VAT, Business, and Sales Tax changes for the eCommerce industry in 2022

With eCommerce booming, borderless shopping increasing, and so many different ways to buy as well as the kinds of items to sell, governments are starting to feel left from the equation in the collection of tax on transactions. In the last few years, governments around the world have updated law to be more in tune with the modern economics.

This means that the process of negotiating tax obligations has become more challenging for business owners. In 2022, more big changes are taking effect and, depending on which country or nations you are operating and live in, it could influence how you run your business.

For U.S. businesses, crossing state lines doesn't differ much than crossing country borders. Actually there are many aspects that could be more difficult in comparison to, say, a business in one EU nation selling to consumers across other EU countries.

As our friends at Avalara illustrate in their tutorial on tax changes in 2022 it's not a small amount to cover around this topic.

In order to make things easier in the meantime, we're going to present a general outline of the tax reforms that are coming for businesses within the U.S., the U.K. as well as the EU as well as a variety of other nations and regions. These are the most important ones that affect those in the U.S., and the others affect other countries.

1. Nexus law: where your business is located

If you are a U.S. businesses, you have to pay sales tax on sales made to customers in states where you are considered to have the"nexus. It was not a problem. There was a connection with one state when it was where your workplace, warehouse or any other physical presence was located. However, now that there are so many remote employees Many states say that your business has a relationship with them if they have employees within their boundaries.

That means you can potentially operate in several states even if all your business operations are located in the same. In addition, if you have a physical presence, some states be able to consider you to have relationship with them when you have a sale that exceeds an amount of money or perform more than a particular number of transactions for customers who reside in their state.

The issue is that certain products are exempt from sales taxes and those rules can be distinct in every state.

In addition, following the South Dakota vs Wayfair 2018 court ruling, states may be able to collect sales tax from outside of their state on products bought within their states. This was done to allow brick and mortar companies to compete on a more even playing field with online businesses. But the logistics of it could be a nightmare.

It is further complicated in some states that have counties with different sales tax rates.

If you are a business that is online, you should research every state, as well as possibly a county which considers that you be physically or have an economic presence in that area and figure out the sales tax that due.

Learn more about the changes to sales tax.

2. Variations in sales tax rates, boundaries, and rules

Finding out how much you are liable for in each state can be hard enough. But what if things change?

Governments regularly update their sales tax rates regularly. Certain items which used to be taxed have now become exempt in some areas like diapers as well as feminine hygiene products. Some other items that were not tax-exempt in the past are now items that are single-use, like plastic bags.

Then there are the rates that are temporary for sales tax holidays, or tax exemptions which may be in place during the COVID-19 pandemic. The public loves them, however they can make tax accounting a challenge for businesses.

In addition to taxes, you have to be aware of boundaries between the taxing authorities. Certain cities are located in two states. Many cities straddle two counties. In some cases, the home that is across the street may have a different sales tax rate. The boundaries can shift.

CSS ee more on this and the other tax-related changes for 2022.

3. What they buy from where and pay for it.

What happens when a buyer purchases online, but wants an item shipped to the location for pick up, and their residence is located in a different tax district from the store? This is known as Buy Online, Pick up at Store (BOPIS). Taxes on sales online could differ from the store where the purchase is delivered.

It is essential 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 or state.

For example, should you take the tax on sales on the purchase price at once or distribute it over the installments? If you collect it in advance, the customer doesn't actually make equal payments. If you split it up in installments, what happens if rate of sales tax changes before the entire payment has been made? Should you collect the new amount for the remaining payments? What about BNPL costs from your service supplier? What will happen if they decide to returned the item prior to any payments have been made even though you've already paid taxes to the government?

Each state, country and county will respond to these issues in a different way.

4. Sales tax sourcing

Three types of sourcing methods used in U.S. states to determine who is responsible for sales tax:

1. Destination sourcing: based on where the buyer is located
2. Origin sourcing: based on where the seller is located
3. Mixed sourcing: a blend of both

Prior to the Internet and eCommerce many businesses relied on origin-based sourcing as it was simple and made the most sense. But now, with so much interstate and international trade, the boundaries have become blurred, and there's now lots of tax money going uncollected from online purchases.

This is why several states are moving to destination sourcing, meaning the tax you pay is based on the location of the purchaser. Even small companies If you offer goods across the US, you may have to keep track of transactions made by clients from the 50 states.

5. Monitoring of sales and business transactions via digital technology transactions

Across much of Europe across Europe Latin America, and the rest of the world countries are working on methods to monitor all business transactions so they can be able to collect the correct amount of sales tax and VAT.

Again, with so much international trade in the EU as well as between and within the EU and Britain and in between Europe with South Korea and other Asian nations, as well as Canada as well as Latin America, various forms of electronic invoicing are quickly becoming standard.

There are 83 countries that have some type of electronic invoicing or reporting legislation in place, and more are working on this. Types of digital transaction monitoring include:

• Real-time reporting: Transaction report as it occurs
• Standard Audit File for Tax (SAF-T): makes it easy for authorities to collect tax information
• Invoicing electronically: Governments approve every invoice prior to a client seeing it
• Invoicing for four days: Not quite as stringent as real time However, it's the same concept

All of these systems are intended to make compliance easier in addition to reducing errors and minimize tax avoidance. These systems also help audits become easier and quicker.

L earn more information about the ways that countries have adopted electronic invoicing to assist with control of sales tax .

Therefore, if your business is engaged in international commerce, you'll have to comply with each nation's tax reporting and invoicing system.

Brexit serves as a good example of how this might function.

Britain is currently implementing the program known as Making Tax Digital, which is applicable to all businesses in the U.K. as well as those selling to it, for example, any company located in the EU. The new system is also applicable to entrepreneurs who work for themselves U.K. businesses and landlords.

And EU firms that sell to customers in Britain are required to tax them with VAT. For smaller purchases under 150 euros, the business would use IOSS, which is the Import One-Stop-Shop (IOSS) the electronic registration portal that makes it easier to adhere to VAT laws.

If those EU companies that sell to countries within the EU They would utilize to use the One-Stop Shop (OSS) system like the IOSS however, only for trade inside the EU.

Working with and accessing the various systems is going to need businesses to invest some cash upfront. However, it allows them to efficiently conduct business with consumers across the many EU countries.

The U.S. has yet to adopt a system of electronic billing or reportage.

6. The Harmonized System

The Harmonized System began in 1988, but with so much digital commerce today the Harmonized System has grown to become an integral part of international commerce.

The Harmonized System is a method for coding and tracking products in every industry every whenever they pass through an international border. It will be easier to track sales across borders so accurate taxes on sales and VAT will be collected on goods as well as services.

The codes are updated each five years. In 2022, the seventh edition will come out.

Using the HS codes can get complicated quickly since the different nations do not update their codes right away. Certain require years. It means you can offer the same product in two different countries, which means you will need to apply two codes.

What happens if a product is classified incorrectly with the wrong code? It could be taxed at the wrong rate and result in penalties and delays, issues at the border, as well as upset customers. Find out more information about the Harmonized System and related global tax issues.

7. Eliminating minimum taxation conditions

Particularly in particularly in U.K. and EU nations, previous minimum requirements for when VAT applies are starting to disappear.

Imports that are coming into the U.K. In the past, there was to be an PS135 minimal order size prior to VAT applied. This is now being phased out, as is the low-value consignment stock relief that was previously applicable for items that fell under PS15. VAT for both of these is now due on the spot with the buyer at the checkout.

The current policy is not subject to any changes to policies for amounts above the threshold.

When imports are made into the EU A similar threshold of 150 euros used to be in effect but that will be gone. IOSS users will now be obliged to collect VAT at point of sale for any purchase less than that sum.

In addition, many countries- including Canada, India, Malaysia as well as China have been looking at similar tax changes.

8. Additional tax-related issues in 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 to be returned, how do you handle the taxes collected? Should you alter tax returns to reflect taxes already due?

Marketplaces online

If you are selling products on one of the dozens of online marketplaces, such as Amazon or Wayfair Some states and even countries tax them, a cost they could or might not pass on to you. Certain states allow these types of sellers stay free of tax.

Different types of product that are not typical

Many countries that have always taxed car rental services and taxis are now trying to tax car sharing too.

If you are selling online-based courses, you might be subject to taxation. But there are several different ways that courses may differ from each other. Some courses are live, some are recorded. Pre-recorded courses are more like a product. Some courses require downloading of material. Many courses offer materials by 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 product categories, including packaged and shipped as a genuine product delivered but not downloaded or customized, as well as a variety of other. Also, every type could be taxed differently depending on the nation and locality where your business is determined to have a presence -- that nexus issue which opened this box of worms at the start of.

Need tax help?

Tax services are not offered by the company, and this article is meant to be informational and helpful for businesses that are trying to understand how they can comply with tax laws.

However, Avalara can help you with tax automation software which makes tax compliance more simple. Smaller companies, in particular which do business within all of the U.S. or across international borders, there's a lot to keep track of. Tax compliance software might be an option worth considering.