VAT, Business, and Sales Tax Changes to eCommerce by 2022
The growth of eCommerce, the ease of buying increasing, and many different ways to buy as well as the kinds of items to offer, government officials are beginning to feel from the equation when it comes to collecting tax on transactions. Since the past couple of years, governments across the globe have modernized law to be more in tune with the modern market.
As a result, dealing with tax obligations has become more difficult for businesses. In 2022, more big adjustments are coming into effect this, in relation to the nation or regions you work in and live in, it could affect how you conduct business.
In the case of U.S. businesses, crossing state lines doesn't differ much from crossing national borders. In fact there are many aspects that is more complex than, for example an enterprise in one EU country selling its products to customers from different EU nations.
As our friends at Avalara demonstrate in their guide to tax changes in 2022 There's plenty to discuss about this subject.
In order to make things easier for now, we're going to give you a broad overview of eight upcoming tax changes for businesses within the U.S., the U.K. as well as the EU, and many others countries and regions. The first two are mainly for countries like the U.S., and the remainder are for other nations.
1. Nexus laws -- where your business is
For U.S. businesses, you are required to collect taxes on sales to customers in states where you are considered to have an"nexus. This was once a simple. There was a connection with a state if it's where your workplace, warehouse or other tangible presence was. Now, with many workers working remotely and many states claiming that you have relationship with them if they have employees that reside within their borders.
That means you can potentially have a presence in multiple states even if all your operations are in one. Beyond a physical presence, states may be able to consider you to have connection to their territory when you have a sale that exceeds a certain dollar amount or make more than a particular number of transactions with customers within the state in which you operate.
This is complicated by the fact that certain products are tax-free and the rules for exemption are distinct in every state.
Additionally, as a result of the South Dakota vs Wayfair 2018 ruling, states are able to now collect out-of-state sales taxes in order to purchase products in their state. The decision was made to permit brick and mortar companies in the market to play on a more level playing field with online businesses. But the logistics of it could be a nightmare.
It is further complex in states that have counties with different sales tax rates.
For online businesses, you have to determine every state, as well as possibly a county in which you are required to prove that you possess a physical or economic presence there and then figure out the sales tax that you are liable for.
Learn more about changes in sales tax.
2. Tax rates that vary as well as boundaries and rules
Knowing what obligations you have to pay in each state could be challenging enough. But what if things change?
Governments are routinely updating their tax rates for sales. Certain items which used to be taxed have now become exempt in some places like diapers and feminine hygiene products. Other items that weren't taxed until recently like single-use plastic bags.
Then there are the rates that are temporary, such as sales tax holidays, or tax exemptions which may have been put into place during the COVID-19 pandemic. They are adored by customers, but they make proper tax accounting extremely difficult for businesses.
In addition to tax rate changes You must also be aware of the boundaries between taxing jurisdictions. There are cities that cross two states. Many cities straddle two counties. Sometimes, the house that is across the street may have different rates for sales tax. And these boundaries sometimes alter.
CSS ee more on this, and more industry tax changes in 2022.
3. Which stores customers shop at and how they pay
What happens if a customer purchase online and has an item shipped to the shop for pick-up, and their residence is located in an entirely different tax district than the business? This is known as Buy Online, Pick up at Store (BOPIS). The sales tax online may be different from the location where the purchase is delivered.
It is essential to monitor every purchase made by a customer so that you're sure that you remit the correct tax to the correct country, city, county, or state.
In other words, would you prefer to take the tax on sales to cover the entire purchase upfront instead of spreading it among each of the payments? Doing it upfront means customers don't have to have to pay in equal installments. If you split it up, what happens if the taxes on sales change prior to the entire payment has been completed? Are you required to collect the new amount for the remaining payments? Do you have to pay any BNPL costs from your service provider? What is the procedure if they have to returned the item prior to all payments were made but you already remitted your tax to the government?
Every country, state, and county may manage these scenarios differently.
4. Sales tax sourcing
There are three types of sourcing methods employed in U.S. states to determine the tax payer:
- Destination sourcing: based on location of the buyer
- Source of origin: Based on where the seller is located
- Mixed sourcing: a blend of both
Prior to the advent of internet-based eCommerce the majority of businesses used the origin source method because it was the easiest to use and was the most sensible. Now, however, due to so much interstate and international trade, the boundaries have blurred and there's an abundance of tax revenues going uncollected from online purchases.
This is why several states are moving to destination sourcing. This means you pay taxes according to the country of the customer. Even small companies If you offer goods across the US, you may have keep track of the transactions made by clients across every state.
5. The monitoring of digital sales by businesses transactions
In the majority of Europe across Europe Latin America, and the rest of the world nations are developing ways to track all transactions in business to ensure they be able to collect the correct quantity of sales tax and VAT.
There is a lot of international trade within the EU and within Europe and Britain, between EU and Britain, between Europe and South Korea and other Asian nations, in addition to Canada as well as Latin America, various forms of electronic invoicing are quickly becoming standard.
83 countries already have at least one type of electronic invoice or reporting legislation implemented, and a number of countries are working on this. Different types of electronic transaction monitoring are:
- Real-time reporting: transactions report as it occurs
- Standard Audit File for Tax (SAF-T) is a tool that makes it simple for authorities to obtain tax-related information
- Electronic invoicing: the government approves each invoice prior to a client seeing it
- Invoicing for four days: Not as strict as real time however, the idea is similar
These systems are intended to make compliance easier in addition to reducing the chance of errors and even tax avoidance. Additionally, they make auditing simpler and faster.
L earn more details about how nations have adopted electronic invoicing to assist with control of sales tax .
So if your business conducts internationally, it will need be in compliance with every country's tax reporting and invoicing process.
Brexit serves as a good illustration of how this could be achieved.
Britain has begun to implement a program called Making Tax Digital, which is applicable to all businesses in the U.K. as well as companies selling products to it like any other within the EU. The new system even applies to individuals who are self-employed U.K. businesses and landlords.
Additionally, EU businesses that sell to those in Britain must charge them VAT. For smaller purchases under 150 euros, the business should utilize the Import One-Stop Shop (IOSS) which is an online registration portal that makes it easier to meet VAT regulations.
For those same EU businesses selling to other nations within the EU They would utilize to use the One-Stop Shop (OSS) system which is similar to IOSS, but only for commerce within the EU.
Utilizing all these systems will necessitate businesses spending amount of money up front, but it they will be able to more efficiently conduct business with consumers in the EU's many nations.
The U.S. has yet to adopt a system of electronic invoicing or reporting.
6. The Harmonized System
The Harmonized System began in 1988, but with so much digital commerce today, it has become an integral component of global commercial activity.
The Harmonized System is a method that allows for the coding and tracking of the products of every sector every when they travel across the international boundary. This will make it easier to monitor sales volumes across borders . This will ensure that precise taxes on sales and VAT will be collected on both products and services.
The codes are revised every five years. Then, in 2022, the seventh edition will come out.
Using the HS codes can get complicated quickly since not every nation updates their codes instantly. Certain need years to update their codes. That means, you might be selling the same item in two countries and you'll need two different codes.
What happens if a particular product is not classified correctly with the correct code? Taxes could be assessed at the wrong amount, and lead to fines and delays, problems with the border and upset customers. Learn more regarding the Harmonized System and related global tax issues.
7. Eliminating minimum taxation conditions
In particular, specifically in particularly in U.K. and EU nations, previous minimum requirements for when VAT applies are starting to fade away.
Imports that are coming into the U.K., there used to have been a PS135 minimal order size prior to VAT was applied. It's now gone along with the Low-Value Consignment Stock relief which was applicable for items that fell under PS15. VAT for both is now due on the spot with the customer, during the checkout.
At present, there are no modifications regarding the policy for sums above the threshold.
When imports are made into the EU the EU, a minimum of EUR150 was used to be the norm however that requirement is going away. IOSS customers are now required to collect VAT at the time of sale for all purchases less than that sum.
Many other countries -such as Canada, India, Malaysia as well as China and Malaysia are currently working on similar types of tax changes.
8. Tax issues that are not taxed for 2022 and beyond
Problems with the supply of food
The issue of shortages in labor and supply may affect your tax situation.
In the case of many products being purchased and then returned, how do manage the tax collected? Do you need to amend tax returns to reflect taxes already remitted?
Marketplaces on the internet
If you are selling products on any of the many online marketplaces like Amazon or Wayfair Some states and even countries tax the cost, which might or not pass on to the seller. Certain states allow such sellers remain free of tax.
Different types of product that are not typical
Numerous countries which have traditionally taxed rental cars and taxis are now attempting to tax car-sharing services as well.
If you sell online classes, they too might be subject to taxation. But there are several ways courses can differ from each other. Certain courses are live some are recorded. Pre-recorded classes are closer to a product. Others require downloads of the documents. Many courses offer materials by post.
Different localities and nations may treat each of the above types of educational and training scenarios in a different way.
Software?
At present, there are at least 10 different kinds of software product categories, such as packaged and delivered in the same way as real products, digitally downloaded but packaged, customized, and several other. Again, each type may be taxed differently based upon the location and the country that your company has decided to be based -this nexus question that opened the issue in the very beginning.
Do you need help with taxes?
does not offer tax services The information in this post is designed to provide information and guidance to businesses looking to better understand how they can comply with tax laws.
However, Avalara can help you by providing tax automation software that makes compliance much more simple. Smaller companies, in particular which do business within the U.S. or across international boundaries, there's plenty to keep track of. The tax compliance software is one thing to consider.