E-commerce marketplaces popped up in the early 1990s and have been on the rise ever since. In the last decade, there’s also been a surge of businesses leveraging multiple consumer channels to sell their products. Not to mention, traditional brick-and-mortar stores had to drastically pivot in 2020 to provide a digital presence, which now means that nearly every business is online!
What has become commonplace has also become confusing for owners because the digital selling environment has grown in regulatory complexity. How can a tax professional keep your business on track as this landscape continues to evolve?
Doing Business in Multiple States
In 2018, everything changed. The precedent-setting court decision in South Dakota v Wayfair overruled the long-standing physical presence rule, thus allowing states to collect sales tax on any business making sales transactions in the state, regardless of their physical presence. The post-Wayfair e-commerce world has made calculations grueling for sellers, especially for small business owners whose capacity is already limited.
Since there was no bright-line test established after the case, sellers are required to closely monitor the always-changing remote sales tax laws in the states that they sell in. E-commerce sellers must now determine whether their business has “economic nexus” in a state, which is a sales tax obligation based on the level of financial activity with the state, including sales revenue, transaction volume, or a combination of both.
Tax professionals can help you determine nexus by completing a nexus study to figure out which states you may have filing requirements. They will determine the states’ sales tax rates, how much you owe, and then file the state tax accordingly.
In addition, we’re seeing some states decrease their threshold amounts as a way to fill budget gaps after COVID-19. Most states are hovering around $100,000 sales threshold—including Massachusetts—and/or 200 transactions, while Kansas adopted a zero-exemption amount and California has one of the highest thresholds at $500,000. Some states (and localities) have even adopted economic nexus provisions for purposes of income and gross receipts taxes as an even more economically attractive revenue generator.
Doing Business Internationally
Reaching global markets through digital marketplaces has become increasingly easy to do. However, the tax structures in other countries are different than the U.S. and should be considered and discussed with an advisor before entering these markets to ensure compliance.
Over 100 countries use the VAT (value-added tax) system, where tax is applied at each stage of the entire supply chain, not just at the point of sale to the final customer as it is in the United States. This means that everyone from suppliers, manufacturers, distributors, and retailers all collect VAT on taxable sales. They also all pay VAT on their purchases as well but can receive a credit on their tax return, so it’s important to document all VAT paid on purchases.
When shipping internationally, businesses are required to pay an import duty, which is a tax placed on imports by customs authorities in the destination country of shipment. Duties vary from country to country, which adds more complexity to the transaction…and cost.
In addition to calculating taxes owed in various international tax structures, e-commerce sellers should consider measuring profitability when selling internationally as well. As mentioned above, there’s a number of new considerations and expenses to weigh. A tax professional can help by putting together a projected revenue report to determine if selling internationally is right for your business.
Leveraging Accounting Software to Streamline Bookkeeping
Skip the shoebox. Skip the Excel spreadsheet. Online sellers need an accounting software to manage the ins and outs of ongoing transactions. At Erock Tax, we’ve always been an early adopter of technology and can find infinite ways that it makes our lives easier and more streamlined. We recommend the same for you. Integrating an accounting software solution into your e-commerce marketplace will sync and compile all of the necessary transactional details in order to keep track of the financial health of your business. The platform will offer a more transparent view of your business and capture trends and patterns that will allow you to forecast, develop strategies, and implement automation for the future.
When choosing the right accounting solution, it’s best to go with one that has features specific to e-commerce businesses. The reason for this is you’ll need to properly track your transactional data, inventory levels, sales tax, expense tracking, shipping costs, and more.
Not all accounting software solutions are created equal. A tax professional can help you identify the right software that best compliments your business and show you how to run valuable financial reports, such as your P&L, cash flow statement, and balance sheet. These reports can help you recognize ways to reduce cost and increase profits in various areas of your business. Similarly, if you sell products on multiple channels, such as Amazon, eBay, or Etsy, you can work with your advisor to sync settlement reports from third-party marketplaces to reduce time spent reconciling information.
Partnering with Multichannel Marketplaces
Digital marketplaces continue to build momentum and reach for their online sellers. Small businesses can partner with some of the largest marketplaces to increase their product exposure, reduce marketing costs, leverage third-party logistical operations, and even partner with multiple channels as part of their selling strategy.
From Amazon to Alibaba, each marketplace is different, so it’s important that you learn how to use the marketplace reports and integrate them into your accounting system for financial reporting purposes. Some marketplaces will automatically pour the data into your system or remit sales tax on your behalf, while others will not. Be sure to obtain the necessary information to efficiently manage your internal controls, inventory, orders, customers, sales tax, and shipping.
A tax professional can review your marketplace reports with you, show you how to reconcile those reports into your system, and extract insightful data on areas of profitability and improvement.
How to Manage Inventory Across Sales Channels and State Lines
E-commerce inventory management often comes with an extra layer of complexity because your inventory may not all be in one place right in front of you. Products may be stored in warehouses scattered across the country, either owned by you or provided through third-party logistics fulfillment centers. Managing that inventory requires ongoing oversight and maintenance so you know what products are overstocked, understocked, in stock, and out of stock. Your business depends on the accuracy of your inventory.
When it comes to taxes, you’ll need to work with a tax professional to calculate the value of the inventory. The taxation will depend on the cost method of how you handle the inventory and what type of structure your business follows. In addition, you will need to be aware of and track inventory shrinkage, which could result from errors, fraud, expired products, or damaged items. Keeping accurate records of your inventory will allow you to track patterns and streamline operations moving forward.
Next Steps
Many e-commerce sellers may find accounting and bookkeeping burdensome and could put it off until month end or even year end. This delay could be an expensive mistake and result in a number of errors in your business that could have been avoided. By working with a tax professional and implementing clear accounting methodologies, you’ll be able to extract valuable information that may just be the key to success in your business.
Contact us at (781) 247-5569 to learn more about the tax implications, timing, third-party report reconciliation, and inventory management for your e-commerce business.
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About Stu: With more than 30 years of experience as a tax professional, Stu Steinberg brings a broad depth of knowledge to his work with his clients. Stu founded Erock Tax to help provide tax and financial planning strategies to individuals, families and small businesses and is passionate about empowering his clients through education about their money health. Stu is highly energetic and brings a sense of optimism, creative problem-solving and a deep level of commitment to every Erock client.