What subscription businesses need to know about sales tax

Tax
Tax

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Meer informatie 
  1. Inleiding
  2. Knowing where you have tax obligations
  3. Understanding product taxability

No matter what the cadence is, subscription charges should be treated as any other one-time charge for sales tax purposes. While it is a recurring charge, you don’t have to add any additional sales tax.

However, understanding details such as product taxability and economic nexus thresholds will be key to managing sales tax compliance for your subscription business.

In this article, we’ll help you understand which sales tax aspects to consider for your subscription business. However, note that this is general sales tax information, and you should consult a tax expert for advice specific to your business.

What’s in this article?

  • Knowing where you have tax obligations
  • Understanding product taxability

Knowing where you have tax obligations

All businesses are required to collect sales tax from customers when they exceed certain thresholds. These thresholds are referred to as economic nexus thresholds, and they are revenue-based, transaction-based, or both.

For example, in the state of Georgia, businesses only need to collect sales tax from customers if they have exceeded $100,000 in revenue or 200 transactions from customers in Georgia. Certain states only have revenue thresholds or 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 state. You can create a physical nexus by having an office space, remote employees, or a warehouse in a state. In general, if your inventory is being stored in a state, you will likely create sales tax obligations in that state. Selling online from your home can also create physical nexus in a state.

What does this mean for subscription businesses? Just like any other business, you must understand where you have tax obligations. If you have customers paying for a monthly curated box of coffee samples in Indiana, but you have not met any nexus thresholds in Indiana, then you don’t have to collect sales tax from these customers. However, you must monitor your sales in Indiana and ensure you start collecting sales tax from those customers once you reach a nexus threshold. Because subscription businesses manage recurring sales, they might reach nexus thresholds sooner than other types of businesses that manage stand-alone transactions.

Understanding product taxability

However, just because you have met a nexus threshold in a state does not mean you are required to collect sales tax. Not all goods and services are taxable—and if the items you are 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 a grocery item and are not taxable. But in Illinois, groceries are subject to a reduced sales tax rate of 1%. If you have customers in both states, you need to be aware of the varying laws and charge sales tax only when the subscription purchase contains a taxable item.

Consider the example of a monthly digital subscription to a newspaper. In some states, these types of subscriptions are not considered taxable, so no sales tax should be applied. However, since not all states have deemed these as nontaxable, you must understand where you have tax obligations—and if those states tax the relevant goods or services you sell.

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