Sales Tax for Subscription Boxes

Are subscriptions taxable? Well, over the past few years, subscription box services have increasingly grown in popularity.  Buyers sign up for regular delivery of everything from food, makeup, music, books, pet supplies, flowers, clothes and more. This industry has ridden the wave of eCommerce and the growing expectation among shoppers that much of what they want to buy can come right to their door.

There are over 500 subscription box services in the U.S. (a number hard to pin down since these companies pop up fast). Most handle a wide variety of customer needs and specialized interests with prices of about $10 to $100 a box. Frequently customers don’t know what’s in their delivery until they open the box – a key appeal in a business model where “dopamine rush” is often used when describing buyers’ habits.

Among other stats:

• In the past decade, the subscription box market has grown from $57 million to $15 billion annually. The market has expanded more than 100% each year over the last five years.

• Niche products lead the industry, a fifth of total sales.

• The average consumer has two subscriptions. About a third of active consumers have three or more.

With booming sales across the country, businesses need to focus on if and how these subscription box services are taxed. How is sales tax managed for this growing industry?

The sales tax obligations related to subscription box services depend on many of the same questions as other remote sellers:

• Are your products taxable? Some products are exempt in some jurisdictions.

• Where do you have customers? Have you reached nexus thresholds in multiple states?

• Will each shipment in a subscription count towards your nexus thresholds?

• How will you charge sales tax? Will you apply sales tax to each individual line item in a shipment or to the entire bundled transaction?

• Are you ready to track your sales tax obligations and remit the tax?

More states and other tax jurisdictions impose economic nexus triggers for businesses selling into their state, meaning that when a transaction count or sales amount is met, companies must collect and remit sales tax. Also, regarding potential physical nexus, where are your offices and employees and where is your inventory stored?

Transaction Count Growth

Many states rely on transaction counts to establish economic nexus. Many subscription boxes allow for a discounted one-time payment instead of monthly payments, but if your customers are paying monthly, each payment could be counted as a transaction. Meaning even though your subscription box could have a low revenue threshold, you may be reaching economic nexus standards faster than you think because you will rack up transaction counts much faster.

Make sure you monitor which states rely on a transaction count because not all of them include it in their economic nexus thresholds.

Meal Plans or Food Delivery

Meal subscription box services have special sales tax rules as groceries are not taxable in some states. Other states only offer a discounted sales tax on groceries.

Prepared or ready-to-eat food is generally taxable – and the inclusion of one prepared-food item can make an entire meal box taxable that otherwise contains non-taxable groceries. Some meal box subscription companies will separately ship (and charge sales tax on) the taxable item.

Plant or Flower Subscriptions

Most states require collection and remittance of sales tax on flowers purchased online for delivery. With some exceptions, most states exempt plants and seeds that are used for human consumption from sales tax. You generally have to charge sales tax on ornamental plants and flowers.

In some states, certain types of plants of flowers incur sales tax whether related to human consumption or not – sometimes even decreed by where and for what purpose the plant will be used.

Clothing or Books

Clothes are typically taxable in most states. There are a few states in which clothing is not taxable or only a certain portion of the clothing is taxable.

Subscription box retailers who ship physical books may have clear rules on sales tax – but if you ever decide to go digital in your delivery you’ll run smack into the newest wave of sales taxation – digital products and downloads.

This is just a sampling of the types of subscription box services available, but it gives you insight into some of the complexities facing this emerging industry.

Sales tax is more complicated than ever, and everyone who says they’re simplifying sales tax is still leaving the hardest parts – and the liability – up to you. Rely on sales tax experts to maintain your compliance. Contact TaxConnex to learn what it means when sales tax is all on us. With the eCommerce industry on the rise, it's important to understand how online sales tax works. To learn more, click here - How Sales Tax Works for eCommerce Businesses