Companies are adopting a subscription-based business model now more than ever and procuring the rewards and benefits. The advantages of this model include better customer relationship management, predictable revenue streams, and more. It not only benefits the merchants but also the consumers as well. It allows for the option of subscribing to an assortment of goods and services on a recurring basis without having to give it a second thought.
While it provides simplicity in some aspects, the unique nature of this transaction adds a level of complexity to calculating and remitting sales tax.
Many subscription product sellers are not aware of how economic nexus and sales tax apply to their business. If you utilize a subscription model and want to avoid unexpected sales tax liability, you need to start by taking a hard look at your business. We always start by helping you answer the 3 most important questions when it comes to sales tax…
Do I Have Nexus
In 2018, the South Dakota v. Wayfair, Inc. supreme court decision expanded the definition of nexus to include economic nexus. Basically, if you sell enough in a state you may have to register, collect, and remit sales tax there regardless of whether or not you have a physical presence in the state.
Despite the fact that your business may be out of state, economic nexus requires businesses to pay taxes in other states if they meet that state's economic nexus threshold.
Knowing whether you’ve established economic nexus can be complicated and requires a thorough review of your operations and the laws in each state. To do this it is important to contact a sales tax specialist.
Each state has its own approach to determining economic nexus and legal grounds for taxing subscription products. Some states base economic nexus on an economic threshold of total sales in their state, some on total sales and/or a threshold on the number of transactions, some on only the total volume of taxable sales, and the thresholds are not the same in every state. When needing to know your sales tax responsibility in each state, you will need to know the thresholds and how your specific subscription may be taxed in that state… Is your subscription taxable, is it taxable at a reduced rate, and/or does the taxation follow the same rules as products when your subscription provides bundled products and services? That’s why question two is so important.
Is What I Sell Taxable?
Each state has its own sales tax legislation, rules, and exemptions on what products and services are taxable; therefore, knowing the taxability of a subscription that includes multiple products and/or services can be especially complex.
In most situations, states will consider the products you ship to be a sale of tangible personal property and you will need to collect sales tax unless of course, you include supplements, food, medications, or any other items that may be subject to a reduced rate or not subject to tax at all. It is important to be mindful of what products are subject to sales tax so they can be included in the monthly subscription fee paid by the customer.
Some subscriptions include services that may or not be taxable and may put the seller in a position to understand if the state would see the bundled fee as a sale of products subject to tax, or a service that’s nontaxable. Or worse yet, maybe the state determines any taxable item as part of a bundled fee (no matter how small it is) makes the whole bundle taxable. Many states have specific legislation on how bundled transactions are handled for sales tax purposes.
Online subscriptions are a new and developing area of the market, and states are often a few years behind new transaction types and especially technology. But, they catch up and often capture transactions under taxable categories, or introduce new legislation to capture new revenues. Laws are consistently changed, so it requires consistent attention.
Who’s Responsible for Collecting the Sales Tax?
The answer to this question ultimately boils down to how you sell your product. Do you use a marketplace platform that has the responsibility of collecting and remitting sales tax? Or do you sell it on your own platform, website, or store where the responsibility is yours?
Do not assume that your product is not taxed or not taxable. We see companies assume there are no sales tax implications when they sell services or intangible or digital products…
Ignoring potential sales tax responsibility, post-Wayfair, is the most costly sales tax mistake you can make. 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. The cost of compliance is much less expensive than the cost of non-compliance… sales tax coming out of your own pocket weeks, months, or years after the transaction is a real margin killer.
Subscription product taxability can be a major source of confusion.
As complex as it is, we can provide simplification and guidance. That’s why we have the Whats Next Call. You can bring us your questions and get your concise, simplified answers; no strings attached.
We want to learn about you and your business, we also want you to learn about us and how we can support you. If at the end of our conversation you find that we are not a good fit, as long as you walk away with greater confidence and peace of mind on your next steps, we are happy.
Let us help you find peace of mind; we look forward to hearing from you.