VAT, Business, and Sales Tax Changes for eCommerce in 2022.

With eCommerce booming, borderless purchasing increasing, as well as many different ways to buy and the types of goods to sell, governments are becoming more and more out of the loop with regards to the collection of tax on transactions. Since the past couple of years, officials around the world have updated laws to reflect the digital economy.

This means that managing tax requirements has become more difficult for merchants. By 2022, even more significant adjustments are coming into effect depending on the country or countries you operate and reside in, could impact how you operate.

In the case of U.S. businesses, crossing state lines doesn't differ much from crossing national borders. Actually there are many aspects that could be more difficult in comparison to, say, a business in one EU nation selling to consumers in other EU countries.

As our friends at Avalara show in their tutorial on tax changes in 2022 it's not a small amount to talk about in this area.

To make it easier to begin We'll give you a broad review of the tax-related changes that will be coming that affect businesses in the U.S., the U.K. as well as the EU, and many others countries and regions. The first two are mainly for countries like the U.S., and the rest concern other countries.

1. Nexus law: where your company is situated

For U.S. businesses, you are required to collect sales tax for sales to clients in states where you have what's called the"nexus. Again, this was not a problem. You had a nexus in a state if it's where your office, warehouse, or any other physical presence was. Now, with many remote employees and many states claiming that the business is connection if it has employees within their borders.

It is possible to operate in several states even if the operations you conduct are within the same. Plus, beyond an actual presence, a state may consider you to have a connection to their territory in the event that you sell more than the amount of a specific amount, or perform more than the specified amount of transactions for customers who reside in their respective state.

Complicating this is the fact that certain items can be tax-free and the rules for exemption are different in each state.

Additionally, as a result of the South Dakota vs Wayfair 2018 court decision, states can now collect out-of-state sales taxes for products purchased within their respective states. The decision was made to permit brick and mortar companies to compete on a even playing field with online businesses. The logistics can become nightmarish.

It is further complex in states in which different counties have different rates for sales tax.

For online businesses, you should research every state, or county that deems you to be physically or have an economic presence there and then determine the tax on sales you are liable for.

Learn more about sales tax changes.

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

Knowing what you owe in each state can be hard enough. But what happens when things change?

The government is regularly updating its tax rates for sales. Some products that were previously required to be taxed are becoming exempt in some areas including diapers, as well as feminine hygiene products. Other items that weren't taxed before now are items that are single-use, like plastic bags.

Then there are the rates that are temporary like sales tax holidays or tax exemptions which may have been put into place during the COVID-19 pandemic. They are adored by customers, but they can make tax accounting extremely difficult for businesses.

In addition to the tax rates changing You must also be aware of boundaries between the taxing authorities. There are cities that cross two states. A lot of cities are located in two counties. In some cases, the home next door has an additional sales tax. These boundaries may shift.

CSS Get more information on these and other industry tax reforms in 2022.

3. Where customers buy and how they pay

What happens when a client buys online but has items delivered to the shop for pick-up or delivery, but their home is in another tax district that is not the company? It's called Buy Online, Pick up at Store (BOPIS). Taxes on sales online could be different from the location in which the order is made.

You'll need a way to track this for every purchase made by a customer so that you can be sure to make sure you are transferring the tax correctly to the correct nation, city or state.

For example, should you charge sales tax on the purchase price in advance or distribute it over the installments? Doing it upfront means the customer doesn't actually make equal payments. If you spread it out in installments, what happens if taxes on sales change prior to the entire payment has been paid? Do you need to pay the updated amount to the remainder of your payments? And what about any BNPL costs from your service supplier? And, what will happen if they decide to returned the item prior to all payments were made but you have already paid your taxes to the government?

Each state, country and county will handle these situations differently.

4. Sales tax sourcing

Three types of sourcing methods that are used in U.S. states to determine the tax payer:

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

Prior to the Internet and eCommerce, most places used origin-based sourcing since it was the most simple and made the most sense. Now, however, due to an increasing amount of interstate and international trade, the boundaries are blurring and there's an abundance of tax revenues that is not collected on online purchases.

For this reason, many states are switching to destination sourcing, meaning the tax you pay is according to the country of the purchaser. For small-sized businesses, if you sell products nationwide in the US, you may have to track purchases made by customers from every state.

5. The monitoring of digital sales by businesses transactions

All across Europe across Europe Latin America, and the rest of the world nations are developing ways to track all transactions in business to ensure they get the right quantity of sales tax and VAT.

Again, with so much international commerce inside the EU and between and within the EU and Britain and in between Europe with South Korea and other Asian countries, and also Canada and Latin America, various forms of electronic invoice are fast becoming standard.

In 83 countries, there is already some type of electronic invoicing or reporting law in place, and more are working to implement it. Types of digital transaction monitoring include:

• Real-time reporting: transactions reporting in real time as it takes place
• Standard Audit File for Tax (SAF-T): makes it easy for tax authorities to collect tax information
• E-invoicing: governments approve each invoice before a customer sees it
• The requirement for invoicing on a four-day basis is not quite as stringent as real time However, it's the same concept

Each of these systems is designed to facilitate compliance in addition to reducing mistakes and reduce tax avoidance. Additionally, they make auditing simpler and quicker.

L earn more about how countries have adopted electronic invoicing to assist with sales tax monitoring .

If your company is involved in international trade, you'll need to comply with each nation's taxes and invoice method.

Brexit is a great illustration of how this could function.

Britain has begun to implement an initiative called Making Tax Digital, which will apply to businesses within the U.K. as well as those selling to it, like any other located in the EU. This new tax system will also apply to individuals who are self-employed U.K. businesses and landlords.

And EU firms that sell to those living in Britain are required to tax them with VAT. If the purchase is less than 150 euros, businesses would utilize IOSS, which is the Import One-Stop Shop (IOSS) which is an online registration site that makes it easier to comply with VAT requirements.

In the case of those EU businesses selling to other countries within the EU They would utilize this One-Stop Shop (OSS) system which is similar to IOSS however, only to conduct business inside the EU.

Accessing and working with the various systems is going to require businesses to spend some money upfront, but they will be able to more quickly conduct business with customers 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 online commerce it's now an essential part of global commerce.

The Harmonized System is a method to code and track all products across every industry each when they travel across an international border. It will be easier to monitor sales volumes across borders . This will ensure that precise tax and VAT can be collected on products as well as services.

The codes are revised every five years. Then, in 2022, the seventh edition will be released.

Using the HS codes can be complicated very quickly due to the fact that there aren't all countries that update their codes right away. Others require years. It means you can be selling the same item in two countries which means you will need to apply two different codes.

What happens when a product is not classified correctly with the correct code? Taxes could be assessed at the wrong amount and result in penalties and delays, problems at the border, as well as unhappy customers. Read more about the Harmonized System and related global tax issues.

7. Eliminating the minimum tax requirements

In particular, particularly in particularly in U.K. and EU nations The previous minimum requirements when VAT applies are starting to fade away.

Imports that are coming into the U.K., there used to be a PS135 minimum order amount before VAT applied. It's now gone along with the low-value consignment stock relief that used to be applicable for items that fell under PS15. VAT for both of these will now be collected at the point of sale, with the purchaser at the time of the checkout.

The current policy is not subject to any changes in the policies that apply to amounts over that threshold.

When imports are made into the EU A similar threshold of 150 euros used to be in effect however that requirement has been removed. IOSS users will now be required to collect VAT at point of sale on all purchases under that threshold.

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

Supply problems

Problems with labor supply and shortages can affect tax planning.

As an example, with the many products being purchased that are then returned, how do manage the tax collected? Should you alter tax returns for taxes already remitted?

Online marketplaces

If you sell products through one of the dozens of online marketplaces, such as Amazon or Wayfair Some states and countries are taxing these marketplaces, and the tax may or may not pass on to the seller. Some states let such sellers remain free of tax.

Non-typical product types

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

If you offer online-based courses, you may become subject to taxation. However, there are many methods that courses differ from one another. Some courses are live, and others have been pre-recorded. The pre-recorded course is more of an item. Others require downloads of the material. Many courses offer materials by mail.

Different localities and nations might approach these types of education and training circumstances in different ways.

Software?

There are currently at most 10 different kinds of software product categories, including packaged and shipped in the same way as real products, packaged but downloaded electronically or customized, as well as a variety of others. Each type of software may be taxed differently depending on the country and location in which your company is determined to be based -- that nexus issue that opened up this can of worms back at the very beginning.

Do you need help with taxes?

Does not provide tax assistance This post is designed to provide information and guidance for businesses that are seeking to learn more about their tax compliance duties.

However, Avalara can help you with tax automation software that makes compliance much easier. Particularly for small businesses which do business within all of the U.S. or across international borders, there's a lot to track. The tax compliance software is something worth looking into.