As the world continues to shift to an online, competitive marketplace e-commerce sellers are left with many legal and financial concerns. Now that tax season is upon us these concerns become even more intensified.
The e-commerce industry can be lucrative. Amazon for example has 190 million reported monthly visitors, but it also comes with its challenges. Less than 50% of small businesses stay online after four years. How can you make sure that your business is set up for success when building and growing your e-commerce business? Some areas to focus on are your revenue and growth model, a payment gateway that is user friendly, what shipping restrictions are in place, how you will manage inventory, and how you will protect customer information (cyber security is here to stay!)
As you can see there are many to-dos when running an e-commerce business. To add yet another layer, figuring out state and local sales tax laws can be challenging. Each state has their own rules and regulations that e-commerce business owners must follow.
As early as 2001 congress still did not fully understand the effects of e-commerce and how to collect taxes. Fast forward to 2018 and the rule of thumb is that any e-commerce business must collect taxes in any state where they have a physical presence, or nexus. If you don’t have a presence in a state than you are not required to collect sales tax. Unfortunately, it’s not as simple as it seems. In general what qualifies as a Sales Tax Nexus? Note: each state has its own rules for determining nexus.
- If the business has a physical location in the state – headquarters, warehouse, office space, etc.
- Home state
- If there are employees working in the state
- If the business has property (including intangible) in the state
- Employees that generally solicit business in the state (sales people).
E-commerce has brought with it more complications as to how Nexus is interpreted. In the past 10 to 15 years states have grown their concern over the issue of collecting online sales tax. They feel these revenues should go to them. The issue is how to monitor and enforce collections.
For online sales there are two different types of Nexus:
- Click-through – direct connection between the buyer and the seller
- Affiliate – presence of an affiliate between the buyer and the seller
Currently Alaska, Delaware, Montana, New Hampshire and Oregon do not have state sales tax. In turn businesses who are headquartered, or have inventory stored in these states, do not need to collect sales tax on in-state transactions. It is also important to note that it varies greatly, from state to state, as to what goods and services are subject to sales tax. According the United States Small Business Association you are generally not required to collect sales tax for the following transactions:
- Resold items
- Raw materials
As of now there is still a lot of controversy on collecting online sales tax. The Marketplace Fairness Act has been stalled in congress since 2017, so it is unclear how rules and regulations may change.
Unfortunately small to large online retailers are held to the same regulations, so for small – midsized e-commerce businesses there is not enough time in the day to sort through the complications of sales tax.
Hiring an accounting professional allows you to stay focused on your business while they handle the process of calculating, collecting and filing sales tax returns. Many professional accountants deal with multiple e-commerce business owners, so they understand the ins and outs of making sure you are adhering to the ever changing online business regulations.
For more information on how DKB’s Outsourced Accounting Services group can help your e-commerce business thrive contact us today.