VAT, Business and Sales Tax Changes for the eCommerce industry in 2022.
The growth of eCommerce, the ease of purchasing increasing, as well as many different ways to buy and the types of goods to market, the government is beginning to feel from the equation in the collection of taxes on transactions. Since the past couple of years, authorities around the world have updated law to be more in tune with the modern economics.
As a result, dealing with tax obligations has become more difficult for businesses. The year 2022 will bring more major changes are taking effect and this, in relation to the nation or nations you are operating and live in, it could affect how you conduct business.
In the case of U.S. businesses, crossing states isn't that different from crossing national borders. However there are many aspects that could be more difficult as, for instance, a business in one EU nation selling to consumers in the other EU nations.
As our friends at Avalara show in their tutorial on tax changes in 2022 it's not a small amount to discuss about this subject.
In order to make things easier to begin We'll present a general outline of the tax-related changes that will be coming for businesses within the U.S., the U.K. as well as the EU, and many other nations and regions. The first two are mainly for the U.S., and the others affect other countries.
1. Nexus law -- Where your business is located
For U.S. businesses, you must pay sales tax for sales to customers in states where you have what's called an"nexus. This was once a simple. It was possible to be considered a nexus within a state if it's where your workplace, warehouse or some other tangible location was. However, now that there are so many employees working remotely Many states say that you have nexus if you have employees within their borders.
This means that you could operate in several states, even though all of the operations you conduct are within the same. In addition, if you have a physical presence, some states be able to consider you to have nexus under their jurisdiction when you have a sale that exceeds an amount of money or conduct more than a particular number of transactions with customers within their respective state.
The issue is that certain products are exempt from sales taxes and that the rules may be differing in different states.
Furthermore, after the South Dakota vs Wayfair 2018 court decision, states can now collect out-of-state sales taxes in order to purchase products in their state. This was done to allow brick and mortar companies to be on a more even playing field with online businesses. The logistics could be a nightmare.
This is made even more complicated in some states where different counties charge different sales tax rates.
If you are a business that is online, you must find out each state -- and possibly county -- in which you are required to prove that you possess a physical or economic presence there and then calculate the sales tax you are liable for.
Find out more information about sales tax changes.
2. Tax rates that vary, boundaries, and rules
Knowing what obligations you have to pay in each state could be challenging enough. But what if things change?
The government is regularly updating its tax rates for sales. Some products that were previously required to be taxed are now exempt from taxation in certain areas, such as diapers as well as feminine hygiene products. Some other items that were not tax-exempt in the past are now, such as single-use plastic bags.
Then there are the rates that are temporary for sales tax holidays or tax reprieves that may have been put into place as part of the COVID-19 outbreak. The public loves them, however they can make tax accounting very hard for companies.
In addition to tax rate changes, you have to know the boundaries of taxing jurisdictions. Certain cities are located in two states. A lot of cities are located in two counties. The house that is that is across the street may have a different sales tax rate. And these boundaries sometimes alter.
S Find out more about this and the other tax changes in 2022.
3. Which stores customers shop at and how they pay
What happens when a buyer purchase online and has an item shipped to the location for pick up or delivery, but their home is in a different tax district from the store? This is known as Buy Online, Pick up in Store (BOPIS). Taxes on sales online could differ from that of the place where the purchase is delivered.
There's a need to track this for every purchase made by a customer so that you're sure that you pay the tax in the correct country, city, county or even the state.
For example, should you charge sales tax on the purchase price in advance instead of spreading it among each of the payments? Making it all upfront implies that the customer doesn't actually make equal payments. If you spread it out, what happens if the sales tax rates change before all payments are paid? Should you collect the new amount for the remaining payments? And what about any BNPL charges from the service provider? Also, what is the procedure if they have to return the item before any payments have been made even though you have already paid your taxes to the federal government?
Each state, country, and county may manage these scenarios differently.
4. Sales tax sourcing
There are three kinds of methods for sourcing employed by U.S. states to determine the tax payer:
- Source of destination: determined by location of the buyer
- Origin sourcing: based on where the seller is located
- Mixed sourcing: A blend of both
Before the internet and eCommerce the majority of businesses used origin sourcing, because it was the easiest and most sensible. But now, with the proliferation of international and interstate commerce, the distinctions have blurred and there's a lot of tax revenue not being collected from online transactions.
For this reason, several states are moving to destination sourcing, meaning you pay taxes according to the country of the customer. For small-sized businesses, if you sell items across the US it is possible that you will need to track purchases made by customers in all 50 states.
5. Monitoring of sales and business transactions via digital technology transactions
In the majority of Europe and Latin America, and the other regions of the globe nations are developing ways to track all transactions in business in order to be able to collect the correct quantity of sales tax and VAT.
Again, with so much international commerce in the EU as well as between the EU and Britain, among Europe with South Korea and other Asian nations, as well as Canada and Latin America, various forms of electronic invoicing are quickly becoming standard.
In 83 countries, there is already some type of electronic invoicing or reporting laws in place, and more are working to implement it. The types of monitoring for digital transactions are:
- Real-time reporting: transactions report as it occurs
- Standard Audit File for Tax (SAF-T): makes it easy for authorities to gather tax data
- Invoicing electronically: Governments approve every invoice before the customer can see it
- The requirement for invoicing on a four-day basis is not as strict as real time, but the same idea
Each of these systems is designed to facilitate compliance in addition to reducing mistakes and reduce tax avoidance. These systems also help audits become easier and quicker.
L earn more information about the ways that countries use electronic invoices for sales tax monitoring .
Therefore, if your business is engaged in international trade, you'll need to adhere to the laws of each country's tax reporting and invoicing method.
Brexit is a great example of how this might function.
Britain has begun to implement the program known as Making Tax Digital, which applies to companies within the U.K. as well as those selling to it, for example, any company within the EU. The new system is also applicable to entrepreneurs who work for themselves U.K. businesses and landlords.
Additionally, EU firms that sell to those living in Britain will have to tax them with VAT. For smaller purchases under 150 euros, businesses would utilize the Import One-Stop-Shop (IOSS) which is an online registration portal that makes it easier to comply with VAT requirements.
In the case of those EU companies that sell to countries within the EU They would utilize the One-Stop Shop (OSS) system, similar to the IOSS however, only for trade inside the EU.
Utilizing each of these platforms will necessitate businesses spending cash upfront. However, it allows them to quickly conduct business with customers in the EU's many nations.
The U.S. has yet to establish 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 commerce.
Harmonized System Harmonized System is a method that allows for the coding and tracking of the products of every sector every time they cross an international border. It will be easier to keep track of sales numbers across borders . This will ensure that precise taxes on sales and VAT will be collected on items and services.
The codes are updated each five years. Then, in 2022, the seventh edition will be published.
Utilizing the HS codes may become complex very quickly because there aren't all countries that update their codes right away. Others require years. It means you can be selling the same item in two different countries, and you'll need two codes.
What happens if a product is misclassified with the wrong code? Taxes could be assessed at the wrong amount which could result in fines and delays, problems with the border and unhappy customers. Read more on the Harmonized System and related global tax concerns.
7. Eliminating taxation minimum requirements
In particular, in the U.K. and EU nations, previous minimum requirements for the VAT regime are beginning to fall away.
For imports coming into the U.K., there used to have been an PS135 minimum order amount before VAT applied. It's now gone along with the low-value consignment stock relief that used to be available for products that were not PS15. VAT for both of these will now be collected at the point of sale by the buyer at checkout.
The current policy is not subject to any changes to policies for amounts above that threshold.
In the case of imports entering the EU A similar minimum of EUR150 used to apply, and that too has been removed. IOSS users will now be obliged to collect VAT at the time of sale for all purchases less than that sum.
Many other countries -such as Canada, India, Malaysia and China -- are working on similar types of tax changes.
8. Other taxing issues for 2022 and beyond
Supply problems
The issue of shortages in labor and supply can affect tax planning.
For example, with so many items purchased, that are then returned, how do manage the tax collected? Must you amend tax returns to reflect taxes already due?
Marketplaces on the internet
If you are selling products on any of the many online marketplaces such as Amazon or Wayfair certain states and countries are taxing them, a cost they may or may not pass on to your customers. Certain states allow the sellers on these platforms remain free of tax.
Different types of product that are not typical
A number of countries which have historically taxed car rental services and taxis are now trying to tax car sharing services as well.
If you offer online-based courses, you might be subject to taxation. However, there are many ways courses can differ from one another. Certain courses are live while others are pre-recorded. The pre-recorded course is more of an item. Others require downloads of the materials. Certain courses send the materials via postal mail.
Different localities and nations can approach each of these types of educational and training circumstances in different ways.
What about software?
There are now at least ten different types of software products, including packaged and shipped in the same way as real products, delivered but not downloaded or customized, as well as a variety of other. Each type of software may be taxed in a different way based on the country and location in which your company is determined to establish a presence- that nexus issue that opened up this issue in the beginning.
Are you in need of tax assistance?
Tax services are not offered by the company The information in this post is designed to be informational and helpful for companies seeking to learn more about their tax compliance duties.
But, Avalara can help you through tax automatization software that makes compliance much simpler. Particularly for small businesses which do business within all of the U.S. or across international boundaries, there's plenty to keep track of. Tax compliance software might be an option worth considering.