A Publication of FastSpring Understanding International Sales Tax/VAT Requirements. Commerce in the Global Economy

Transcription

1 A Publication of FastSpring Understanding International Sales Tax/VAT Requirements Commerce in the Global Economy

2 Table of Contents Introduction An Overview of Sales Taxes in the United States Differences Within the US for Computing State Sales Taxes Variances in Filing Schedules for State Sales Taxes An Overview of VAT Rates and Rules How is VAT Different from Sales Tax The Challenges of Currency Conversion and VAT Customer Location and VAT Rules What Information Do You Need? Conclusion About FastSpring

3 Introduction International transactions have become a staple of commerce. Successfully navigating the tax regulations and procedures of each jurisdiction in a global marketplace can be challenging for a business of any size. Whether you are selling e-books, cloud computing, software, games, SaaS, subscriptions or other products online, it is critically important to be in compliance with all applicable tax codes because penalties and added fees can have a direct and significant negative impact on the bottom line. FastSpring is a leading commerce and subscription management company that helps companies expand worldwide sales and increase revenue in the online global economy. With multiple filing procedures and tax thresholds, international commerce requires a substantial investment in administrative education and implementation. Even if no taxes are due, there may still be filing requirements that incur a penalty if the reports are not submitted properly and timely. 3

4 Thousands of successful retailers have chosen to use a merchandising and fulfillment expert that facilitates all the US state sales taxes along with international VAT filings and payments. Others have elected to keep the function in-house. To help you decide the best option for your company, FastSpring created an informational Sales Tax/VAT guide with a general overview of international e-commerce. It is not designed to replace the services of professional tax advisors; it is meant to familiarize you with some of the complexities involved in filing and reporting sales in the United States and around the world. 4

5 An Overview of Sales Taxes in the United States Many states are now moving toward different ways to collect taxes. Currently in the United States, sales and use taxes are generally only charged at the final point of sale with resellers and wholesalers exempt from payment. However, many states are now moving toward different ways to collect taxes and the federal government is looking to implement a system where sales tax would be charged and paid based on the online customer s location. Such a system would present a new set of challenges but considering the increased tax revenue potential, most expect that it is more a question of when this becomes the law of the land rather than whether it will become part of the national tax structure. Since sales tax is a major source of revenue in all but a handful of states, the rapid growth of e-commerce has fueled movement towards a national policy for online sales transactions. 5

6 Differences Within the US for Computing State Sales Taxes While many states do not have a way to calculate or collect sales tax for online purchases of digital goods, many others have an obligation already in place for any merchant with a presence in the state to collect, report and remit tax for all e-commerce sales. In fact, more states are changing their definitions of what constitutes a presence in the state so as to trigger sales tax collection obligations for a greater number of remote sellers. Tracking these changing definitions state-by-state is important to surviving audits and avoiding non-compliance penalties. In terms of online purchases of digital goods, there are three main categories: software downloads, digital products such as ebooks and games, and SaaS services. Each of the 50 US states has different definitions for these three categories with respect to how they are taxed. Depending on the state definition, all three categories or only one could be considered and taxed as a tangible product. To add to the situation, some states may consider the items as intangible but still taxable as if they were tangible while other states such as California do not tax downloadable products. Each state varies in its laws and interpretations and keeping up with the changes from state to state can be daunting. 6

7 To illustrate just how differently sales taxes are treated from state to state, we have included a map showing sales tax treatment of software. Updated in 2013, this map was created by taxfoundation.org, which is a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since They note: Ideally, all software purchases should be taxable to final users and exempt for business users. Instead, states tax some kinds of software and exempt others, based on whether it is customized or off-the-shelf and whether it is on CD or downloaded, all silly distinctions for tax purposes. States like Hawaii, New Mexico, South Dakota, Tennessee, and Texas are at least consistent in taxing it all. No state exempts it all, although Florida and Maryland come close. As for why Arkansas, Ohio, and South Carolina tax custom software when you buy it on a CD but exempt it when you download it, your guess is as good as ours. As for why Arkansas, Ohio, and South Carolina tax custom software when you buy it on a CD but exempt it when you download it, your guess is as good as ours. - taxfoundation.org 7

8 We present state tax treatment of five different kinds of software: (1: triangle) pre-made canned software purchased in the form of tangible property like a disk or CD; (2: square) canned software downloaded directly onto a computer; (3: circle) custom software purchased on a disk or CD; (4: starburst) custom software downloaded; and (5: star) custom software customized by the user for their use. 8

9 Variances in Filing Schedules for State Sales Taxes Some states are set up for quarterly sales tax filings while others are on a semi-annual or annual basis. Other states base reporting requirements not on a calendar schedule but on gross sales figures. Keeping track of which states are on which schedule can be difficult and time-consuming. In the interest of protecting your bottom line, managing timely reporting is a business necessity. 9

10 An Overview of VAT Rates and Rules Over 150 countries around the world collect VAT (Value Added Taxes) and the rules for each country and divisions within each country such as states or territories can vary greatly. Understanding the difference between sales tax and VAT is an important first step for all new e-commerce sellers. Typically, sales tax and use tax are charged at the point of sale based on the final sales price. Value Added Taxes are exactly as they sound. At each step in the process of bringing an item to market, as value is added to the transaction, VAT is assessed based on current value. 10

11 How is VAT Different from Sales Tax? If you have an article of clothing selling online for $100, sales tax would be based on the $100 cost of the item. Let s use 10% for this example. Final cost to the customer: $ $50 fabric sold to designer for $55 $5 10% VAT remit to government With VAT, the fabric sold to the designer for $50 would trigger a 10% VAT of $5 which the seller of the fabric would charge the designer and then remit the $5 to the government. When the designer sells the clothing to a retailer for $80, the designer charges the retailer $88, keeps the $5 for the VAT already paid and remits the added $3 to the government. The retailer puts a price tag of $100 on the clothing and the customer is charged $110 which represents the $100 price tag plus 10% VAT. The retailer then deducts the $8 in VAT paid when it purchased the clothing and submits the $2 VAT to the government. 2 3 $80 clothing sold to retailer for $88 $100 clothing sold to consumer for $110 $3 10% VAT remit to government $2 Deducts $8 in VAT already paid when clothing was purchased and remits $2 to government At each step of the transaction, there are filings that must be made properly and promptly. It can be a difficult and time-consuming task to keep up with all of the filing and remitting obligations for both VAT and sales tax. 11

12 The Challenges of Currency Conversion and VAT Adding to the obligations for filing and remitting Value Added Taxes are differences in currency valuation from one country to another. Using the previous example, if the fabric was purchased from a Japanese vendor, the original $50 value would have been paid in Japanese Yen and the 10% VAT paid to the Japanese government at the equivalent of $5 US but at the current value in yen. At the next step in the process, a US designer may convert the transaction to US currency but if the final retailer is in the EU, the VAT charged to the online customer would be in Euro. Clearly, there may be challenges at each step of the transaction. It is necessary to determine what is being sold, who is selling it and what is the final sales price and currency used. It is also important to note that sales to businesses (B2B) are governed by different rules and rates than sales to consumers (B2C). Fabric purchased from Japanese vendor $55 fabric sold at the equivalent value in yen 10% VAT, $5 value in yen paid to Japanese government A US designer can convert transaction to US currency but if the final retailer is in the EU, VAT must be charged in Euros. 12

13 If your business is engaged in global e-commerce, you could end up spending a great deal of time and resources trying to determine not only all the right answers but in many cases, the right questions. Without accurate information, you will not be able to file the required paperwork and submit the VAT to the proper government agencies. Customer Location and VAT Rules If you sell e-books, software, online games, cloud computing services or SaaS in the global marketplace, as of January 1, 2015, there was a serious change in EU VAT rules that took effect, requiring the determination of the country in which your customer is located. For example: If you sell digital goods to a consumer, your company must determine the correct VAT percentage in effect for the country that the buyer is from (whether or not the buyer/consumer was in that country at the time of the purchase). If you sell digital goods to a company (with a valid VAT number), there is a 0 percent VAT charge. If you sell digital goods to a company without a valid VAT number, you must charge the correct VAT percentage for the buyer s country. If you are in the EU and sell digital goods to companies or consumers who are purchasing from within their own country, you must charge the correct local VAT. 13

14 What Information Do You Need? With the increased mobility of customers, billing or shipping addresses are no longer sufficient to determine the appropriate tax jurisdiction for VAT. To determine the correct VAT, you will need the following data on your customers: What is their country of origin? Is the purchase on behalf of a company or is it a consumer purchase? What is the VAT number and is it valid? What is the purchase amount? How much VAT should be charged? (This is important because if the buyer is in a different location when making the purchase, you need to determine the country where the digital goods will be used.) With the increased mobility of customers, billing or shipping addresses are no longer sufficient to determine the appropriate tax jurisdiction for VAT. While the industry standard is now the customer s IP address, it can be very challenging to determine unless you have the proper systems in place. Also worth noting is that the 2015 change in EU VAT requirements removed tax thresholds so now even if sales are extremely limited, there is a requirement to register, file and maintain accurate VAT records. 14

15 Conclusion Whatever you are selling in the global economy, it is vital that you keep abreast of changes in tax laws for all 50 states as well as for those for any country where you do business. Staying in compliance with all applicable tax codes and filing schedules will avoid penalties and added fees that can negatively impact cash flow and profitability. Using a digital commerce expert to facilitate sales tax and VAT filings and payments can free you and your staff to concentrate on doing what matters most: building your core business and expanding into new areas of opportunity. Using a digital commerce expert to facilitate sales tax and VAT filings and payments can free you and your staff to concentrate on doing what matters most. 15

16 About FastSpring Founded in 2005, FastSpring is a leading e-commerce and subscription management company that helps thousands of clients, both large and small, sell more of their products worldwide in today s challenging online global economy. With a platform that can work across boundaries and accept more than a dozen currencies with display options in over 20 languages, FastSpring can handle tax collection, compliance and payment on your behalf, including management of different Value-Added Taxes (VAT) from around the globe, US state sales taxes, and more. FastSpring s team of experts and award-winning support specialists is available to help make collecting payments and paying only the appropriate amount of taxes for your valuable goods and services easy and error-free. For more information about FastSpring services visit sales@fastspring.com, call (U.S.), or (Worldwide). 16