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Sales tax for subscription businesses

by TaxJar January 6, 2023

Please note: This blog was originally published in 2022. It’s since been updated for accuracy and comprehensiveness.

In the time before the e-commerce revolution, most start-ups needed funds for a brick-and-mortar location before launching. Today, all you need to start an e-commerce company are essentially two things: an internet connection and a fantastic idea. (Even your idea doesn’t need to be perfect; Nintendo was once a taxi company and a playing card manufacturer.)

There are a plethora of new business models in the 21st century – and with that, many more questions about how to stay compliant. We’ll explore some of the more innovative new business models, along with the potential sales tax implications.

SaaS (Software as a Service) 

Some of the most prominent tech brands in the world use a SaaS model for their product. TaxJar is also a SaaS company, so we know all too well the issues that can crop up with regards to sales tax compliance. 

SaaS is not taxable in every state – but it is taxable in many of them. Take a cursory glance at this handy map we’ve created of where SaaS subscriptions are taxable, and it becomes clear that you’d have your hands full keeping track of each state’s rules and regulations with regards to SaaS.

For SaaS companies like Quimbee, a legal education platform, the solution was simple: use TaxJar with AutoFile. This allows them to fully automate the sales tax process, stay up to date with changes in tax laws and rates nationwide, and alert them if they approach economic nexus thresholds in a new state. 

Online fitness memberships

Having a fitness membership to a gym used to mean paying a monthly membership fee to go to a local gym… or not going at all and then feeling guilty whenever you looked at your credit card statement. Either way, in most states, the gym owner could stay compliant by collecting and remitting state and local taxes from its clients. 

Since the pandemic began, the business model for many gyms (and at-home fitness companies like Peloton) has moved to include an online subscription component for everything from yoga classes to personal training or group classes. The business model for a gym owner has shifted considerably – instead of just targeting locals who are looking for a place to workout, now anyone looking for a fitness class online is a potential client.

While an expanded customer base is an exciting prospect for any company, there are potential sales tax compliance issues. An online fitness class subscription is considered a digital good, but some states consider digital goods tax exempt and some do not. Peloton was recently sued because the company allegedly charged sales tax to customers in a state where digital goods are exempt, like New York. If your company is holding online fitness classes, TaxJar’s sales tax compliance platform can help you avoid issues like this by properly collecting (or not collecting) the right amount of sales tax on that item from every buyer, every time.

Monthly subscription services

At this point, if you can dream of a subscription box, chances are it exists. For a monthly fee, everything from coffee to perfume to vinyl records can show up every month right to your front door. While the contents of a subscription box generally change each month, one thing stays the same: every one of those companies needs to consider the sales tax implications of having customers in multiple states, and must assign the correct tax codes to their products.

Underwear Expert – a men’s underwear subscription business – had those same concerns, and signed up for TaxJar for an enterprise-level solution that could grow with their business. “Having a subscription-based business model is more complex than a traditional e-commerce model, so getting things right from the beginning is important,” said Michael Kleinmann, the founder of Underwear Expert. Now TaxJar is filing on behalf of the company in multiple states, and makes sure the company stays compliant as it adds customers across the country.

Meal subscription services have also grown in popularity as dining habits have changed since the beginning of 2020. While grocery items are not taxable in multiple states, prepared or ready-to-eat food is often taxable. We’ve broken down a few of the sales tax issues that meal subscription companies may face when shipping their delicious food to other states, but we always encourage the input of a tax professional before making any decisions about your business. 

TaxJar can help your company, whether it’s a SaaS company, a monthly subscription service,  or anything in-between. Learn more about how TaxJar works, and get started automating your sales tax compliance today.

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