Sales Tax Laws: How eCommerce Brands Can Respond to Changing Legalities
Tax laws are complicated enough for citizens. For global eCommerce companies, they can be mind-boggling.
Sales tax laws are particularly complex, and they are becoming more so by the day. Across the globe, dozens of countries are creating and updating these laws, causing migraines for executives at global brands looking to remain compliant.
The State of Global Sales Tax Laws
Digital tax laws are changing around the world as governments move to charge taxes based on the location of the purchaser rather than the seller, explains sales tax software provider Quaderno. Quaderno highlights 22 regions that have recently established new digital tax laws, including Australia, the EU, and the United States, as well as nine other regions planning to impose a digital tax.
Indirect tax such as VAT is a particularly hot topic in these countries. “Across the globe indirect VAT/GST rules are being amended to ensure that foreign digital suppliers become liable for the collection and remittance of these taxes,” says Taxamo. The VAT/GST compliance company notes that changes are happening with indirect tax collection in 15 countries, including much of South East Asia and South America.
State-Level Compliance in the US
It’s not just national-level jurisdictions that eCommerce brands need to keep an eye on. In the United States, changes in online sales tax have been happening at the state level since the U.S. Supreme Court ruled to overturn a 1992 decision in South Dakota v. Wayfair in June 2018.
This allowed states to tax online sales above a certain threshold, writes NetSuite’s Ian McCue. “Back in June , a number of states had already passed laws that taxed online sales, and the Supreme Court decision affirmed their legality. It also opened the floodgates for states to establish their own rules around e-commerce and start collecting duties.”
Since then, 37 of the 45 states that have a sales tax have established new laws related to eCommerce. The others could still do so. What’s more, the tax laws vary from state-to-state, McCue says. Only 23 states follow South Dakota’s guidelines, with the others adopting their own rules.
“Without a doubt, there is a lot of ‘chaos’ right now in the U.S. around Sales Tax,” writes eSellerCafe’s Richard Meldner. Unless you have no presence whatsoever in the States, Meldner continues, the changes are going to affect both US-based and international sellers. For global eCommerce brands, a state-by-state approach to tax compliance will be necessary.
Physical Presence vs. Economic Presence
Lacking a physical presence isn’t enough to avoid tax obligations in some countries. Thomson Reuters reporters Jessica Silbering-Meyer and Robert Sledz point to India as one of the first countries that has expanded laws to count any economic activity with residents as a “significant economic presence” that requires taxation. The expanded law came into force on April 1, 2019.
More changes to global sales tax laws might yet be on the way, write UPS’s Kate Gutmann and Amgad Shehata. At this year’s World Economic Forum, 76 countries committed themselves to establishing an international eCommerce framework that would lead to a better business and regulatory environment.
Instability in the UK
Then there is the matter of Brexit.
The UK is a major global eCommerce player, and the exact nature of the country’s future relationship with the EU is still to be decided. eCommerce brands should be ready for further disruption, writes the team at Easyship.
“Cross-border eCommerce faces a serious challenge from Brexit, but much of its impact is still uncertain as the exact terms of the UK’s withdrawal from the EU remain in flux. Entrepreneurs focused on global eCommerce will need to pay close attention to developments if they hope to get through this tumultuous period with minimal disruption.”
Changing Sales Tax Laws Create 3 Big Problems for Global Brands
Changing sales tax laws are bad news for brands that rely on eCommerce, writes strategic communications professional Richard Levick. While giants like Amazon and Apple will be fine, everyone else is going to have a tough task keeping up.
Changes create enough problems for small brands operating in one market. For cross-border eCommerce brands, it’s another issue entirely. As more sales tax laws change, more challenges arise.
1. Tracking Changes and Accounting for Them
Perhaps the biggest challenge facing global eCommerce brands is keeping track of what is changing where.
Nick Hart, Senior Manager of VAT at accounting firm Saffery Champness, believes “E-commerce companies doing business in foreign consumer markets need to be vigilant about keeping up with tax laws in every country where they have customers purchasing their products and services.” Trends in tax law suggest that this will be the case in many countries, regardless of whether the company has a physical presence or simply an economic presence.
“No matter where you operate, you’ll be required to comply with local tax collection regulations, so it’s critical to have an accounting infrastructure in place,” writes Scott Heimes, Chief Marketing Officer at Zipwhip.
When tax laws change regularly, that infrastructure needs to be even more robust and responsive, however. Even when tax laws have been changed in one country, there’s no guarantee those changes will enjoy any kind of permanence. The growth of eCommerce companies is making governments flip-flop over new laws, writes the team at Pitney Bowes.
“Even in developed countries, such as the U.S., there is debate about the applicability of state taxes on eCommerce transactions, so you can imagine the inconsistency of legal and tax regulations in less developed countries.”
It’s not enough to have to track things by country, either. Many eCommerce brands will have several different sales channels in each country where they operate. Calculating and reporting tax on all of these channels is essential, writes Karl Ciz, UK Country Manager at UNITEDPRINT. Everything must be clearly segmented for the tax authority rather than run through a single account.
2. Administrative Burdens When Entering New Markets
It can be tough to enter new markets at the best of times, write Chad Brooks, Nicole Fallon, and Saige Driver at Business News Daily. “Learning the different tax codes, business regulations and packaging standards in different countries can be challenging.” There’s also the issue of setting up foreign bank accounts, or even foreign business entities.
That, by the way, is why we almost always suggest brands partner with full-service eCommerce companies to establish those local footprints.
This becomes an even more pressing concern when the climate around sales taxes is turbulent. Tax is inevitable, but international trade makes everything more complicated, writes the team at Ecommerce Guide. Different countries don’t just have different tax rates. They also have different rules around creating and retaining records. “Are digital invoices and receipts acceptable [in that market]? Even if they are, are you confident that you can digitally archive your material for the amount of time required?”
Complicated, evolving tax laws create higher barriers to entry for eCommerce companies entering a new market.
3. Keeping the Customer Experience Seamless
Sales tax can be as taxing on customer experience as it is for the company itself. Complex and constantly changing sales tax laws mean confusion is almost inevitable, writes Vertex Inc.’s Brian Wilchusky. “When tax calculations for online transactions are inaccurate – or so noticeable as to be disruptive – they can give rise to CX problems and potentially costly compliance risks.”
Companies don’t just have to calculate how much tax needs to be added. They also need to consider at what point in the sales process that tax needs to be applied, writes Alex O’Byrne, Co-Founder of We Make Websites.
“For example, in the United States, online shoppers are familiarized with experiencing extra fees for tax and VAT at the checkout and don’t usually expect to see tax or VAT included in product listings. However, in the European Union, product listings on e-commerce sites are legally required to include the value-added tax.”
It’s not just a matter of staying on the right side of the law. Add additional charges to orders at checkout in countries like the UK, O’Byrne writes, and you’ll infuriate customers, who will then abandon their shopping carts.
What’s the Solution?
Global eCommerce brands have two options when it comes to dealing successfully handling changes in global sales tax laws. The first is to exclusively use third-party marketplaces as your distribution channels.
“Some countries, including the U.K., Germany, and India, are increasingly leaning on online marketplace platforms such as Amazon.com Inc. and eBay Inc. to take a role in collecting value-added tax (VAT) or goods and services tax (GST) from foreign sellers,” write Bloomberg’s Hamza Ali, Isabel Gottlieb, Ryan Prete and Benjamin Parkin.
Many countries are considering or have already passed legislation which makes collecting sales tax a non-negotiable. This is happening in the US. too. The team at Avalara points out that 12 states have enacted this kind of legislation so far, with 10 more states considering it.
While there are upsides to partnering with these platforms, they are far from perfect. Further, these platforms aren’t available in a host of countries that brands may wish to sell in. A more sustainable and comprehensive solution is to partner with a merchant of record.
A merchant of record is responsible for a huge number of things, writes Tom Villante, Chairman, CEO, and Cofounder of Yapstone. They process payments, distribute funds, ensure compliance, create fraud mitigation systems, and — crucially — process sales tax.
Finding a reliable merchant of record is a must for eCommerce brands that want to grow, writes Jia Wertz, CEO of Studio 15. “Online businesses rise and fall under the construct that exchanging money between the consumer and seller must be frictionless. There is no question that how that money is transferred becomes critical in ascertaining how strong the business to consumer relationship will be.”
As an authorized merchant reseller, Scalefast is held financially liable by banks and responsible for declaring taxes in every country you sell in. As a result, companies who partner with Scalefast are able to expand their business across borders without the risk. Find out more about how we can become your brand’s global infrastructure.