Line items
1. EU introduces new payment reporting system to identify noncompliant businesses
The brief: Starting in 2024, the EU will require payment providers to report cross-border payment data to tax authorities, which will be used to identify potentially noncompliant digital businesses for increased penalties or criminal proceedings.
The backstory: The EU continues to implement new VAT rules and enforcement to ensure nonresident digital businesses collect and remit VAT. Beginning January 1, 2024, the EU will require payment providers to report information on foreign entities receiving more than 25 cross-border payments per quarter. This data will be stored in a database called the Central Electronic System of Payment Information (CESOP), and shared via a network called Eurofisc to identify companies doing business in the EU that aren’t VAT compliant. Non-compliant businesses face penalties, back taxes, interest, and criminal proceedings.
The bottom line: Digital companies selling into the EU should review their VAT compliance approach ahead of 2024 to avoid audits or penalties. Even compliant businesses should verify their VAT data matches incoming payment info reported to tax authorities. This increased tax enforcement highlights the importance of proactive VAT compliance for software companies.
2. Denmark ramps up VAT audits of foreign digital companies
The brief: The Danish Tax Agency (DTA) has recently increased VAT audits of nonresident businesses selling digital goods in the country.
The backstory: EU VAT regulations state that nonresident digital businesses must register and charge VAT on B2C sales in Denmark and other member states. The DTA obtains customer data from banks and credit cards to identify noncompliant providers. If found negligent, the DTA can claim up to 10 years of back taxes, which accumulate quickly at 7% monthly interest. As the DTA shares taxpayer data across the EU, noncompliance has broad implications.
The bottom line: Foreign digital sellers with customers in Denmark should proactively address VAT obligations before facing an audit—and note the potential consequences for sales made across the EU.
3. India expands list of taxable digital products and services
The brief: In July, India published new GST rules that deem a wider range of online services to be taxable for B2C sales made by nonresident businesses. The new rules are effective October 1.
The backstory: India is expanding its definition of OIDAR (online information and database access and retrieval) services under the country’s GST (Goods and Services Tax). Nonresident companies are required to charge GST on sales of taxable products to B2C customers in India. With the new definition, more digital services remote training or consulting may now fall under GST. India also introduced new requirements for marketplaces to ensure vendors are GST registered if required.
The bottom line: India is not alone in expanding the range of products that fall under its tax regime, with Australia, New Zealand, and Singapore making recent changes. These updates illustrate the importance for businesses selling digital products like software to track changing regulations across the world.
4. New Mexico and South Dakota lower statewide sales tax rates
The brief: On July 1, lowered sales tax rates went into effect in both New Mexico and South Dakota, with the latter’s tax cut featuring an unusual “sunset clause” that will repeal it in 2027.
The backstory: Last year, the New Mexico legislature passed a bill, signed by Governor Michelle Lujan Grisham, that cut its Gross Receipts Tax rate by 0.25%, to 4.875%. The Taxation and Revenue Department administers the tax, which is New Mexico's version of a sales tax. The South Dakota legislature passed House Bill 1137 to reduce the state's sales tax rate 4.5% to 4.2% as well as taxes on farm machinery, amusements, and motor vehicles. The tax cut has a sunset clause that will repeal it on June 30, 2027.
The bottom line: While tax rate and regulation changes are common across the US, lowered state-level rates aren’t frequently seen. The tax cuts could benefit software companies doing business in those states by slightly reducing their tax obligations, but businesses should continue monitoring updated regulations across the US for accurate compliance.
Forecasting
- Oracle continues its battle with Florida courts over $1.3 million in sales tax refunds, and pushed one of three active lawsuits forward in a Florida appeals court in August. The sales tax was charged on software products that aren’t taxable in Florida, but Oracle has faced a number of hurdles in reclaiming the funds since launching the lawsuits in 2018. How the cases proceed in the coming months has implications for other companies who’ve made sales tax errors, even those like Oracle who overpaid.
- In August, New Zealand introduced a proposed Digital Services Tax (DST) to tax large multinational tech companies. The bill signals a global trend of governments seeking to tax major tech players operating in the digital economy, and software companies should monitor the New Zealand bill and other digital tax policy shifts worldwide.
- Brazil’s government is considering a proposal that would consolidate its complex state and national tax regimes into a single, unified tax on goods and services. If passed, the new tax regulations would significantly simplify compliance for software businesses operating in Brazil, bringing it more in line with international VAT standards.
