Tax collection: What you need to know
June 26, 2020
If you work in the eCommerce space, the first things on your list are probably setting up your website, accepting payments and securely protecting yourself from fraudsters—but there may be one small thing you’re forgetting.
Actually, it isn’t that small. You may have an obligation to collect and pay taxes in the regions where you deliver your products or services—even if you don’t have physical presence there. If you think that tax collection is limited to your business jurisdiction, you may be in for a surprise.
A 2018 US Supreme Court ruling established new rules for online transactions, giving states the authority to establish “economic nexus” for these purchases. Under Nexus, if you ship goods or services out of state, you may be required to collect and remit sales tax based on the recipient’s tax code.1
Here’s a look at tax by the numbers:
- 12,000 U.S. tax jurisdictions
- 35,000 sales, use, rental tax rates
- 42,000 ZIP codes
- 30,000,000 product exemptions
- 160,000,000 mailing addresses
That’s enough to make your head spin. And to further complicate matters, tax is often calculated based on ZIP code. However, just because the ZIP code is the same doesn't mean the tax rate is. Greenwood Village, Colorado, for example, has one ZIP code and four different sales tax rates.
Be sure to use geolocation
Rather than using ZIP code, geolocation technology helps you create a more accurate tax calculation that accounts for overlapping city, county and state lines. This is critical because tax rules can vary dramatically. For example, some jurisdictions tax candy the same as any other food, some tax candy separately, and some don't tax it at all. How a product is taxed can come down to something as marginal as whether or not it has flour in it.
Also be sure to tax by line item
Tax should be calculated for each line item, rather than the order total. This allows you to accurately account for all tax conditions, including VAT and sales use taxes.
Automate, automate, automate
Sales tax is complex. Rules and rates are always changing and can vary by region. Managing tax ‘in-house’ may seem ideal at first, but as rules and rates change it can be costly to maintain. And since mistakes can put you at risk of an audit and subsequent fines for noncompliance, outsourcing can be a better option. Technology solutions can automate the tax calculation process, taking the burden off your hands.
Interested in how Cybersource can help?
With our Global Tax Calculation solution, you can centralize your payment services—helping to simplify onboarding and integration and reduce maintenance cost. Altogether, saving you from the costly headache of managing tax tables, calculations and compliance fines.
Please note, you should check with a tax specialist for tax advice and help determining your tax requirements.
Disclaimer: Content is provided “AS IS” and intended for informational purposes only and should not be relied upon for operational, marketing, legal, technical, tax, financial or other professional advice. Visa Inc. does not make any warranty or representation as to the completeness or accuracy of the Information, nor assume any liability or responsibility that may result from reliance on such Information. Readers are encouraged to seek the advice of a competent legal professional where such advice is required.