First steps towards cross-border tax compliance

If you’re a retailer or ecommerce merchant selling across borders, tax and customs compliance should have a prominent place in your business plan. If you ignore your tax obligations, noncompliance penalties could significantly affect your revenue, and failing to comply with customs rules could severely delay delivery of your goods. 

We’ve created this introductory guide to help you establish an effective international tax compliance strategy. Whether you’re already selling abroad or hoping to expand into international sales, our guide can offer helpful information. We look at new compliance obligations and tax requirements you’ll encounter as your business grows, as well as explain how managing those obligations can help your business expand across borders effectively.

In the guide, we examine international tax compliance in relation to shipping, warehousing, alternative ways of selling, and peak sales season. We also shine a spotlight on Harmonised System (HS) codes, which are a key aspect of cross-border tax compliance.

For retailers and ecommerce sellers, ensuring speedy delivery is essential for a good customer experience. For instance, customers in France typically expect a maximum delivery time of between three and five days, but recent reports suggest consumer patience might be wearing thin. Therefore, it’s important to consider any factor that might cause delays when shipping internationally. 

Compliance is one such factor. When shipping goods internationally, you must pay an import tax as your goods cross borders; otherwise, customs can withhold your goods. Furthermore, applying incorrect HS codes to your packages means customs authorities cannot accurately identify your goods to apply the correct tax rate, which can also delay delivery. 

For ecommerce sellers, it’s also crucial to be able to calculate additional charges like import taxes and apply them instantly. Customers expect to see an accurate final landed price at checkout and having to pay extra fees on delivery can harm the customer experience. 

Automating tax calculations on your checkout page is necessary, especially if you ship to multiple countries, because (as with all things tax) shipping taxation rules differ depending on where you operate.

For example, in the U.S., the taxability of shipping will vary from jurisdiction to jurisdiction and may depend on things like the goods you ship and the carrier you use. When trading across borders, you must be aware of the relevant tax obligations. However, you can reduce the complexity of international tax compliance by relying on automation to track your tax obligations in each country.  

Warehousing and tax compliance primarily overlap when it comes to the place of supply rules. These rules mean retailers can trigger new tax compliance obligations depending on where they store inventory. For tax purposes, the authorities treat goods as being supplied from the location where their transport to the customer begins (in this case, a warehouse). 

For place of supply rules, the locations of the buyer and seller in relation to the transaction are irrelevant. If a U.K. ecommerce business sells goods to private customers in France, and its warehouse is in Germany, it’ll pay German VAT since that’s where the goods are supplied from.

According to the 2023 DeliveryX Warehousing report, more and more U.K. retailers are using third-party fulfilment centres and warehouses across Europe to avoid post-Brexit customs fees. While storing goods abroad can also erase many of the complexities surrounding cross-border tariffs, the place of supply rules mean businesses will need to register and remit VAT to the authorities of the region their international warehouses are located in. 

These additional tax obligations appear even if you’re a marketplace seller using warehouses or fulfilment centres provided by the marketplace (e.g., Amazon FBA). From the Avalara Tax Changes 2023 report: Transactions involving a non-EU seller fulfilling orders from a warehouse in the EU for a European consumer face additional deemed seller requirements, no matter the value of the goods sold. Similar rules also exist in the U.S., so if you’re an EU retailer or marketplace seller trading in the U.S., you’ll need to register for sales tax wherever you have a warehouse.

If you use a marketplace to sell your goods abroad, it’s important to keep tax compliance in mind. The tax laws regarding marketplaces differ between countries and territories. For example, U.S. marketplace rules state that the marketplace facilitator needs to collect and remit sales tax on behalf of its sellers. However, in some states, the sellers must report the sales tax collected on their behalf, and in other states, they’re not required to do so. 

The EU also has specific tax rules for both marketplace sellers and facilitators to comply with. Marketplace facilitators in the EU must record the value of goods as different rules apply for imports valued above and below €150. Additionally, marketplaces must retain electronic records of third-party sales in the EU for 10 years.

Automating international tax compliance is the best way to reduce the risk of noncompliance penalties if a business trades via marketplaces in multiple countries (or states, in the case of the U.S.). As such, it can be decidedly beneficial for your business to invest in a digital tax solution for marketplace sellers if you hope to expand your marketplace sales internationally.

The subscription model is a popular alternative to traditional one-off transactions. However, tax compliance for a subscription business can be somewhat more complicated, depending on where your business sells its goods:

• In the U.S., offering downloadable goods or services via subscription puts you at a greater risk of acquiring sales tax obligations in new jurisdictions. Many states require a business to register and remit for sales tax after 200 transactions per year, regardless of annual revenue. If you sell a monthly software subscription, having as few as 17 customers in the same state could create a new tax obligation.
  

• Since selling goods and services via subscriptions usually means making more regular sales over a longer period, tax rate changes are a more significant hurdle for these businesses. Subscription businesses need to source an automated tax calculator that can update to account for any changes to regulations and help them comply with tax regulations.
  

• Even if a customer establishes a subscription contract domestically, the subscription companies can develop new tax obligations if the customer primarily uses the subscription product or services in a different country. While tax registration can be a simple process in many areas, this can sometimes create difficulties if your business has no local representation.

A subscription management platform such as Chargebee or Recurly can simplify tax compliance for businesses using a subscription sales model. While the primary benefit of these platforms is to manage your operations, you can also integrate tax compliance software into them to help track tax obligations and perform tax calculations for you automatically. 

Subscription retailers that provide physical products through a monthly subscription — such as Ffern, Look Fantastic, and Bike Club — should also consider the taxability of their products in all relevant jurisdictions. The taxability and tax rates of their goods may vary if these businesses sell to different countries.

Peak sales season means more transactions and increased revenue for many businesses. While maintaining this increased revenue as long as possible is important, becoming (or staying) tax compliant should also be a priority. Failing to be tax compliant can lead to expensive noncompliance penalties, so businesses need to handle their tax obligations correctly to maximise their peak sales season profit. With inflation driving costs up across all industries, keeping an eye on your bottom line by being tax compliant is more important than ever. 

There are a number of ways a company’s tax obligations may expand during peak sales season:

Switching on international selling is critical to growth during peak sales seasons. Selling abroad can also be easier than you might think — while details like global marketing and translating web pages can improve your cross-border sales, all you need is an accessible ecommerce website and a robust shipping function. 

However, if a significant number of international customers order from you, you may incur additional tax obligations in those customers’ countries of origin. If you think you’ll be selling across borders frequently during peak seasons, you should take the time to research the tax obligations that doing so might create.

Manual tax compliance can become much more difficult during peak sales season due to increased sales volume — specifically because you may surpass sales thresholds for tax registration. In the U.S., these sales thresholds relate to the concept of economic nexus, and exceeding a certain value or number of sales in a state can mean you need to register for sales tax within that state. 

Two tasks are essential to reduce the risk of tax noncompliance when you start to approach sales thresholds over peak sales season:

• Tracking the volume and number of sales you make in each country or state so you don’t unknowingly exceed a sales threshold 

• Completing tax registrations as soon as possible so you’re collecting and remitting the correct amounts of tax 

However, manually completing these tasks can lead to errors, which can result in noncompliance penalties. With that in mind, you may want to consider implementing automated solutions to handle tax compliance, as doing so can help reduce the risk of receiving these penalties by minimising human error. 

There’s a notable relationship between international tax compliance and Harmonised System (HS) codes. Applying the correct HS codes to your shipments enables customs authorities to apply the correct tax rates to the goods being shipped abroad. As such, applying correct HS codes is an important part of a company’s journey towards complete tax compliance. There are other notable benefits, too: 

• Reduced customs expenses: Applying incorrect HS codes to your shipments can prevent authorities from applying the correct customs duties and import fees, which could lead to you being overcharged. By using the correct HS codes, businesses can ensure they’re paying the appropriate rate of duty.
  

• Accurate final landed price: Without the correct HS codes, your ecommerce platform won’t be able to apply accurate prices, as most price calculation software uses HS codes to calculate customs duty.
  

• Fewer delays at customs: Customs authorities can delay your goods if incorrect HS codes are applied, since the authorities must take time to identify those goods. Using the correct codes reduces the risk of those delays (but be aware that delays can still occur for other reasons).

The Harmonised System can be complex, so the best way of ensuring you apply more accurate HS codes is to use an automated solution like Avalara Tariff Code Classification.

Our solution can quickly categorise products in even the most complex industries, from retail to manufacturing. Once products are categorised, tax rates and customs duty can be applied at checkout. As a result, you can immediately let your customers know what they need to pay and deliver their items more quickly by getting them through customs.

Additionally, you can easily integrate Avalara solutions into your existing systems, minimising disruption to your growth targets. Contact our team to find out how you can start using Avalara Tariff Code Classification to stay tax and customs compliant.

For additional information on HS codes, check out our ultimate guide to HS code classification. The guide includes a range of handy tips to help your business stay customs compliant, such as solutions to the most common HS code errors and a guide to country-specific codes. If HS codes are your company’s weak spot, our ultimate guide to HS code classification can help.

This guide is meant to be helpful but is not certified legal or tax advice. Consult with a qualified professional before making any business decisions. Keep in mind that customs and tax laws change often.