Whatever the cadence is, subscription charges should be treated the same as any other one-off charge for sales tax purposes. While it is a recurring charge, business don't have to add any additional sales tax.
However, for subscription businesses based in the US, understanding the finer details, such as product taxability and economic nexus thresholds, will be key to managing sales tax compliance.
In this article, we'll help subscription businesses to understand which sales tax aspects to consider. However, please note that this is general sales tax information. Businesses based in the US should consult a tax expert for tailored advice.
What's in this article?
- Knowing where a business has tax obligations in the US
- Understanding product taxability
Knowing where a business has tax obligations in the US
All businesses in the US are required to collect sales tax from customers once they have exceeded certain thresholds. These thresholds are referred to as economic nexus thresholds, and they are revenue-based, transaction-based or both.
For example, in the US state of Georgia, businesses only need to collect sales tax from customers if they have exceeded US$100,000 in revenue or if they have processed 200 transactions from customers in Georgia. Certain US states only have revenue thresholds, while others require businesses to exceed both the revenue and transaction thresholds before collecting sales tax. These thresholds vary from state to state.
In addition, businesses can reach a nexus threshold by having a physical presence – or "physical nexus" – in a particular US state. They can create a physical nexus by having an office space, remote employees or a warehouse in the state. In general, if the business's inventory is being stored in a US state, it will probably create sales tax obligations in that state. Selling online from home can also create physical nexus in a US state.
What does this mean for subscription businesses in the US? Businesses in the US must understand where their tax obligations lie. If they have customers paying for a monthly curated box of coffee samples in the state of Indiana, but they have not met any nexus thresholds in Indiana, then they don't have to collect sales tax from these customers. However, they must monitor their sales in Indiana and ensure that they start collecting sales tax from those customers once they have reached a nexus threshold. Because subscription businesses manage recurring sales, they may reach nexus thresholds sooner than other types of businesses that manage stand-alone transactions.
Understanding product taxability
However, just because a business has met a nexus threshold in a US state does not mean that they are required to collect sales tax. Not all goods and services are taxable – and if the items that a business is selling are not taxable, then you are not required to collect sales tax on them.
Subscription businesses commonly sell items such as food, drinks, clothing and software-as-a-service (SaaS). Product taxability varies significantly by state for these categories. For example, in Indiana, coffee grounds are considered to be a food item and are not taxable. But in Illinois, food is subject to a reduced sales tax rate of 1%. If a business has customers in both states, they need to be aware of the varying laws and only charge sales tax when the subscription purchase contains a taxable item.
Consider the example of a monthly digital subscription to a newspaper. In some US states, these types of subscriptions are not considered taxable, so no sales tax should be applied. However, given that not all states have deemed these subscriptions to be non-taxable, businesses must understand where their tax obligations lie – and if those states tax the relevant goods or services that they sell.