Subscribing to Sound Sales Tax Compliance Judgment
Let's explore the rules and risks around sales tax requirements on new services sold through subscription models.
As more companies undergo digital transformations that create profitable new sales channels, their leaders should recognize that new offerings, especially those delivered via subscription models, may transform their tax compliance requirements.
Subscription models that generate recurring revenue are booming across a surprising assortment of business-to-consumer and business-to-business industries and companies. So much so that the publication Multichannel Merchant deemed 2020 “The Year of Subscription Service Growth.” As consumers, most of us are highly familiar with the convenience of subscribing to video streaming services, music services, food-delivery services and other offerings from digitally born companies.
However, business leaders tend be far less familiar with the sales tax compliance requirements on new services sold through the subscription model. This is especially the case when companies that have traditionally sold tangible goods—elevators or mechanical equipment, for example—begin selling intangible services, such as online monitoring and maintenance services.
This unfamiliarity makes it imperative for tax teams to educate business colleagues on:
- The sales tax compliance risks associated with the subscription model;
- The dizzying number of state and local sales tax rules and rates that come into play depending on the characteristics of the product or service being sold, the location of the sale, and any applicable tax holiday and sales tax exemption stipulations; and
- The fact that U.S. sales and use tax rules and rates change constantly (similar volatility also defines VAT/GST rules and rates throughout Europe and other global regions).
In the U.S. alone, there are in excess of 11,000 taxing jurisdictions, and these taxing authorities have made more than 6,000 new and updated sales and use tax rates during the past decade. More sales tax rate changes are almost certainly on the way as state and city governments grapple with budget deficits due to declines in sales tax revenues they suffered during COVID-19 social distancing measures.
Even when subscription sales teams and their tax colleagues are well-aware of the complexities of sales tax compliance requirements, the process of satisfying those requirements can be arduous. Fortunately, tax automation can tame that complexity. Even better, many subscription sales platforms offer smooth integrations with tax engines that can be easily configured to automatically manage sales tax calculations on a global basis while keeping current with relevant rates and rules (including those related to sales tax exemptions and tax holidays).
The 2020s may indeed shape up to be the decade of the subscription services model. Companies that optimize this opportunity will do so by identifying—and eliminating—associated sales tax compliance risks as quickly and efficiently as possible.
PLEASE REMEMBER THAT THE TAX MATTERS PROVIDES INFORMATION FOR EDUCATIONAL PURPOSES, NOT SPECIFIC TAX OR LEGAL ADVICE. ALWAYS CONSULT A QUALIFIED TAX OR LEGAL ADVISOR BEFORE TAKING ANY ACTION BASED ON THIS INFORMATION. THE VIEWS AND OPINIONS EXPRESSED IN TAX MATTERS ARE THOSE OF THE AUTHORS AND DO NOT NECESSARILY REFLECT THE OFFICIAL POLICY, POSITION, OR OPINION OF VERTEX INC.
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