Sales tax for subscription-based businesses

Are subscriptions taxable? Depends on what they’re for and where they’re delivered.

Over the past few years, subscription box services, for instance, have exploded in popularity as buyers have signed up for regular delivery of everything from food, makeup, music, books, pet supplies, flowers, clothes and more. This industry has ridden the wave of eCommerce to join long-established subscription markets for publications and memberships.

The hundreds of subscription box services in the U.S. alone (a number hard to pin down since these companies pop up fast) handle a wide variety of customer needs and specialized interests with prices anywhere from $10 to $100 a box.

Among other points:

• The global subscription box market was expected to grow to $31.27 billion in 2023, a compound annual growth rate of 16.74% from previous years. The subscription box market is expected to reach $59.77 billion by 2027.
• Major players in the subscription box market include Amazon, Blue Apron, Dollar Shave Club, FabFitFun, Harry’s, HelloFresh and Try the World.
• People age 25 to 34 constitute more than a third of subscription box buyers.
• About 45% of customers have two or more subscription boxes, and 14% have four or more subscriptions.
• More than half (54%) of customers have said they might cancel their subscription box service if the items didn’t arrive on time.

How is sales tax on subscription services managed for this growing industry?

The sales tax obligations related to subscription box services depend on many of the same questions as other remote sellers: Are your products taxable or exempt in tax jurisdictions where you have customers? Have you reached nexus thresholds in multiple states? Will each shipment in a subscription count toward your nexus thresholds? Will you apply sales tax to each individual line item in a shipment or to the entire bundled transaction?

Regarding potential physical nexus, where are your offices and employees and where is your inventory stored? The latter’s a special concern when dealing with a marketplace facilitator like Amazon.

Many states (but not all) rely on transaction counts to establish economic nexus. Many subscription boxes allow for a discounted one-time payment instead of monthly payments, but if your customers are paying monthly, every payment could be counted as a transaction – meaning you could hit economic nexus thresholds faster than you think. That’s probably one of the biggest considerations for sales tax on subscription services.

Are subscription services taxable? It depends on the product

Meal subscription box services. Groceries are not taxable in some states; other states only offer a discounted sales tax on groceries. Bear in mind too that exempting groceries from sales tax has become politically expedient as American families struggle with inflation and other economic woes. Kansas and Tennessee just became the latest states to green-light such exemptions.

Prepared or ready-to-eat food is generally taxable – and the inclusion of one prepared-food item can make an entire meal box taxable that otherwise contains non-taxable groceries. Some meal box subscription companies will separately ship (and charge sales tax on) the taxable item.

Plants or flowers. Flowers, in most states, require collection and remittance of sales tax on purchases online for delivery based on the location of the customer. Most states exempt plants and seeds that are used for human consumption from sales tax. You generally have to charge sales tax on ornamental plants and flowers.

Wine. According to The Wine Institute, wine incurs sales tax in all states that have a sales tax except in Kansas, Massachusetts and Rhode Island. Wine and other spirits also incur excise taxes in many states.

Clothing or books. Clothes are typically taxable in most states (barring special sales tax holidays, especially this time of year). There are a few states in which clothing is not taxable or only a certain portion of the clothing is taxable.

Subscription box retailers who ship physical books may have clear rules on sales tax – but if you decide to go digital in your delivery you’ll run smack into the newest wave of sales taxation – digital products and downloads.

That new development and this sampling give you some insight into the sales tax on subscription services complexities.

Sales tax is more complicated than ever, and everyone who says they’re simplifying sales tax is still leaving the hardest parts – and the liability – up to you. Rely on sales tax experts to maintain your compliance. Contact TaxConnex to learn what it means when sales tax is all on us.