Ecommerce starts out simple—and then you expand and look to keep expanding. And once your operation reaches a global scale, the complexities only compound.
There’s perhaps no better example of this than tax compliance: Navigating domestic tax situations comes easily enough, but you begin to sell across borders and into new markets and suddenly you might find yourself a tax novice all over again.
In this brief guide to taxes when selling internationally, you can get a crash course in global tax compliance issues that vary based on what, how, and where you sell—and understand your business’s options for keeping it all straight.
Common International Ecommerce Tax Terms
To begin, here’s a breakdown of key tax terms that ecommerce businesses can expect to encounter often:
An indirect tax is collected by an intermediary (like a retailer) from the person who bears the ultimate economic burden of the tax (such as the consumer). The intermediary later files a tax return and forwards the tax proceeds to the government. Examples include sales tax and value-added tax (VAT), which we cover below. Unlike direct taxes such as income tax, indirect taxes are levied on transactions, goods, and services.
Import duty is a tax collected on goods brought into a jurisdiction. The rates and rules for import duties vary by country and are determined by the classification of goods and their value, the country of origin, and other factors. Import duties are usually aimed at protecting local industries and generating revenue.
Sales tax is a consumption tax imposed by the government on the sale of goods and services. A retailer collects sales tax at the point of sale and pays it to the government. The United States primarily uses sales tax, and the rate can vary widely by state and locality.
GST (Goods and Services Tax)
GST is a value-added tax levied on most goods and services sold for domestic consumption. Consumers pay the GST, but it’s remitted to the government by the businesses selling the goods and services. It is a common form of tax in many countries, including Canada, Australia, Singapore, and India.
VAT (Value-Added Tax)
VAT is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. The amount of VAT the user pays is on the cost of the product, less any of the costs of materials used in the product that have already been taxed.
De Minimis Value
The de minimis value is the threshold below which no duty or tax is charged on imported goods. This value varies from country to country and can affect how shipments are processed by customs. For ecommerce businesses, understanding each country’s de minimis threshold is important for calculating total costs for international shipments.
Navigating Different Tax Standards Around the World
As your ecommerce business stretches across international borders, it becomes imperative to grasp and adhere to the varied tax laws in every market you touch. The complexity of different tax jurisdictions, each with its own set of rules and rates, presents a unique challenge. Approaching each situation, brands must:
- Identify the jurisdiction: A tax jurisdiction is defined by the governing body—be it a country or a state—that has the legal authority to tax an entity or individual within its domain. For every sale your cross-border ecommerce venture makes, pinpointing the exact tax jurisdiction involved and complying with its specific laws is a crucial first step.
- Comply with jurisdiction requirements: Within each jurisdiction, businesses must identify and comply with a unique set of regulations and requirements, including registration, licensure, and filing returns.
- Accurately calculate and pay taxes: With these local regulations in mind, taxes must be accurately calculated and remitted for each and every transaction.
Indirect Tax Compliance for Different Types of Products
Of course, it’s not only where you’re selling that matters but also what you’re selling and how.
Taxes for Physical Products
For physical goods, indirect taxes such as VAT, GST, or sales tax are typically imposed at the point of sale and are based on the physical location where the transaction occurs. When goods are imported, customs duties and import taxes are assessed at the border based on the product’s classification, value, and country of origin. Businesses selling physical products must account for these taxes and may pass them on to the consumer at checkout or upon delivery.
The calculation of indirect taxes on physical goods usually considers:
- The location of the sale (point of sale, online sale, or import)
- Classification of the goods (which can affect the rate of duty and tax)
- Value of the goods (including shipping and insurance for imports)
- Applicable trade agreements or exemptions
Taxes for Digital Products
Digital products, such as software, digital downloads, streaming services, and online subscriptions, are taxed based on the consumer’s location rather than where the seller is based. This is because digital products are delivered and consumed over the internet without the need for physical shipping, making the traditional concepts of borders and customs less relevant.
For digital products, VAT or GST may be imposed by the country where the consumer resides. Many jurisdictions, however, have implemented specific rules to tax digital services provided by foreign companies, requiring these companies to register for VAT and GST and collect taxes from consumers in the customer’s location. This is sometimes referred to as the “place of supply” rule. This place of supply issue can add yet more complexity because of the difficulty in determining the customer’s location and the varying rules imposed across different jurisdictions.
In sum, while indirect taxes on physical goods are largely determined by the location of the sale and importation rules, digital products are taxed based on the consumer’s location. Ultimately, though, these differences underscore the multi-layered complexities of taxation when selling internationally.
Because of the complexity involved in tax compliance—and the potential risks of non-compliance—enlisting the help of experienced experts can provide a great advantage to international ecommerce brands.
For instance, Digital River can serve as an organization’s merchant of record, handling all registrations, calculations, exemptions, filings, remittances, and invoicing requirements on their behalf, around the globe.
Leave the complications and ever-changing rules to us—and learn more today about how Digital River can serve as your one-stop-shop for simplifying global taxes and accelerating global growth.