People working inside a shipping room packing boxes.
Initially delayed due to the COVID-19 pandemic, the EU has begun issuing various tax and tariff labeling changes that U.S. small businesses need to know about. — Getty Images/SDI Productions

In the pandemic era, online shopping significantly increased, and more U.S. businesses than ever started shipping overseas. However, U.S.-based companies that sell goods online to customers in the European Union will soon need to comply with new rules surrounding value-added tax (VAT) and tariff code labeling.

On July 1, 2021, these new rules — which can be somewhat complicated — will go into effect, so business owners should pay attention. Here’s what businesses need to know about the EU tax and tariff labeling changes happening on July 1.

Why the EU’s VAT rules are changing

Starting in 2015, the European Union has been working to “simplify VAT obligations” for all goods and services sellers. In a nutshell, the EU wanted to make sure each country was receiving correct taxes on goods coming from a different country. These changes have been implemented in stages, with one of the last stages starting on July 1, 2021.

One reason why many U.S. businesses may not have known is that the new VAT e-commerce rules were initially supposed to go into effect January 1, 2021, but were delayed six months due to the COVID-19 pandemic. As such, many businesses should move quickly to begin identifying the easiest way to comply with the changes.

How the EU VAT taxes change under the new rules

The most crucial change for U.S. businesses is that any item sold for less than €22 (socks, cleaning tools, small electronics, kids’ toys, etc.) was previously exempt from VAT. After July 1, 2021, all goods priced up to €150 will be subject to VAT, and the seller will be required to collect and pay it. (The new reforms target goods up to €150, but any item that was more expensive than that already had its own rules, and those will remain unchanged.)

The second most important change is that sellers and online marketplaces will likely need to use a service such as the “Import One-Stop Shop” (IOSS) to help them collect VAT. The stated goal of the IOSS is to allow “suppliers and electronic interfaces selling imported goods to buyers in the EU to collect, declare and pay the VAT to the tax authorities, instead of making the buyer pay the VAT at the moment the goods are imported into the EU.”

According to FedEx, all businesses will be affected, but the changes will mainly affect business-to-consumer (B2C) sales and online marketplaces based outside of the EU, as well as EU-based businesses selling to consumers in the EU. These changes could lead to simpler procedures and reduced administration. There could also be broader implications for the way you conduct business into the EU, FedEx says. FedEx provide more information for sellers shipping to the EU here.

When a small business sends an item to the EU, it will need to include a specific tariff code.

New tariff code rules added, too

While the tax changes are essential for U.S. small businesses to understand, the EU also has implemented new rules around labeling items with tariff codes. When a small business sends an item to the EU, it will need to include a specific tariff code. This code gives customs offices more information about the imported items. This code will be six to 10 digits long, depending on the country to which the item is sent.

Starting July 1, businesses that are sending purchased items to EU customers must include the tariff code. If they do not, items could be delayed at customs or returned altogether.

What businesses need to do to comply with these changes

First, when it comes to VAT changes, businesses should start collecting VAT on every good they sell up to €150. They can use the IOSS or a third-party shipper such as FedEx or UPS to help them charge VAT in a more straightforward manner. To sign up for IOSS, businesses must be registered in a European Union country they are trying to sell. If they are not registered, they will need to appoint an intermediary to take VAT on their behalf.

Second, when it comes to complying with the tariff code additions, businesses can search for codes using tools from the European Taxation and Customs Commissions and the U.S. International Trade Commission. Companies should know the tariff numbers for each corresponding item they sell. For example, if I were a U.S. business that made high-end garden umbrellas and sent them to German customers, I would make sure the proper code (6601100000) is added to the shipping label.

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