A membership-based subscription website is a great way to earn income on a recurring basis. It lets you create a predictable income source for your business and avoid getting caught in the feast and famine cycle of freelancing and project work. But as great as these websites are, they also have a downside: when you run a subscription e-commerce business, you have to deal with subscription tax.
Sales tax rates are relatively easy to figure out for one-time purchases. But they become much more complex with subscriptions and recurring billing.
Keep reading to learn about the common issues that arise when dealing with membership sites and subscription billing and how you can simplify subscription tax management.
Here’s what we’ll cover:
- Membership Sites
- Subscription Tax and Billing
- How To Simplify Subscription Tax Management
- Final Thoughts: Subscription Tax, Subscription Billing, and Membership Sites
A membership site is a website where subscribers pay a membership fee to access content. The membership fee could be a recurring subscription that periodically charges a set dollar amount, or a one-time fee for lifetime access to its content and services.
This type of website has become the go-to monetization model for many businesses across the tech industry, such as startups and SaaS (software as a service) companies. However, there is more nuance to membership sites than it seems, especially when it comes to tax laws.
Subscription Tax and Billing
As mentioned earlier, membership sites that use subscription billing face unique challenges when charging sales tax.
For starters, sales tax rules for a variety of businesses — including software and SaaS companies, membership sites, online course creators, and clubs — vary significantly by state. That’s because, in the early days of the internet, software was sold on CD-ROMs, making them tangible personal property and easy to tax.
Nowadays, software primarily sells online, and many developers and service providers have transitioned into offering monthly subscription plans. The same goes for online course creators. That means no tangible property exchanges hands, which makes the previous taxation rules invalid.
To mitigate that, the Department of Revenue in many states has modernized the definition of sales of tangible personal property to include software, courses, and club memberships, and reclassified remotely accessed software and software subscription services as taxable products.
Challenges with Subscription Tax
However, that alone doesn’t solve all the problems associated with charging subscription tax. Mass validation of payment and billing information needs to happen to ensure every transaction is legitimate, sometimes posing a problem for the subscription billing platform itself.
On top of that, you have to consider where the sale took place to charge the appropriate sales tax amount. That is challenging because a user might live in one state but use a billing address from another state.
You also have to keep in mind the economic nexus can be hard to establish. An economic nexus occurs when your company does enough business in a state that it imposes its taxing authority.
If you make enough sales in a particular state, you’ll meet the threshold and establish your economic nexus in that state. Once you do, you’re obligated to register, collect, and remit sales tax.
The threshold differs by state. The most popular threshold is $100,000 in sales or 200 separate transactions within a calendar year period.
But it doesn’t stop there.
These limitations impact more than just SaaS companies. The same rules apply without exemptions to any membership site, whether you sell courses, subscription boxes, community memberships, coaching memberships, or business memberships.
How To Simplify Subscription Tax Management
As you can see, sales tax information and management for subscription-based websites can get complicated pretty quickly. That’s precisely where Paid Memberships Pro’s new Add On, Avalara: AvaTax Integration, comes in.
The Avalara AvaTax Add On is completely free, and you won’t need a tax professional to guide you through it. It automates sales and provides tax calculations during membership checkout by integrating with a cloud-based service.
You will need the Paid Memberships Pro plugin to use the Avalara: AvaTax Integration Add On.
Paid Memberships Pro Plugin 101
Since you’re here, you already know that Paid Memberships Pro is an open-source subscription management WordPress plugin that empowers users to manage membership sites efficiently.
With Paid Memberships Pro, you can use automation to manage members with different pricing models, offer recurring billing cycles for subscriptions, and ensure a smooth billing process for an exceptional customer experience. It also offers six payment gateways, WooCommerce integration, admin reports, free add ons, and the Memberlite Theme.
Paid Memberships Pro is free, with premium plans starting at $297/year.
Avalara: AvaTax Integration Add On 101
When you have the Paid Memberships Pro plugin, you can enable the Avalara: AvaTax Integration Add On. It accurately applies subscription tax calculations to all membership payments.
Keep in mind the plugin won’t handle tax payouts for you. But it will make it easy to process monthly and yearly income tax filings, simplifying your subscription management and tax returns.
Similarly, the Add On is not designed to charge tax on top of a subscription fee. But its design lets you bake it into your membership pricing — which is preferable for the widely varied subscription tax rates.
The Avalara: AvaTax Integration Add On simplifies subscription tax management and tells you the exact amount of sales tax you need to pay as soon as you log into your dashboard.
Moreover, the plugin lets you categorize and code your membership products to determine where you need to pay the taxes for each product you’re selling. So you don’t have to waste time researching the tax amounts you should be charging or worrying about legal trouble with the IRS down the road.
Not only can the Avalara: AvaTax integration help you with local taxes and state taxes, it can also determine non-U.S. taxes, including VAT and GST. So you only need to install one extension to automate sales and perform tax calculations for your membership site, whether your subscriber is based in the U.S., Luxembourg, or anywhere else in the world.
Final Thoughts: Subscription Tax, Subscription Billing, and Membership Sites
If you want to avoid legal trouble and make sure your business is compliant with every rule and regulation, you can’t afford to ignore sales tax. Even if you haven’t collected sales tax before, now is the time to start.
For those that find tax calculations daunting, here’s the good news:
With the Avalara: AvaTax Integration Add On and Paid Memberships Pro, you can easily automate the process of registering, collecting, and remitting sales taxes for your membership site. Check out the Add On today and see how it can help you make subscription tax management easier.