As a subscription-based business, you may already be familiar with sales tax compliance challenges. But compliance can become even more complicated during an economic downturn coupled with potential changes in consumer behavior. When sales decline, increase, or shift unpredictably, it’s essential to stay on top of sales tax rules and regulations to avoid penalties and maintain compliance. In this post, we’ll explore the tax compliance challenges that economic downturns and changes in consumer behavior pose for subscription businesses, as well as the strategies you can use to minimize the impact.
During an economic downturn, subscription businesses may experience shifts in sales volume, product mix, and cash flow. These changes can impact a business’s sales tax compliance in several ways:
- Sales Thresholds: One of the primary ways that economic downturns can impact sales tax compliance is by affecting the sales thresholds that businesses must meet to be required to collect and remit sales tax. For example, if your company operates in a state with a sales threshold of $100,000, but your sales drop to $80,000 during an economic downturn, you may be tempted to stop collecting sales tax. However, it’s important to note that sales thresholds are typically calculated on a rolling basis over a specific period, so you may still be required to collect and remit sales tax even if your sales have temporarily fallen below the threshold.
- Changes in Product Mix: Economic downturns can also lead to changes in the products or services consumers purchase. For example, during a recession, consumers may be more likely to buy lower-priced items or to cut back on discretionary spending. If your business sells a mix of taxable and non-taxable items, these changes in consumer behavior could impact your sales tax compliance obligations.
- Cash Flow: Finally, economic downturns can impact a business’s cash flow, making it more challenging to pay sales tax on time. It can be tempting to delay paying taxes or to use sales tax funds to cover other expenses. However, failing to pay sales tax on time can result in penalties and interest charges, which can add up quickly. Especially when federal and local governments look at tax revenue to compensate for decreases in other areas.
To manage the sales tax compliance challenges posed by an economic downturn, subscription-based businesses can employ several strategies:
- Stay Up-to-Date on Sales Tax Regulations: During an economic downturn, states may adjust their sales tax laws and regulations to generate revenue. Businesses must stay informed about these changes and adjust their compliance strategies accordingly. This may involve working with a tax professional or leveraging tax automation software to ensure you follow the latest local, national, and global rules.
- Monitor Sales Thresholds Closely: Even if your sales have fallen below the sales threshold, monitoring them closely is essential to ensure that you remain compliant. Remember that sales thresholds are typically calculated on a rolling basis, so you may still be required to collect and remit sales tax even if your sales have temporarily fallen below the threshold.
- Adjust Your Product Mix: If you need to adjust your product mix during an economic downturn, ensure you collect the appropriate sales tax on these new products. For example, if you typically sell high-priced luxury items and you need to introduce lower-priced or digital items, the sales tax responsibilities may change.
- Prioritize Cash Flow: Finally, during an economic downturn, it’s essential to prioritize cash flow and ensure you can pay your sales tax on time. This may require cutting back on expenses, negotiating payment plans with vendors, or exploring other sources of financing to cover short-term cash flow gaps.
As you’ve learned, economic downturns can pose significant challenges for subscription businesses’ sales tax compliance. However, staying informed about sales tax regulations, monitoring sales thresholds closely, adjusting your product mix, and prioritizing cash flow can help maintain compliance and protect your business’s financial stability.
Changes in consumer behavior can significantly impact your compliance obligations, particularly when it comes to the taxation of digital products and services. In this post, we’ll explore the challenges that changes in consumer behavior pose for subscription businesses’ sales tax compliance and strategies for managing these challenges.
- Taxation of Digital Products and Services: As more consumers shift their purchasing habits from physical goods to digital products and services, states are responding by introducing new sales tax regulations for these products. However, the rules around taxing digital products and services vary from state to state, making compliance challenging for businesses operating across multiple jurisdictions.
- Changes in Subscription Models: Subscription businesses are also increasingly experimenting with new pricing models, such as consumption-based billing or tiered pricing. These changes can impact a business’s sales tax compliance obligations, mainly if the pricing models involve both taxable and non-taxable components.
- Sales Thresholds: Finally, changes in consumer behavior can also impact a business’s sales thresholds, mainly if the company operates across multiple states. As more consumers shift to online purchasing, businesses may exceed the sales thresholds in states where they previously had a minimal physical presence.
To manage the sales tax compliance challenges posed by changes in consumer behavior, subscription-based businesses can employ several strategies:
- Stay Up-to-Date on Sales Tax Regulations: As states introduce new sales tax regulations for digital products and services, businesses must stay informed about these changes and adjust their compliance strategies accordingly. This may involve working with a tax professional to ensure that you follow the latest regulations and take advantage of any available exemptions or credits.
- Review Your Subscription Models: If you’re experimenting with new pricing models, reviewing these models from a sales tax compliance perspective is essential. This may involve separating taxable and non-taxable components or adjusting your pricing to ensure you’re collecting the appropriate sales tax amount.
- Monitor Sales Thresholds Closely: If your business operates across multiple states, monitoring your sales closely to ensure you comply with each state’s sales thresholds is essential. This may involve adjusting your pricing or marketing strategies to stay within the thresholds in specific jurisdictions.
- Automate Your Sales Tax Compliance: Finally, subscription businesses may benefit from automating their sales tax compliance processes. This can help ensure that you’re collecting the appropriate sales tax amount, regardless of changes in consumer behavior or sales thresholds.
Changes in consumer behavior can significantly impact subscription businesses’ sales tax compliance obligations, particularly when it comes to digital products and services. However, staying informed about sales tax regulations, reviewing your subscription models, monitoring sales thresholds closely, and automating your sales tax compliance processes can help ensure your business remains compliant and financially stable.
When you use Chargebee, you harmonize layered data from customer information, to plans, and billing cycles – all in the same place so you can continue to serve and charge your customers effectively. Once you have built a simple and easy-to-customize subscription model with Chargebee, your next step should be to ensure your tax compliance is keeping up. Using a subscription model means changing how you register your business with tax authorities, collect tax, and create tax returns. That’s where Avalara comes in.
To help stay compliant, businesses should take advantage of an automated tax tool, like Avalara. With automation, companies can simplify everything from registration to tax calculation, which means an easier entry into the world of subscriptions.
Coupling Avalara’s tax automation capabilities with Chargebee’s subscription and billing management features generates compounding effects. It helps you send more accurate invoices to your customers (irrespective of plan, tax region, or any other changes), makes compliance easier, and seamless data exchange into a single dashboard helps you stay audit-prepared every day.
Avalara has many solutions to help your business understand your tax responsibilities and stay compliant, regardless of where you operate or the type of products you sell. Get started by getting in touch with the Avalara team.
Avalara Disclaimer: Tax rates, rules, and regulations change frequently. Although we hope you’ll find this information helpful, this article is for informational purposes only and does not provide legal or tax advice.