How Sales Tax Affects Your Subscription-based Business Model
- Aug 11, 2015 | Suzanne Kearns
Subscription-based services have grown up right along with the Web. While in the past only book-of-the-month clubs and mail-order music clubs took advantage of the concept, today almost any type of ecommerce business can. For example, The Dollar Shave Club sells razors on a subscription basis, Birchbox delivers monthly beauty products for him and her, and Craft Coffee delivers freshly roasted coffee to your doorstep every month.
The benefits to this type of business model are obvious. Business owners can cultivate their relationships with customers over time because they have contact with them on a reoccurring basis. In addition, subscription-based business models ensure that revenue comes in regularly, making it easier to predict and control cash flow. But along with the benefits of running this type of business come some complicated sales tax issues.
Here are a few issues you’ll need to be aware of should you decide that a subscription-based model is right for your business.
You Need to Determine Nexus
You have the legal obligation to collect sales tax in every state in which you have nexus. Traditionally, nexus is established when a business has a physical presence in a state, such as a store, warehouse, employee, or other physical location. But since so many consumer sales have moved to the Internet, states are scrambling to make up the loss in collected taxes and are looking toward ecommerce businesses to foot the bill.
Now, retailers are required to collect sales tax in some states when a person clicks-through an affiliate to make the purchase. The nexus laws are different in every state and jurisdiction, and are constantly changing, which makes keeping up with them an almost impossible task for a subscription-based company that sells in many states.
Origin or Destination Sales Tax?
It’s not enough to know the sales tax rates of each state, because in many states, those rates can vary from city to city, or even from one block to the next.
What’s worse, when you’re figuring sales tax on a subscription-based model, some states require you to determine it based on where the seller is located (origin-based), while others ask that you use tax rates based on where the items is shipped to (destination-based).
To make matters even more complicated, some states use a combination of the two methods. If you live in an origin-based state, you should charge subscribers who live in your state the tax rate applicable to your state, but if you ship to a destination-based state, you will need to determine the tax rate for that address.
Is Your Product Taxable?
It used to be that only physical products were taxed, but now different jurisdictions decide what is taxed and what isn’t, and it’s up to you the seller, to know whether you have to charge tax. For instance, if you sell software on a subscription basis, some states don’t tax it, while others do only if there is a physical component to it, such as a download or customer service support.
In addition, some of your buyers may be tax exempt, and it’s up to you to not only ask for and keep copies of their tax exemption documents, but also make sure they stay current. For instance, if you sell craft goods on a subscription basis, some of your buyers may purchase it to use for resale and not be required to pay sales tax.
Sales Tax Holidays are Different in Every Jurisdiction
Every state has different rules for when buyers may purchase certain items and not have to pay sales tax on them. If you aren’t aware of the many different rules and regulations, you could potentially charge customers sales tax when they aren’t required to pay it. If a customer knows they’re being required to pay tax when it’s not necessary, it could create bad feelings toward your business. Check out the list of sales tax holidays for 2015.
So What’s the Answer?
If all of this sounds hopelessly confusing, that’s because, quite frankly, it is. That’s why we’ve worked hard to create a solution for ecommerce sellers that takes all of the guesswork out of sales tax compliance, and frees up your time to dedicate to growing your business. For sellers in need of a sales tax calculation solution, Avalara AvaTax automatically figures sales tax for the 12,000 jurisdictions in the US, and does it quickly so sellers don’t have to deal with shopping cart abandonment from customers who don’t like to wait.
Struggling with sales tax filing? You've come to the right place. Returns for Small Business users can import sales tax data and AutoFile sales tax returns.
Don’t let sales tax complexities keep you from taking advantage of the subscription-based business boom. Just make sure you partner with a software provider that will keep you compliant.