VAT, Business, and Sales Taxes Changes to eCommerce by 2022

The growth of eCommerce, the ease of purchasing increasing, as well as various ways to purchase and types of products to sell, governments are beginning to feel from the equation with regards to the collection of taxes from transactions. In the last few years, authorities around the world have updated laws to reflect the digital economics.

This means that dealing with taxes has become increasingly challenging for business owners. The year 2022 will bring more major modifications are in place and depending on the country or nations you are operating or reside in, may impact how you operate.

For U.S. businesses, crossing state lines doesn't differ much from crossing national borders. Actually, in many ways it can be much more complicated in comparison to, say, a business in one EU country that sells to consumers from the other EU nations.

As our friends at Avalara demonstrate in their guide to tax changes in 2022 it's not a small amount to discuss about this subject.

So to keep it simpler for now this article will give you a broad outline of the tax-related changes that will be coming for businesses within the U.S., the U.K. and the EU, and many different countries and regions. These are the most important ones that affect countries like the U.S., and the remainder are for other nations.

1. Nexus laws -- where your company is situated

In the case of U.S. businesses, you are required to collect taxes on sales to clients in states where there is the"nexus. This was once a simple. There was a connection with one state when it was where your workplace, warehouse or other tangible presence was situated. However, now that there are so many remote employees, many states claim your business has a relationship with them if they have employees within their boundaries.

That means you can potentially have a presence in multiple states even if your operations are in one. Beyond the physical presence, some states be able to consider you to have relationship with them if you sell over an amount of money or make more than a certain amount of transactions with customers within their respective state.

Complicating this is the fact that some products can be tax-free and those rules can be different in each state.

Additionally, as a result of the South Dakota vs Wayfair 2018 court ruling, states may now collect out-of-state sales taxes in order to purchase products in their state. The decision was made to permit brick and mortar companies to be on a more even playing field with internet-based businesses. But the logistics of it can become nightmarish.

It is further complicated in some states that have counties with different sales tax rates.

For online businesses, you should research each state -- or county which considers that you be physically or have an economic presence there and then determine the tax on sales due.

Find out more information about the changes to sales tax.

2. Different sales tax rates as well as boundaries and rules

Knowing what you are liable for to each state is hard enough. What happens if the situation changes?

Governments regularly update their tax rates for sales. Some items that used to be taxed are becoming exempt in some places like diapers as well as feminine hygiene products. Other items that weren't taxed in the past are now like single-use plastic bags.

Then there are the periodic rate adjustments like sales tax holidays or tax reprieves that may have been enacted as part of the COVID-19 outbreak. The public loves them, however they can make tax accounting a challenge for business.

In addition to tax rate changes You must also be aware of the boundaries between taxing jurisdictions. Some cities straddle two states. Some cities span two counties. Sometimes, the house across the street has an additional sales tax. And these boundaries sometimes alter.

S ee more on this, and more industry tax reforms in 2022.

3. What they buy from where and how they pay

What happens when a buyer purchases online, but wants the item delivered to the location for pick up when their address is in an entirely different tax district than the business? It's called Buy Online, Pick up at Store (BOPIS). The online sales tax may differ from the store that the purchase will be delivered.

There's a need to keep track of every purchase made by a customer so that you're sure that you make sure you are transferring the tax correctly to the correct country, city or state.

As an example, do you take the tax on sales to cover the entire purchase at once, or spread it out over the installments? Doing it upfront means the customer doesn't actually make equal payments. If you spread it out, what happens if the sales tax rates change before the entire payment has been completed? Are you required to take the updated rate for the remaining payments? What about BNPL charges from the service supplier? Also, what happens if they take back the item after any payments have been made even though 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 kinds of methods for sourcing that are used in U.S. states to determine who is responsible for sales tax:

1. Destination sourcing: based on geographical location of the buyer
2. Origin sourcing: based on where the seller is located
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 to use and was the most sensible. But now, with an increasing amount of interstate and international commerce, the distinctions are blurring and there's a lot of tax revenue going uncollected from online purchases.

This is why some states are shifting to destination sourcing. This means you pay taxes according to the country of the purchaser. Even for small businesses, if you sell items across the US You may need to keep track of orders made by buyers across every state.

5. Monitoring of sales and business transactions via digital technology transactions

Across much of Europe and Latin America, and the other regions of the globe nations are developing ways to monitor all business transactions so they can get the right amount of sales tax as well as VAT.

With the volume of international commerce in the EU, among and within the EU and Britain as well as among Europe as well as South Korea and other Asian countries, and also Canada and Latin America, various forms of electronic invoice are fast becoming commonplace.

There are 83 countries that have an electronic invoice or reporting legislation implemented, and a number of countries are working on this. Types of digital transaction monitoring comprise:

• Real-time reporting: transactions report as it occurs
• Standard Audit File for Tax (SAF-T) is a tool that makes it simple for authorities to gather tax data
• Electronic invoicing: the government approves each invoice before a customer sees it
• Invoicing for four days: Not so strict as the real-time requirements However, it's the same concept

All of these systems are designed to facilitate compliance and reduce the chance of errors and even tax avoidance. These systems also help audits become easier and faster.

L earn more about how countries use electronic invoices for sales tax monitoring .

Therefore, if your business is engaged in international commerce, you'll have to adhere to the laws of each country's taxes and invoice system.

Brexit is a great example of how this might be achieved.

Britain is now implementing the program known as Making Tax Digital, which will apply to businesses within the U.K. as well as companies selling products to it for example, any company located in the EU. The new system is also applicable to individuals who are self-employed U.K. businesses and landlords.

Furthermore, EU businesses that sell to people in Britain must charge them VAT. If the purchase is less than 150 euros, the business would make use of an Import One-Stop Shop (IOSS) which is an online registration site that helps adhere to VAT laws.

For those same EU companies that sell to countries within the EU They would utilize this One-Stop Shop (OSS) system, similar to the IOSS, but only to conduct business inside the EU.

Working with and accessing each of these platforms will require businesses to spend some amount of money up front, but it they will be able to more efficiently conduct business with consumers in the EU's many nations.

The U.S. has yet to implement a system for electronic billing or reportage.

6. The Harmonized System

The Harmonized System began in 1988 and, in the age of digital commerce today the Harmonized System has grown to become an essential part of global business activity.

Harmonized System Harmonized System is a method that allows for the coding and tracking of the products of every sector every time they cross an international border. This makes it simpler to monitor sales volumes across borders so accurate taxes on sales and VAT will be collected on both items and services.

The codes get updated every five years. In 2022 the seventh edition will come out.

Utilizing the HS codes may get complicated quickly since there aren't all countries that update their codes instantly. Certain need years to update their codes. It means you can be selling the same item in two countries and will have to use two different codes.

What happens if a particular product is classified incorrectly with the wrong code? Taxes could be assessed at the wrong amount and result in penalties as well as delays, delays at the border, and unhappy customers. Find out more information on the Harmonized System and related global tax problems.

7. Eliminating minimum taxation obligations

Particularly in particular in the U.K. and EU nations, previous minimum requirements for the VAT regime are beginning to fall away.

Imports that are coming into the U.K., there used to be an PS135 minimal order size prior to VAT was applied. It's now gone and so is the low-value consignment stock relief that used to be applicable for items that fell under PS15. VAT for both must now be collected in the store, with the customer, during checkout.

There are currently no changes to policies for amounts above the threshold.

In the case of imports entering the EU, a similar threshold of 150 euros used to be the norm, and that too has been removed. IOSS customers are now required to collect VAT at the time of sale on all purchases under that threshold.

In addition, many countries- including Canada, India, Malaysia and China and Malaysia are currently looking at similar tax reforms.

8. Other taxing issues for 2022 and beyond

Problems with supply

Problems with labor supply and shortages can affect tax planning.

In the case of many items purchased, that are then returned, how will manage the tax collected? Should you alter the tax return for taxes that have already been remitted?

Marketplaces online

If you are selling products on one of the hundreds of online marketplaces like Amazon or Wayfair Some states and nations are taxing the cost, which may or may not pass on to your customers. Other states are letting such sellers remain exempt.

Different types of product that are not typical

Many countries that have always taxed car rental services and taxis are currently trying to tax car sharing too.

If you sell online-based courses, you may become subject to taxation. However, there are many ways courses can be different from each other. Some courses are live, while others are pre-recorded. Pre-recorded courses are more like a product. Others require downloads of the material. Some send materials through the mail.

Different nations and different localities may treat each of these kinds of training and education service scenarios in a different way.

What about software?

At present, there are at least ten different types of software categories such as packaged and delivered as a genuine product digitally downloaded but packaged or customized, as well as a variety of others. Again, each type may be taxed differently depending on the country and location where your business is determined to be based -- that nexus issue that opened the box of worms at the beginning.

Need tax help?

does not offer tax services This document is intended to be informational and helpful for businesses that are looking to better understand their tax compliance duties.

However, Avalara can help you by providing tax automation software which makes tax compliance simpler. Particularly for small businesses that do business across all of the U.S. or across international borders, there's a lot to keep track of. Tax compliance software might be one thing to consider.