U.S. and European shoppers are expected to spend 20 billion euros ($22.1 billion) on online purchases over the busiest shopping weekend of the year: “Black Friday” on November 29, and “Cyber Monday” on December 2: a sales bonanza for online retailers.
But global EU and U.S. tax tripwires await them. Sharp-eyed tax authorities have been stepping up measures this year to identify sellers from other jurisdictions trading tax-free in their patch. This includes enforcing annual foreign or remote seller thresholds for the first time, which the Black Friday/Cyber Monday windfall will tip many e-commerce sellers over.
Biggest Shopping Days of the Year in EU and U.S.
Retailers will generate more sales in the fourth quarter of 2019 than during the preceding three quarters combined. The key dates are:
- November 29—Black Friday, a Thanksgiving tradition exported from the U.S., where high street and online retailers push their biggest discounts. It’s a hugely popular time to shop for tech, from smartphones to laptops.
- December 2—Cyber Monday, is the biggest online shopping day in the U.S., with online sales estimated at $8 billion for 2018. It’s now also well embedded in Europe. Its origins were around encouraging small e-retailers competing with the large brands.
These peak festive shopping days in the EU and U.S. will tip thousands of online merchants into local tax obligations. This includes EU sellers who will cross over the EU value-added tax (VAT) distance selling country thresholds.
Similarly, EU sellers into the U.S. run the risk of going over remote seller sales tax thresholds. The latter has become the hot tax zone following the June 2018 South Dakota v. Wayfair, Inc. (“Wayfair”) Supreme Court ruling, which has enabled the vast majority of states to tax EU and other foreign sellers for the first time.
U.S. States Rush to Tax Remote Sellers Following EU Model
The U.S. Supreme Court Wayfair ruling opened the option for U.S. states to tax remote or foreign sellers for the first time. This effectively copied the long-standing “distance selling” model of the EU whereby foreign sellers to consumers have to register in the country of the consumer and charge VAT. In both the U.S. and EU cases, registration thresholds apply (see below).
The case upended the test of whether a remote business was responsible for sales tax, from “physical nexus” to “economic nexus.” This change means that selling to a state’s businesses or consumers, without local staff, stock or premises, now triggers the obligation to register with the state and other tax jurisdictions.
Since 2018, the majority of states have updated their sales tax obligations on remote sellers, and co-opted marketplaces as tax collectors:
- 43 states have now obliged remote businesses to charge sales tax since Wayfair;
- 34 states have implemented marketplace tax collection obligations for their sellers.
To understand if these obligations apply, sellers must understand the local registration thresholds that apply to them.
VAT and Sales Tax Thresholds Trap Distracted Sellers
The manic Black Friday selling period often distracts sellers from being aware of or tracking their tax thresholds, and the tax authorities are all too aware of this.
To ensure the smallest businesses are not dissuaded from selling in other jurisdictions—which boosts the growth of low-cost offerings for consumers—post-Wayfair, the U.S. and EU set annual sales thresholds below which sellers can just apply and report their local taxes as with local sales. However, once over the tax thresholds, local compliance obligations apply.
The EU and US thresholds apply as follows.
Annual Registration Threshold for Foreign/Remote Sellers
- EU VAT—100,000 euros: Germany; the Netherlands; Luxembourg; U.K. (70,000 pounds ($90,390)); 35,000 euros: all other 24 states
- U.S. Sales Tax—Most states* operate between the following bands: $100,000 to $200,000 sales; or 200 individual transactions per annum
*California $500,000 per annum
Planning Points to Get VAT and Sales Tax Compliant
Where sellers breach these EU or U.S. thresholds, there are many questions to get distracted over, from whether to register, how to settle back taxes, through to how to submit returns correctly.
Below is a checklist of the key questions, and how to keep on top of them.
- Should you register?
The EU obligation to register or U.S. “nexus” rules for determining if you have to be registered vary from country and state-to-state. In the U.S., they are expanding for EU sellers fast following the 2018 Wayfair ruling. States are additionally extending tax nets to traditional and digital services.
Action: A VAT registration or U.S. nexus study should review the seller’s footprint and offerings in each jurisdiction to determine if you should be tax registered. It’s important to consolidate sales from local warehouses and “distance sales” from the home country. Jurisdictions have diverging rules on whether these should be added against their threshold.
2. What about back taxes?
Once it is clear a seller should be registered, how much tax is due from prior sales? This may include interest and penalties. What is the best route to disclose and pay any historic taxes outstanding?
Action: A tax exposure analysis can estimate tax due on prior sales, and what fines may be due. Consider speaking to a local VAT or sales tax agent to look to mitigate any liabilities by identifying exempt transactions.
Some jurisdictions offer voluntary compliance reporting, including registering for tax and choosing the optimum disclosure path based on the various options by country or state.
3. How to get tax-registered?
If there are no back taxes, then the appropriate EU Finance Ministry or U.S. Department of Revenue or Taxation, or other similar taxing authority, still needs to be approached, and an application filed to register.
Action: Most jurisdictions lay out online the documentation, background and application forms required. Outside of the U.K., Ireland and U.S., most countries will only work in their local language. This can be challenging, so, again, a seller may look to appoint an agent to ensure any resulting questions are followed up on.
4. What about back filings?
Once registered, many states will require the submission of returns covering old transactions.
Action: Many sellers may have been charging and remitting the VAT of their own country. This will be recoverable if declared due in a different jurisdiction. However, it may create a significant cash flow issue since the tax due must be paid before the tax paid is remitted.
5. How to get the live tax calculation right?
EU VAT determination rules and rates are very static and predictable. Once over a country’s threshold, there is one main standard rate for most consumer goods.
U.S. taxability—understanding the rates, rules and taxing boundaries—is the most complex area of U.S. sales tax. It’s annoying for customers and potentially costly for a seller if the tax authorities notice it is wrong.
Action: Because of the EU rate stability and country-only level, accounting systems can generally manage cross-border calculations.
U.S. sales tax is far more complex because there are over 12,000 states, counties, cities and municipalities with overlapping taxes. Plus, the rates change frequently, sometimes several times a year. This means sellers require a tax engine add-on to ensure live calculations, based on customer or retail outlet addresses, are precise.
6. How to file returns and settle due taxes?
Keeping on top of all the filing deadlines and forms is a major task for both the EU and U.S., in addition to managing multiple tax payments to different states and local jurisdictions.
Action: On the reporting side, EU states do not have a harmonized return format—some countries’ returns run to hundreds of boxes and include supplemental filings such as Intrastat and EC Sales Listings. Plus, all reporting is in the local language which creates a huge barrier to businesses of any size. In addition, some countries, such as Spain, require funds to be paid via a local bank account
The U.S. is less complex in that returns are made available online, in English. The challenge is the multiplicity of deadlines and varying payment methods.
Again, automation on reporting has made great strides in the past five years. There are some tools which can extract transactional data, categorize by country/state reporting requirements and produce draft returns. The most advanced offerings will offer automated filings in territories such as Germany and the U.K.
Richard Asquith is Vice President of Global Indirect Tax, Avalara.
The author may be contacted at: email@example.com
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners