Hello, everyone, and welcome to your next subscription session. My name is Sarah McCready. I am the director of product marketing here at Recurly, and am really, really excited to dive into this next topic.
So subscription taxes, they are a very complicated world navigate for a lot of brands, especially as you're scaling globally. So I'm really excited to have Gina Chen here with me from our integration partner Vertex to really dive into this topic and talk about how to streamline, managing subscription taxes globally. So Gina, do you wanna do a quick introduction before we dive in? Sure.
Hi, everybody. I'm Gina Chan. Like Sarah mentioned, I am a senior sales engineer here at Vertex, but I've been in the sales and use tax base since Well, you guys can do the math since nineteen ninety nine. So it's been a while.
Started traditionally with the big four doing sales and youth tax consulting and then kinda got in the software game about halfway through my career. So excited to to chat with you about sales taxes today.
Awesome. So to kick things off, there might be some people in the audience that are actually new to having a subscription offering. Right? A lot of brands we're seeing at sort of the Fortune five hundred level are all kinda getting into subscriptions and figuring out what that looks for them. Looks like for them. And so what are some of those nuances to that are the differences between a one time or recurring purchase?
A lot of times, one time purchases are more localized or centralized, meaning we're not reaching out as too big of a market as we would in terms of the subscription billing model. Right? And then the other complexities that we see is volume.
So volume with subscription billing, it's a monthly occurrence. A lot of times companies bill upfront monthly, they'll bill semiannually, they'll bill annually, and that can affect the tax as well, you know, whether we're charging an upfront amount for the sales tax charge for the whole year or if I'm doing monthly payments, are we doing tax calculations every month? And that also can trickle down to Well, what happens if I am a tax inclusive pricing, right, and the tax rate changes? You know, that could affect your bottom line. So you really wanna take into consideration, how you do your pricing model, how you do your billing model in terms of frequency. And then again, there's a lot of whole other nuance that we can go into, but those are kind of the initial ones to start looking at if you're going into a subscription bottle.
Is do I have the right resources to handle the changes and tax. Do I have the right resources to then gather that data and file timely and pay timely with the jurisdictions?
So those are just some of the things that I would definitely highlight right off the bat in terms of if I'm going and I'm growing my business and I'm going into new regions, New Jersey how am I gonna keep up with all of that?
So with that being said, obviously, it's a lot to juggle.
And you're you manage directly a lot of these big brands that are doing that, kinda behind the scenes. So what are some of the big pitfalls or mistakes that you see teams making when it comes to managing taxes on the back end? Number one is resources. Right?
You you may have been filing in a couple of states and all of a sudden your filings went from only five to ten states to potentially hundreds. There's almost, you know, Over ten thousand, you'll hear thirteen thousand taxing jurisdictions just in the US alone, and you wanna make sure that tax doesn't slow down the growth of the business. Right? So you really need to prepare ahead of time that if I'm increasing my tax filings or even my research of the tax content by ten twenty fold, Is that something my business can sustain?
Is that something my tax department can sustain and also grow, be able to not slow down the business as we enter new jurisdictions or decide that we wanna sell a new product. Right? If I decide to add a product to my subscription base and I am in all forty five states that have a sales tax as well as all of the local jurisdictions, how quickly am I gonna be able to ramp up to research that new product? So those are definitely some of the areas to look at is if you're going toward and this goes not just subscription, but specifically with subscription is it is such a recurring model at a such a volume.
A small percentage of being off could throw a lot of the business off in terms of the revenue and the the margins.
Yeah. And beyond the revenue and margins, like, what are other risks associated with kinda not getting this done correctly? So I always say it comes down to the returns. Right?
Because in the end, the whole process of applying the right rules, applying the right tax, exempting the right customers. All of that really ultimately flows down to my tax return. Right? I would say you almost wanna start backwards from the back because If that data doesn't get to the returns right, that's when states come in calling.
That's when audits don't turn out properly. That's when cash flow can be affected by the business because maybe you didn't have enough of reserve in your account to offset those liabilities.
So, I mean, that is one of the major things is really on the back end Do I have all the information I need to properly file the returns? Do I have all the information I need to properly to send an audit if the auditors come in? And again, back to the whole resource part is do I have enough resources to do all of those functions?
So we've talked about things more broadly speaking.
There's obviously a lot to navigate kind of regionally, but then also globally. So what's your perspective there?
So I've seen a lot of companies who sell digital goods, especially in this subscription model. And the hardest part of digital goods that I'm talking to other companies in this similar situation is figuring out where the sales should be sourced. Right? For a lot of the smaller subscription model businesses, they may not sometimes get a full address for their customer.
You know, they may just have a zip code and a credit card number. So that's the number one thing is how do I source those digital goods? Where is the sourcing? One of the things in, in global from a bat perspective, they use almost like a three pronged approach.
So they'll make sure that at least two out of three pieces of information match up to be able to tax properly for that jurisdiction. That could be a credit card number. It could be an IP address.
It could be where the card credit card resides or where the actual customer is, adding if the if you're capturing addresses, where that address is. So companies in that situation, if they're just starting out, I always say the more information, the better. I know you want people to go through a fast check out and you want them to put in as minimal, minimal information as possible, but that could get you in trouble from a taxing perspective because if you can't source the sale properly, then you're not gonna get the correct amount of tax there.
And then what about within the US as well?
Within the US, the complexities are so weird. I mean, a top of just being is on top of not having to source by country, but source at rooftop level, is a huge one. Like I said, thirteen thousand, ten thousand to thirteen thousand plus taxing jurisdiction.
Getting the right address is very key. But on top of that, it's understanding that every rule, every state or jurisdiction could source that sale differently.
Depending on if it's tangible goods, depending on if it's a digital service or a digital item, some are sourced at the origin. Where the sale takes place. Some are sourced at the destination where the consumer is actually getting those services or receiving the items.
Some states decide to mix origin. So it could be that the, sale comes from the state level at the origin or the destination and vice versa.
Also mixed origin, you'll see, for example, in Texas. In Texas, across the board, you usually get the tax from the origin. But if it doesn't hit the eight and a quarter or eight point seven five max amount, then you actually get it from the destination.
So there's so many complexities. Like in Tennessee, there's a single article rule. If you buy something that's an eye single item over fifteen hundred dollars, then it becomes a different tax rate up until it gets to twenty six hundred dollars. You know, there's clothing exemptions.
So in New York, almost the state in most counties exempt items under a hundred and ten dollars. Right? If I have a subscription clothing model, you know, that definitely varies in what clothing they're sending me. Right?
If things are over a hundred ten, I'm gonna get taxed. If things are not, I'm not gonna get taxed. And even at some county levels, that's also taxable. So not only is the jurisdictions making it complex in terms of where you're buying it from, but the next level of complexity comes to what am I selling?
So it's it can be again, there I'm just the tip of the iceberg here in terms of all the different complexities that you could run to from a regional local level as well as from a bat perspective.
Yeah. And I know within kind of about fifteen minutes, we can't dive into every single, kind of thousands of different scenarios. So what do you recommend for businesses to kinda stay on top of what the latest is in terms of tax regulations, both regionally and globally.
Make sure you have a good platform.
Number one, you know, from the front end perspective like a recurly, and also the back end perspective from a tax side. Right? If you're a tax team and this is what here all the time as resources are tough right nowadays.
People are jumping jobs and whatnot. So what happens if someone leaves?
Right? Where is all that knowledge gone? So putting a tax engine in place with your subscription billing, like, we're currently definitely helps you kind of future proof the business. If someone retires, if someone leaves, at least the decision makers on the tax side aren't going anywhere because that becomes your tax engine.
You know, you don't need the resources to do all of that research. You don't need the IT resources to update rates and tax ability content every month. So the business can still continue even if there is turnover in your, in your resources. And then just the fact that there's so much granularity, what is a specific customer's exempt for what they're buying from you?
Right? How do I track that? Do you need that for audit proof? It's for proof of audit?
You know, that this person gave me an exemption certificate sales tax holidays, you know, every state, depending on what you're selling, attention, eventually, sometimes has sales tax holidays on hurricane items, sales tax holidays on school items, you know, whatnot. And what happens if I'm buying stuff that falls under that even though it's a subscription?
Right? We it goes back to there's so much to manage that putting a good tax engine in place that has sales tax holidays has the ability to to handle exemptions and then has the reporting or even the back end compliance products to be to continue that into in journey. Right? It's not just collecting the tax.
It's that into a journey of collecting the right tax all the way to supporting my audit and then also on top of that, being able to provide some maybe data analytics to the business. Right? The tax team has so much good information that If it's property packaged and utilized, you know, if I'm doing a subscription campaign in a a certain state or a certain jurisdiction, the sales data that comes in of what product and what region is very valuable to the business. Right?
So the data analytics of churning tax tax data into being more relevant to the business can also help fund other projects. Let's just say So definitely something to consider is when you're looking at going into subscription billing and you haven't traditionally been, doing a lot of compliance or in a lot of taxing jurisdictions or have nexus in a lot of places. You know, I always use the rule of thumb where If I'm already going over five to ten states, that's almost like the cusp of when it makes sense to start looking at a at a tax engine per se.
Yeah. I love that perspective of leveraging tax data to actually fuel growth. Right? And I feel like that's happening a lot more within prescription businesses because it does kind of affect every single cross functional team.
So, yeah, that's a that was a great point. So I know we're already at a time, unfortunately, and Vertex has a really great guide as well on this topic. So we'll be sharing that out as well to the audience. But if you have any other questions, continue to put them in the chat, and, or you can email events at recurly dot com.
So Gina really appreciate you joining us today and sharing all of your expertise.
And thank you to the audience for listening in, and we'll see you soon. Thanks, everybody.
