Best Practices for Sales Tax Display in The Checkout

Why is handling taxes in checkout so hard?

In their attempts to grow by reaching new markets and selling their products across borders, merchants quickly find that, in order to be compliant in these new regions, they have to follow local regulations for taxing the sale of goods and services. “Nothing a qualified accountant or legal collaborator couldn’t handle for my business, right?” you may think. And sure, legal council is invaluable in handling taxation in a country, but it doesn’t cover the customer experience side of the transaction.

What are the different taxes involved?

To start with, there isn’t one universal tax merchants have to collect. Depending on where they sell around the world, merchants will have to collect and pay some form of consumption tax that may vary significantly from one country to another.

Selling in Europe

Value Added Tax (VAT) is a general tax applied to all sales of goods and services in the European Union. VAT is a consumption tax, meaning it is paid by the end consumer, but merchants doing the selling are the ones who charge the VAT rate to the client. The VAT rate varies among EU countries and it can be anywhere between 17% and 2% (reduced rates may apply for specific goods or services).

  • B2C: Always charge VAT on the sale of digital goods using the VAT rate applicable in the European customer’s country.
  • B2B: Use the reverse-charge VAT mechanism. Do not collect VAT from the buyer, but request their VAT number and provide them with a detailed invoice.
  • B2C and B2B in the European country where your business operates: Always charge VAT when selling digital goods in your home country.
  • Outside your home country, in the EU:
  • B2C: Always charge VAT for all B2C sales. The VAT rate depends on the yearly volume of cross-border digital good sales you make across the entire EU. If you sell below €10,000 (~$12,000) in digital goods throughout the EU in a year, you may charge the VAT rate of your home country. If you sell more than this threshold in a year, then you must charge the VAT rate of your customer’s country of residency.
  • B2B: Do not charge VAT, but request the buyer’s valid VAT number for invoicing and your records. The buyer will pay the VAT themselves to their own government.
  • B2C: Always charge VAT at the rate of the European customer’s country of residence.
  • B2B: Use the reverse-charge VAT mechanism (provide an invoice with information and your customer will pay the VAT).
  • B2C: Always charge VAT. If your annual sales to that country exceed a certain threshold (which varies by country), charge the destination country VAT rate and register for a VAT number in that country. If your annual sales to the consumer’s country are below the imposed threshold, then you charge the VAT rate of your own country and file for taxes in your own country.
  • B2B: Use the reverse charge VAT mechanism and collect the business’ VAT number.

Real-world VAT examples

Let’s start with a look at Germany. The country imposes a VAT of 19% on taxable goods or services, though some items like eBooks or food may qualify for reduced VAT of 7%. Shoppers in this market always expect to see the final price, including the amount owed for VAT. As a result, the total price is shown from the very product page.

Selling in the U.S.

Unlike Europe, which operates under the value-added-tax (VAT) system, the United States issues a tax on sales or on the receipts from sales. Currently, 45 states and the District of Columbia issue a general sales tax on most goods and certain services (with some exemptions in place). Sales tax in the United States applies at both the state and city level, resulting in thousands of different tax rates across the country. As if that weren’t enough, each state and city has different rules on whether or not sales tax applies to a particular good or service. This means that the sale of a service may not be taxable in California, but it may be taxable in Arizona. Additionally, you may find that there is a reduced rate or exemption for children’s clothing in New Jersey, but that the same children’s clothing sold in Ohio is taxable. Finally, a service may be exempt in the state of Illinois, but the city of Chicago (located in Illinois) will impose a tax on that same exact service! Does that sound complicated? It is.

Selling in the rest of the world

Many countries in the world have implemented provisions similar to the EU and the U.S., meaning that you may be obliged to register to collect and pay to the authorities the appropriate sales tax.

Best practices when displaying pricing

Pricing is one of a shopper’s key elements for considerations during a store visit, as attested by the multitude of pricing models that have been developed in the SaaS space. The way pricing is handled in the checkout process can make the difference between a sale and an abandoned cart. You can create a seamless purchase funnel by ensuring that the price displayed on your ads, landing pages and website is consistent throughout. This will avoid any unpleasant or confusing surprises when a shopper is making a purchase decision on the checkout page. Some of the most important elements include ensuring the price is displayed in the shopper’s local currency throughout the purchase process, and that the price includes or excludes sales tax according to the shopper’s location.

Conclusion

Each new market you want to sell in requires paying attention to local currency and taxation rules, as these translate into user journey elements that either convert customers or scare them away. There is no one general rule to follow to understand how a state or a country handles taxation.

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
2Checkout (now Verifone)

2Checkout (now Verifone)

2Checkout (now Verifone) is the leading all-in-one monetization platform for global businesses built to help clients drive sales growth across channels.