It used to be easy. You had a brick and mortar storefront, customers came into said store to make their purchases, wherever your store was located told you how much sales tax was owed, and you paid them. Alas, things have changed. Now you have an online store instead of a brick and mortar store, customers purchase from your store from locations all around the world, and you may (or may not?) have taxes due all over the place.
How do you begin determining what consumption taxes need to be collected from your customers?
“Old School” Sales Tax
With a traditional sale, the government imposes a sales tax at the point of sale on goods and services. The retailer collects that tax and passes it on to the appropriate government body. Generally, that government body is the state, and they set their own tax rate. However, some states do not impose sales tax at all, and some local governments impose sales tax in addition to state tax.
Done and done…at least as far as consumption tax goes! So, how has sales tax changed with the popularity of internet sales?
Sales Tax in the Internet World
With internet sales, sales taxes have become a bit more complicated. Now you don’t have to just worry about collecting and remitting sales taxes in the jurisdiction that your brick and mortar store is located, but you may have to do the same for internet sales.
In general, if your store has a physical presence in a state (a ‘nexus’, e.g., a warehouse or storefront, etc.) and you sell to customers in that state online, then you must collect and remit that state’s sales tax. If there is no physical presence in a state and you sell to someone in that state, then you do NOT have to collect and remit that state’s sales tax. Usually, in those instances, the customer is supposed to pay their state’s required sales tax in the form of a use tax, but this is rarely done unless it is ‘big ticket’ items. Of course, many states are looking at legislation to change this current system and bring an end to ‘tax-less internet sales’.
Now, what about international consumption taxes?
Value Added Tax (VAT)
One of the most common consumption tax structures used internationally is the Value Added Taxes (VAT) system. It is especially common within the European Union (EU). When a product is being produced, a tax is added at every stage where ‘value is added’ to the product, as well as at the final sale of the product. For example, a business building chairs will be charged tax on all of the supplies they purchase to build the chair, and then a tax is charged again when the chair is sold to the purchaser with the actual tax burden on the consumer.
Goods and services that are being sold from a country that imposes VAT are usually exempt from paying an additional VAT when selling into another VAT country. Goods and services that are being sold into a country that imposes VAT from a country that doesn’t impose VAT are usually taxed in order to keep competition fair for in-country businesses.
How Does VAT Apply to Your United States-Based Business?
If you are selling to a consumer in a country that collects VAT, you will be required to collect and pay under certain circumstances.
- Sale of digital goods and services to consumers in VAT countries
If you sell digital goods and services to a consumer in a country that imposes VAT taxes, you will be required to collect and pay that tax on every sale.
However, you DO NOT need to collect and pay VAT on digital goods and services that involve “human intervention” which has been defined differently by different countries. For example, if you customize a product for a customer and then deliver it via download, you are not required to collect VAT.
As the global market continues to grow there are many questions left unanswered. For example, many countries have yet to determine whether e-mailing a product will count as “human intervention”. When in doubt, contact the country you will be selling to, explain your product, and ask for clarification.
- Sale of physical goods to consumers in VAT countries
The sale of physical goods from the United States that are shipped into VAT countries is governed by a separate set of regulations than digital goods and services. Generally, a small value sale will not be required to collect and pay a VAT. The value level minimum for VAT will vary based on country.
What do You Need to Know About Collecting and Paying VAT?
There are a few steps you need to complete in order to begin tackling VAT:
- Get a VAT ID. If you do not have a physical presence in any VAT country, you can choose which country to do this through.
- Find out where your buyer is. This generally means where they are when they purchase the product and where it will be used. You then have to save two identifiers of that location for your records for ten years (e.g., billing address and IP address.)
- Find out what the tax rate is. The tax rate will come from whatever country your buyer is in.
- Pay that country any VAT owed quarterly. This can generally be done online.
- Utilize MOSS. If you owe multiple countries VAT, you can register for MOSS (Mini One Stop Shop) which will allow you to make a single payment of VAT for all EU countries you have sold to each quarter.
Oh so simple, right? If you don’t want to tackle the international tax headache, there are platforms for sale of certain digital goods that will take care of collecting and paying VAT for you. This can take the form of a shopping cart software or another website to sell your goods through.