With eCommerce booming, borderless shopping increasing, and so many different ways to buy and types of products to sell, governments are starting to feel left out of the loop when it comes to collecting taxes on transactions. Over the past few years, authorities around the world have updated laws to reflect the digital economy.
As a result, dealing with tax obligations has become more difficult for merchants. In 2022, more big changes are taking effect and, depending on which country or countries you operate and reside in, could impact how you operate.
And for U.S. businesses, crossing state lines isn’t much different than crossing country borders. In fact, in many ways it can be much more complicated than, for example, a business in one EU nation selling to consumers in other EU nations.
As our friends at Avalara show in their guide to tax changes in 2022, there’s a lot to cover around this topic.
So to keep it simpler 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., the EU, and many other nations and regions. The first few concern mostly the U.S., and the rest concern other countries.
1. Nexus laws — where your business is located
For U.S. businesses, you have to pay sales tax for sales to customers in states where you have what’s called a nexus. Again, this used to be simple. You had a nexus in a state if it’s where your office, warehouse, or other tangible presence was located. But now, with so many employees working remotely, many states claim your business has a nexus if you have employees who reside within their borders.
That means you can potentially have a presence in multiple states even if all your operations are in one. Plus, beyond a physical presence, a state may consider you to have a nexus under their jurisdiction if you sell over a certain dollar amount or conduct more than a particular number of transactions to customers in their state.
Complicating this is the fact that some products are exempt from sales taxes and those rules can be different in each state.
Furthermore, after the South Dakota vs Wayfair 2018 court decision, states can now collect out-of-state sales taxes for products purchased within their states. This was done to allow brick and mortar businesses to compete on a more level playing field with online businesses. But the logistics of it can become nightmarish.
This is made even more complicated in some states where different counties charge different sales tax rates.
For online businesses, you must find out each state — and possibly county — that deems you to have a physical or an economic presence there and then calculate the sales tax you owe.
2. Variations in sales tax rates, boundaries, and rules
Figuring out what you owe in each state can be hard enough. But what if things change?
Governments are routinely updating their sales tax rates. Some items that used to be taxed are becoming exempt in some places, such as diapers and feminine hygiene products. Other items that weren’t taxed before now are, such as single-use plastic bags.
And then there are temporary rate changes, such as sales tax holidays, or tax reprieves that may have been put into place during the COVID-19 pandemic. Customers love them, but they make proper tax accounting very hard for businesses.
In addition to tax rate changes, you have to be aware of boundaries between taxing jurisdictions. Some cities straddle two states. Many cities straddle two counties. Sometimes, the house across the street has a different sales tax rate. And these boundaries sometimes shift.
3. Where customers buy and how they pay
What happens if a customer buys online but has the item delivered to the store for pickup, and their residence is in a different tax district from the business? This is called Buy Online, Pick up in Store (BOPIS). The online sales tax may be different from the location where the purchase is delivered.
You’ll need a way to track this for each customer purchase so you can be sure to remit the correct tax to the correct country, city, county, or state.
For situations like Buy Now Pay Later (BNPL), you have a few decisions to make regarding sales tax.
For example, should you collect the sales tax for the full purchase value upfront, or spread it out among each of the payments? Doing it upfront means the customer doesn’t actually pay equal installments. If you spread it out, what happens if the sales tax rates change before all the payments have been made? Do you need to collect the new amount for the remaining payments? And what about any BNPL fees from the service provider? And, what happens if they return the item before all payments were made but you already remitted your taxes to the government?
Every country, state, and county may handle these situations differently.
4. Sales tax sourcing
There are three types of sourcing methods used by U.S. states to determine who pays the sales tax:
- Destination sourcing: based on location of the buyer
- Origin sourcing: based on location of the seller
- Mixed sourcing: a blend of both
Before the internet and eCommerce, most places used origin sourcing, because it was the easiest and made the most sense. But now, with so much interstate and international commerce, the lines have blurred and there’s a lot of tax revenue going uncollected from online purchases.
For this reason, many states are switching to destination sourcing, meaning you pay taxes based on the location of the buyer. Even for small businesses, if you sell products nationwide in the US, you may have to keep track of purchases made by customers in all 50 states.
5. Digital monitoring of business sales transactions
Across much of Europe and Latin America, and the rest of the world, nations are developing methods to monitor all business transactions so they can collect the proper amount of sales tax and VAT.
Again, with so much international commerce within the EU, between the EU and Britain, between Europe and South Korea and other Asian nations, as well as Canada and Latin America, various forms of electronic invoicing are quickly becoming the norm.
83 countries already have some type of electronic invoicing or reporting laws in place, and more are working on it. Types of digital transaction monitoring include:
- Real time reporting: transaction reporting as it happens
- Standard Audit File for Tax (SAF-T): makes it easy for authorities to collect tax information
- E-invoicing: governments approve each invoice before a customer sees it
- Four-day invoicing requirements: not as strict as real time, but the same idea
All of these systems are intended to make compliance easier, as well as reduce errors and minimize tax avoidance. They also make auditing easier and faster.
So if your business conducts 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 work.
Britain is now implementing a program called Making Tax Digital, which will apply to businesses within the U.K. as well as those selling to it, such as any in the EU. The new system even applies to self-employed U.K. businesses and landlords.
And EU businesses that sell to people in Britain will have to charge them VAT. For smaller purchases under 150 euros, the business would use the Import One-Stop Shop (IOSS), an electronic registration portal that makes it easier to comply with VAT requirements.
For those same EU businesses selling to other nations within the EU, they would use the One-Stop Shop (OSS) system, similar to the IOSS, but only for commerce within the EU.
Accessing and working with all these systems will require businesses to spend some money upfront, but will allow them to more easily 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 part of international business activity.
The Harmonized System is a method for coding and tracking products in every industry every time they cross an international border. This will make it easier to monitor sales volumes across borders so accurate VAT and sales taxes can be collected for goods and services.
The codes get updated every five years, and in 2022 the seventh edition will be released.
Using the HS codes can become complex very quickly because not every nation updates their codes right away. Some take years. That means, you might sell the same item in two different countries, and will have to use two different codes.
What happens if a product is misclassified with the wrong code? It could be taxed at the wrong rate, and lead to fines and delays, problems at the border, and upset customers. Read more about the Harmonized System and related global tax issues.
7. Eliminating minimum taxation requirements
Particularly in the U.K. and EU nations, previous minimum requirements for when VAT applies are starting to disappear.
For imports coming into the U.K., there used to be a £135 minimum order size before VAT applied. That’s on its way out, as is the Low-Value Consignment Stock relief that used to be in place for goods under £15. VAT for both of these must now be collected at the point of sale with the customer, during checkout.
There are currently no changes to policies for amounts above that threshold.
For imports coming into the EU, a similar minimum of €150 used to be in effect, and that too is going away. IOSS users will now be required to collect VAT at the point of sale for all purchases below that amount.
And many other nations — including Canada, India, Malaysia, and China — are working on similar types of tax reforms.
8. Other taxing issues for 2022 and beyond
Supply and labor shortage problems may affect your tax situation.
For example, with so many products being purchased and then returned, how do you handle the taxes collected? Must you amend tax returns for taxes already remitted?
If you sell products through one of the dozens of online marketplaces like Amazon or Wayfair, some states and countries are taxing them, a cost they may or may not pass on to you. Other states are letting these types of sellers stay exempt.
Non-typical product types
Many countries that have always taxed car rental services and taxis are now trying to tax car-sharing services as well.
If you sell online courses, these also may become subject to taxation. But there are several ways courses can differ from each other. Some courses are live, while others are pre-recorded. Pre-recorded courses are more like a product. Other courses require downloading materials. Some send materials through the mail.
Different nations and different localities may treat each of these types of training and education service situations differently.
What about software?
There are now at least ten different types of software product categories, such as packaged and delivered like a real product, packaged but downloaded electronically, customized, and several others. Again, each type may be taxed differently depending on the nation and locality where your business is determined to have a presence — that nexus issue that opened up this can of worms back at the beginning.
Need tax help?
WooCommerce does not offer tax services, and this article is meant to be informational and helpful for businesses that are trying to understand their tax compliance duties.
However, Avalara can help you with tax automation software that makes compliance much easier. For small companies in particular that do business across the U.S. or across international borders, there’s a lot to keep track of. Tax compliance software might be something worth looking into.
Check it out: The WooCommerce AvaTax extension integrates Avalara’s software directly with your store.