If you own a regional e-commerce store based in the United States, you may or may not be aware of something called VAT.
VAT stands for Value Added Tax, and it’s most common use is in the European Union, though other countries have similar systems.
VAT is similar to sales tax, except that while sales tax is based on the final retail price, VAT is based on the intent of the buyer. If the buyer intends to add value before selling the item again, the seller does not collect tax. If the product is being bought for final consumption, then the seller does add VAT.
For the purposes of most online stores in the United States, you need only worry about the latter scenario, meaning you need to correctly calculate VAT for items you sell internationally.
Why You Need To Be Aware of VAT
Remember in our previous article, how we talked about selling state-to-state in the USA, and how each state has different rules for sales tax? Most, (but not all), states enforce destination-based tax, meaning the merchant must keep track of taxes, based on the shipping addresses of the buyers.
Europe has something quite similar. If you ship products to Europe, or if you sell downloadable goods to Europe, you must keep track of the different tax rates for each European country you ship goods to.
VAT laws have been in place since 2003. But in 2015, several laws changed for non-residential merchants (sellers from the US with European customers). These newer laws require merchants to register for VAT in each country that they expect to have customers in.
Some things to keep in mind:
- VAT is destination-based. This means the country where the goods are being delivered or consumed is the country you must track VAT for — on each purchase.
- VAT varies drastically from country to country (between 15 and 27%).
- All non-resident merchants are expected to be compliant going back to the original laws in 2003.
- Digital goods sold in Europe are VAT-taxable. If you plan to sell downloads in Europe, you must adjust prices accordingly.
Some other things to be aware of:
Sellers must keep specific consumer data on record for 10 years after the date of each transaction, and pay the proper VAT to each country where they sold goods.
There is also no minimum threshold of sales for online sellers to reach before they are obligated to pay VAT. Let’s say you make one sale to the United Kingdom during the year. This means you have to pay VAT on that one sale at the end of the year.
An alternative is to keeping track of multiple VAT rates in the EU is to file for simplified VAT registration in a Member State country. The seller can then make quarterly payments to the country they registered in, and they distribute payments to the other EU countries. The downside is the seller has to send quarterly liability reports to the country where they are registered.
These are known as MOSS, or Mini-One-Stop-Shops, and they report to each EU state for you.
If you sell e-books, and calculating VAT sounds like a headache, you sell your e-book through Amazon, and they will automatically include VAT as part of your suggested price.
This means that you’ll see less of a profit, because Amazon would take their royalty, plus the VAT tax of the purchaser’s country would be taken out of the list price, but it keeps you compliant with international tax laws.
VAT and WooCommerce
What if you have a WooCommerce powered store on top of WordPress, and you want to make sales to the European Union and other VAT countries? Is there a way to take care of compliance easily?
It turns out there is a way.
What Taxamo does is detect the location of the buyer, calculate the correct tax rate, and apply the appropriate VAT. Taxamo also generates multi-regional tax settlement reports to take the pain out of quarterly reporting.
If you plan to sell internationally, it’s good to be aware of VAT tax laws. Currently, the EU, Japan, Norway, and South Africa all have VAT laws in place.
Being compliant with international tax laws is a way to protect your online revenue and continue growing into different markets.