Sales tax is a necessary part of doing business online. And while not all digital products are subject to sales tax, an increasing number are. And it’s easier than ever for a state to require companies to collect on their behalf, regardless of where they are located. Going a step further, how do you account for sales and use taxes in other countries to which you might sell? Every country, and in many cases, each state or province within a country has a different set of rules and requirements for when to collect, how much to collect, and how to report and remit sales tax.
Let’s take a closer look at what these entail, how to implement the tools and resources needed for effective sales tax collection, and what problems might develop.
What Is Sales Tax?
Sales tax is levied by a government - local, state, or federal - on goods or services purchased by an individual or business. That might sound relatively simple on the surface, but keep in mind that sales taxes are different in almost every location. There is no single law that applies to all businesses regardless of location. And in June 2018, it got even more complicated in the United States with the Supreme Court’s ruling in Wayfair vs. South Dakota, which found that states could collect sales tax on all transactions, regardless of the physical location of the seller. If someone sells into a state, that state can collect sales tax on those transactions.
Suffice it to say, if you are selling digital goods or services online, there’s a good chance you should be collecting sales tax. At a national level, sales tax often has different names and general requirements. These include:
- The United States - Most often called sales tax, but sometimes also referred to as use tax, these taxes are collected by individual states and sometimes local municipalities.
- Canada - Canada has a tiered tax system with a GST at the federal level and PST charged at the Province level, similar to how sales tax is handled in the United States. The combination of the two is the HST (Harmonized Sales Tax) rate and applies in six of the provinces. Alberta charges no PST at this time.
- Europe - The Value Added Tax (VAT) is a consumption tax within the European Union. There are thresholds in most of the EU countries to minimize taxation on small businesses, but the average VAT is 21.3% across all EU member countries.
- Australia - Australia collects a 10% tax known as GST on almost all goods, services, and items sold or consumed in Australia. Those sold to buyers outside of Australia are generally not charged GST.
Each of these regions has a different process by which the sales tax is calculated, levied, and collected, so it’s important that you are fully aware of your legal obligations within each region before you start selling there. We’ve partnered with TaxJar, a leading expert on sales tax requirements and collection, and you can find in-depth resources there about how to make these calculations and stay compliant.
On What Goods are Sales Tax Collected?
The first step in determining if you owe sales tax is nexus. This is the term used to describe a business’s legal obligation to collect and remit sales tax within a certain jurisdiction. In the past, a physical presence was required to establish nexus. However, most states and many other countries have now passed what are called “economic nexus” laws that define nexus differently.
Economic nexus is a blanket term referring to any company that conducts business in a given location, regardless of their own physical location. TaxJar has a comprehensive guide to economic nexus by each state, with information on the 43 states that currently have relevant laws
But even with new nexus laws, not all transactions are taxable. While almost all physical sales are taxable save some very specific exceptions - often related to medical equipment, farm gear, and unprepared foods - it’s not as cut and dry with digital goods. For reference, there are currently only 28 states that tax digital goods while 23 states do not (four states have no sales tax at all). This is changing currently as many states look at revising their sales tax laws to account for economic nexus. Here’s a more detailed breakdown with tips on how to manage digital sales tax from TaxJar.
Automatically calculate sales tax with DepositFix
With DepositFix, you can calculate sales tax dynamically, based on your location (sales tax nexus) and the location of your customers. Thanks to our integration with TaxJar, you don’t have to worry about different tax rates.
There are simple 2 steps to activate tax calculation for your form:
- Provide your business address in the settings.
- Activate ‘Automatic Sales Tax’ option in the form builder for a specific form.
After that, you’ll see a new ‘Billing Country’ field on your form, the country is automatically preselected based on the location of your customer.
For US and Canada it will display ‘State’ and ‘Zip Code’ as well since these fields are also required for tax calculation.
After the address fields are specified, the tax amount will be automatically added to the total.
After the payment is done, the tax amount will be saved in HubSpot contact records, so you can reports based on that.