Sales Tax and Subscription Boxes for Your Online Business
- Jun 14, 2016 | Stephanie Faris
Subscriptions are nothing new, but in recent years they’ve evolved beyond magazines and fruit-of-the-month clubs. Businesses across all industries have realized that recurring revenue is the key to reliable cash flow. Instead of selling a product once and hoping a customer comes back later, brands get a commitment to pay a monthly rate for a product or service.
For product-based businesses, this recurring revenue comes in the form of subscription boxes, which involve sending a box with at least one product in it each month in exchange for a monthly fee. These boxes contain a variety of items, either chosen by the customer or selected by the business. But for businesses that are accustomed to product sales instead of monthly fees, sales tax can be confusing. Here are a few things to know about collecting sales tax on subscription box payments.
Subscriptions and Tax
In some states, service-based subscriptions aren’t subject to tax based on general laws pertaining to services. Pest control companies and landscapers often charge monthly rates for their services, for instance, and in states where services aren’t taxed they can collect those payments tax free. However, when a business offers a subscription for products, product-based tax laws apply. If a customer pays $9.99 a month for a monthly box filled with products, the business will be expected to tax that $9.99 payment as it would if the customer had bought the products in a one-time-only transaction.
Subscription Boxes and Nexus
As with all product sales, businesses must follow their own state’s laws when it comes to shipping items out of state. In most cases, this means that they won’t pay tax on a sale to a customer unless they have a physical presence in that state. Known as nexus, the definition of “physical presence” can vary from one state to the next, but in general a business pays sales tax on sales to another state if it has a storefront, representatives, or a warehouse in that state.
If you sell through Amazon and use Fulfillment By Amazon (FBA), you’ll need to determine whether there are warehouses located in each state and if that qualifies as nexus under local laws. You'll also need to check state laws about whether to charge sales tax on shipping. In some cases, you'll need to tax shipping costs on deliveries that you send to states in which your business has nexus.
When a customer buys a product, businesses merely apply the sales tax laws as they stand at that time. Subscription-based businesses face challenges in keeping up with those changes and applying them. Unfortunately, this can bring complaints from some customers who notice their monthly cost has suddenly increased without notice. You can include a disclaimer in your terms that emphasizes that rates can increase as tax laws increase, but that won’t eliminate complaints. In addition to keeping up with sales tax law changes in each of the states where your customers are located, you should also send a brief email alerting them if you must suddenly increase the price they’re paying.
Subscription boxes have become popular with ecommerce businesses, allowing them to create a reliable income from one month to the next. By knowing the sales tax laws as they apply to each state in which you sell, you’ll be able to prepare your customers for the amount they’ll be expected to pay each month, avoiding surprises and reducing cancellations.