Amazon, eBay, and Etsy – they’ve all made it incredibly easy for anyone selling online to sell their products internationally. Almost too easy. As countries across the globe crack down on international sales tax, ecommerce sellers are starting to feel the pinch (and fines) of selling across borders. Join us as we take a look at the fine-ancial implications of international eCommerce and how you can take action now to avoid being caught out later.
What is international sales tax?
Let’s backtrack a little bit first. Sales tax is money collected from someone buying a product, which is then later passed onto the government, for government spending.
When the buyer and seller live in the same country, the process is simple – you collect sales tax at the local rate and submit it to the local government. When the buyer and seller live in different countries, things get a little more complicated, and international sales tax may, or may not, be owed to the buyer’s local government, at its own rate.
What’s the problem with international sales tax?
International sales tax itself isn’t a problem per se – but it can cause significant (and costly) problems for online sellers – especially those who accept international orders without first understanding the consequences. Common problems driven by international sales tax are:
- Charging customers too much – if you’re not sure of the local country’s tax rates and rules, you could be charging customers too much, limiting your success in that country.
- Charging customers too little – likewise, if you’re not sure of the local country’s tax rates and rules, you could be charging your customers too little, footing a large tax bill at the end of the year yourself.
- Breaking the law – if you fail to pay the correct amount of international sales tax, or if you fail to realize that you need to pay international sales tax, you could be subject to hefty fines and restrictive penalties.
But while this can all sound a bit doom and gloom, it’s not all bad. Cross border sales are set to amount for USD$627 billion by 2022 – making up 22% of the ecommerce industry. International ecommerce can be a hugely profitable, rewarding, and scalable business opportunity when done right – you just need to know the top tips for navigating international sales tax first.
Top tips for avoiding the pinch of international sales tax
So let’s jump straight in – what are the best ways to avoid being caught out by international sales tax?
1. Work out whether you’re affected
Before getting yourself into a twizzle about international sales tax, it’s first worth working out if you’re actually affected by international sales tax.
Same country or state
If you’re only selling to customers in the same country or state as you, then you can probably stick to local ecommerce tax laws and not worry about anything international other than your next vacation.
State to state
If you’re selling to customers in different states, then the law is a little murkier. Some states require you to have a significant presence in that state before being required to collect taxes.
However, in June 2018, the US Supreme Court decided that states could require businesses without a physical location to collect sales taxes on purchases made from that state. If you sell state to state, then research the local ecommerce tax laws before proceeding.
Country to country
If you’re selling to customers from a different country, then you may be required to register and collect local taxes if your annual turnover is above a certain threshold. Again, research the local ecommerce tax laws before proceeding.
If you’re still unsure, seek the help of an international ecommerce accountant or bookkeeper pronto.
2. Calculate your tax rates
Once you know which countries or states you’re required to collect local tax in, next you need to work out how much tax you need to collect and when you need to submit it. Tax rates and submission deadlines vary significantly, so take the time to research the appropriate rates and deadlines properly.
3. Ensure your listings are compliant
The impact of international sales tax begins way before your annual (or quarterly) tax bill. In some countries (such as the EU), you’re required to include Value Added Tax (VAT) in the product listing – whereas, in the US, this is rare and will make your product prices seem expensive.
4. Assign orders to the correct country
Once you’ve decided you’re accountable for international sales tax, and you’ve updated your listings accordingly, next you’ll need to assign your sales orders to the correct country. For low-volume, single-channel sellers this will be relatively easy to do within your sales channel admin, or manually in your accounting software.
For high-volume, multi-channel sellers, this is a little more tricky. A useful tip here is to use the tracking categories in Xero to create different countries for sales orders to be assigned to, and use Xero ecommerce integration software to automatically push cross-channel sales orders to the correct country tracking category.
Under the ‘Accounting’ tab, select Advanced > Tracking Categories > Add Tracking category, and then away you go.
5. Apply and file the correct tax rates
After your orders have been assigned to the correct country, you’ll then need to apply the correct tax rate so that you can collect the appropriate rate of tax for filing.
While this can be done manually or via CSV, a far easier and quicker way is to use Xero’s tracking categories to filter your orders by country and bulk change the tax rate to the correct one.
6. Make someone accountable
The final, and perhaps most important tip of them all, is to make someone responsible for keeping you up-to-date and compliant with local tax laws and regulations. If this is beyond your expertise, capacity, or desire, then enlist the help of a professional ecommerce accountant or bookkeeper.
Not only will their international sales tax knowledge keep you fine and error-free, but with them using the latest ecommerce accounting integration software to send your orders to Xero automatically, they could save you time and money too.
International sales tax – final thoughts
International ecommerce sales tax doesn’t have to be taxing – you just need to be aware of the implications and enlist the right expertise and tools to ensure that you’re compliant now and in the future.
Author bio: Niki Tibble is a content writer for Expandly, a multi-channel management platform empowering online sellers to manage multiple sales channels, shipping carriers and Xero from one platform. She also writes for CartStack, Deliverr and have written for Oberlo, so she knows what’s what when it comes to eCommerce!