Subscription-based selling is appealing to businesses for its reliability of loyal customers and steady revenue. From gift boxes to magazines to cutting-edge software, it’s one of the most diverse ways of selling.
The model does come with steady sales tax obligations and risks though, and if not properly understood, it could lead to significant sales tax risk in the business.
Two aspects of business activity in a time period are used to assess whether businesses have economic nexus in a state: sales revenue and the number of transactions within a year. The trouble for subscription-based sales is that every payment or renewal is tracked as a transaction, meaning you reach that transaction count much faster.
This means that customer loyalty, one of the big bonuses of subscription-based billing for a company, can work against the seller when trying to keep up with nexus thresholds and sales tax requirements.
Take subscription boxes, a burgeoning industry where buyers sign up for regular delivery of everything from food, makeup, clothing and music to books, pet supplies, flowers and scads of other categories. There are more than 500 subscription box services in the U.S. charging rates anywhere from $10 to $100s of dollars a box.
The average consumer has two subscriptions; about a third of active consumers have three or more. That’s a lot of potential renewals and payments in a lot of potential tax jurisdictions that have their own unique nexus thresholds and taxability rules depending on what’s being sold. Sales tax on groceries and prepared food also vary widely state to state.
Subscriptions don’t just apply to clothes, flowers and other tangible personal property though. Subscription based pricing can also be seen in streaming services, SaaS, and more. Many services have historically not been considered taxable, but if you still assume your business is completely exempt and are selling software, SaaS or certain services, you may be in for a big surprise. Over the last few years many states, with their eyes on potentially huge sources of tax revenue, started taxing technology, digital goods, software and SaaS. And in the states in which your products and/or services are taxable, you still have to worry about the transaction counts associated with economic nexus and how quickly your transactions can add up with subscription-based billing. It is something you need to be aware of and continually track as you sell into new states so you can accurately monitor your sales tax obligations and maintain compliance.
One of our client’s, WorthPoint, sells a subscription-based service that gives access to a database – not considered tangible personal property or software in most states. Instead, they service is considered an information service whose taxability varies from state to state. The 2018 Wayfair decision created a huge hassle for them in the states in which their subscriptions were taxable, and their nexus footprint was much larger than they’d imagined, creating a lot of work for what was once seen as a smaller operation. By utilizing the expertise of an expert like TaxConnex to monitor their growing nexus footprint and help them identify where their service was taxable, they now have sales tax handled.
If you sell subscriptions of any product in multiple states, keeping track of changing sales tax rules can be overwhelming. But not understanding your sales tax obligation or not acting on a growing obligation could have big repercussions for your business down the road.
Sales tax is more complicated than ever and not getting any easier. Rely on sales tax experts to maintain your compliance. Contact TaxConnex to learn what it means when sales tax is all on us.