Subscription boxes are unlike other forms of e-commerce. Customers subscribe to monthly deliveries of a good, like clothes, food or razors for shaving. Sometimes consumers select the item and know what they will receive, other times it’s random like a surprise gift box every month.
The unique nature of this transaction has a number of effects on calculating and remitting sales tax. If you sell subscription products, it’s worth considering how these three taxability factors will affect your business.
Subscription products are an indirect transaction. The customer pays a subscription fee that covers the cost of goods.
The thing to be mindful of is that the products are subject to sales tax. So you have to tax the goods through the monthly subscription fee.
While that sounds simple, it can get complicated pretty quickly.
Subscription fees are often subject to discounts and payment plans. The tax base varies if you pay it monthly, annually, semi-annually or whenever there's a blue moon. The frequency and discount doesn't matter so much. But whenever you do receive pay it’s critical to make sure that the tax is getting paid along with it.
Your taxability also depends on what states you’re delivering to.
If you do enough business in a state, you’ll exceed the threshold and establish economic nexus there.
Identifying nexus on subscription products is a lot like identifying nexus for other products and services. You look at sales tax laws in the states where you have sales.
Then, you determine if your business meets taxability or threshold requirements there. If you do, you’ll then have to collect and remit sales tax for all transactions you conduct in that state.
Of course, in a post-Wayfair tax system, this is easier said than done. There are as many sales tax laws as there are states. And each state has its own approach to determining economic nexus and legal grounds for taxing subscription products.
(Not sure if you’ve triggered nexus? Visit the economic nexus state guide1 by the Sales Tax Institute for more information.)
In the same way that each state has its own sales tax legislation, they also have their own rules on what products are taxable.
In most cases, states will consider the products you ship to be a sale of tangible personal property, and you're going to have to collect tax.
That said, things start to get complicated when you consider exemptions. Clothing is taxable in many states, but some will exempt clothing under certain amounts.
The taxability of food boxes varies as well. In some states, the taxability of food depends on the specific product. Some items will fit within the definition of groceries. Packaged desserts, for example, might be taxable, while produce might not be. This means some items are either tax exempt or sell at a reduced tax rate.
You also have to be careful about shipping. Some states will charge sales tax on the shipping of your subscription products. Plus, some states might consider the subscription box itself to be one of the goods you’re selling.
In summary, this presents a unique challenge, because boxes can have a mix of exempt and non-exempt items. When that happens, the states all have different ways to handle the mix of taxability.
If this sounds confusing or cagey, that’s because it is. Online subscription products are relatively new, and since South Dakota v. Wayfair2 sales tax laws change constantly.
This is a new, developing area, and states haven't necessarily caught up.
That said, states understand how to tax more developed products such as food and clothes. Because there’s no legal gray area, it’s beneficial to take a conservative approach to taxing these types of products.
The whole point of subscription products is the variety. But as the contents of the box vary, so does the taxability.
The taxability of your box changes by month, by state.
This presents a problem: your tax liability on the contents changes, but you have to cover it by taxing the fixed subscription fee. One way to manage this is to have variable taxes on each subscription payment.
Again, this is all easier said than done. You’ll need to closely monitor your taxability and collections by month, by state.
The worst sales tax mistake you can make is to fail to collect a tax when you should have. When you collect at the time of sale, your customer will willingly pay it. If you fail to collect and remit sales tax upfront, it will come out of your pocket either during an audit or when you try to get compliant.
If you're not sure whether to collect tax for your subscription products, it’s better to be safe and charge the sales tax.
Like many things with economic nexus, the only way to know your taxability is to take a hard look your business. Because this can be complex, many e-commerce sellers turn to sales tax specialists for help. Here are a few steps you can follow if you decide to do so.