes already due?
Online marketplaces
If you offer your products via one of the dozens of online marketplaces such as Amazon or Wayfair, some states and nations are taxing the cost, which could or might not pass on to the seller. Other states are letting such sellers remain free of tax.
Different types of product that are not typical
Many countries that have always taxed taxi services as well as car rental taxis are now trying to tax car sharing services as well.
If you are selling online courses, these also might be subject to taxation. But there are several different ways that courses may differ from one another. There are courses that are live some are recorded. Pre-recorded classes are closer to the product. Some courses require downloading of materials. Certain courses send the materials via mail.
Different countries and localities might approach these types of educational and training scenarios in a different way.
Software?
At present, there are at least ten different types of software categories such as packaged and delivered in the same way as real products, packaged but downloaded electronically customizing, as well as many others. Each type of software may be taxed differently based on the nation and locality in which your company is determined to establish a presencethis nexus question which opened this box of worms at the beginning.
Do you need help with taxes?
Does not provide tax assistance, and this post is designed to provide information and guidance to businesses seeking to learn more about how they can comply with tax laws.
But, Avalara can help you with tax automatization software that makes compliance much more simple. Particularly for small businesses that do business across the U.S. or across international border, there's lots to keep track of. Software for tax compliance might be something worth looking into.