Tax in a Subscription-based Economy

Establishing a subscription model has a number of considerable advantages. However, one downside of entering into a subscription model lies within the new tax compliance requirements. 

Business leaders tend to be unfamiliar with tax compliance requirements on new services sold through subscriptions. Compliance is particularly difficult when companies that have traditionally sold tangible goods begin selling intangible services, or when a business is selling their subscription to customers abroad. 

In the latter case, businesses are finding themselves having to deal with international tax compliance rules as well as the aforementioned new complexities of tax rules for subscription services. 

Avalara are tax compliance experts, specialising in delivering automated tax compliance software. Avalara’s compliance solutions work in tandem alongside the ‘plug-&-play’ billing system, Chargebee, which helps to keep subscription management uncomplicated as your business grows.

In this blog, we’ll discuss how your business can remain tax-compliant when offering subscription services. We’ll also look at how technology can support your business as you expand into the subscription-based economy, and discuss how the Avalara-Chargebee integration allows you to simultaneously automate both your subscription management and your tax compliance, even when trading across borders.

New Services? New Compliance Rules

The recent trend of offering subscriptions has created more compliance complications for businesses. As we have seen with cryptocurrency and other emerging technologies, mass adoption tends to lead to regulation, and the rise of the subscription-based economy is no different. 

Subscription-based businesses have tax obligations like any other company, but the particulars of recurring revenue models can make these obligations difficult to understand.

One challenge that the subscription model faces is, of course, the tax ramifications. Businesses new to the subscription-based economy might not have a great understanding of how it’ll change the way they do taxes. In turn, this lack of knowledge might put them in danger of becoming non-compliant. 

To stay compliant, businesses can take advantage of automated tools, like the range of tax solutions offered by Avalara. With help from Avalara, businesses can simplify everything from tax calculations to registration, which means an easier entry into the world of subscriptions.

Growing pains

The tax footprint for subscription-based businesses is larger than that of normal retail companies, and with added liabilities comes a greater risk of noncompliance. 

Failing to stay up to date with new tax laws can cause significant harm to your business. Therefore tax compliance is an essential task for any business within the subscription-based economy.

Keeping up to date with your tax obligations means ensuring you’re fully registered with all the relevant authorities, understanding your deadlines for tax returns, and knowing which rates apply to your sales. These tasks can be reasonably simple for small businesses, but become more complex the larger your business grows. 

If you’re intending to trade internationally, you may need to seek support or find a digital solution to your tax needs. According to research, staying on top of tax regulations and compliance is the number one pain point for CFOs in Western Europe.

The unique tax laws of different countries, unfortunately, tend to add a layer of complexity to compliance. For example, the economic and physical presence nexus rules in the U.S. make it tough for businesses to understand in which states they owe taxes, and each of those states may also have different laws regarding the taxation of subscriptions. 

Digital services (which are often sold under the subscription model) tend to have their own rules that can vary between states and countries. These rules can change regularly because of the relative novelty of digital services. If you sell a digital good, doing so using the subscription model can often change that product into an ongoing digital service, which alters the tax rules surrounding it.

The Solution

Having an awareness of changing regulations is key, as is performing thorough research prior to any big initiatives (like adopting the subscription model). 

Using a subscription model means changing how you register your business with tax authorities and create tax returns. That’s where Avalara comes in.

Avalara has helped the Software as a Service company Wondersign to remain compliant when trading internationally. Wondersign helps businesses manage multichannel commerce. As the company is based in the U.S., they’ve had to deal with the difficulties of American sales tax compliance from early in their development. However, by using Avalara’s calculations platform and returns solution, Wondersign has been able to expand both throughout the U.S. and internationally.

Additionally, Wondersign has kept its subscription services tax compliant while scaling internationally by using the Avalara-Chargebee technology integration. The Chargebee platform streamlines the invoicing process, while Avalara helps ensure tax compliance.

Proxyclick is another client that Avalara has helped. The visitor management solution of Proxyclick has seen great success in helping companies abide by the necessary precautions surrounding COVID-19. However, Proxyclick has needed additional assistance to make sure they stay tax compliant as they scale.

The Avalara-Chargebee technology integration helped Proxyclick automate its tax calculations, which has proven invaluable as the originally EU-focused company began expanding into the United States. 

If you don’t have a background in finance or tax law, consider outsourcing your research to a more knowledgeable partner. Avalara offers research services covering both U.S. and EU tax rules, allowing you to confidently enter new markets without fear. We also offer a range of digital solutions that can assist your CFO with everything from tax rate calculations to filing VAT returns.

At Avalara we have a huge range of digital solutions to help your business understand your tax responsibilities and stay compliant, regardless of where you operate. Click here to view our solutions for U.S.-based businesses (or those selling into the U.S.), or click here for businesses operating in or selling to the EU.

If you’re interested in more information about the modern subscription model (and how to implement it in your business, download our guide on Expanding Into the Subscription-based Economy.

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