States rely heavily on collecting sales tax from both brick-and-mortar and online retailers. In 2017 alone, local and state governments collected a combined $389 billion in revenue from general sales taxes, which made up 12% of general revenue. However, due to COVID-19, states are struggling with tax collections from physical storefronts. In fact, collections have nosedived as much as 50% in the fallout of the pandemic, putting more focus on ecommerce businesses.
The South Dakota vs. Wayfair ruling in 2018 made it legal for states to collect sales tax from ecommerce businesses. With more people shopping and selling online than ever before due to the pandemic, we’re experiencing a wave of ‘Wayfair’ tax revenue, making states even more determined to collect sales tax from ecommerce sales. This will ultimately lead to more audits, enforcement and possible litigation over the next year.
So what can you do to avoid any issues and make sure you are complying with your tax responsibilities? As an accountant that exclusively works with ecommerce businesses, here’s my advice.
Stay Informed
Currently many ecommerce businesses in the U.S. – and across the globe – are experiencing fast growth in order volumes. U.S. ecommerce sales jumped by 92.7% in May, according to a new SpendingPulse report from Mastercard.
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With a higher influx of sales, or any amount of sales, comes a critical need to understand your unique tax liabilities as an online retailer. You have the responsibility to charge your customers the correct amount of sales tax, and divert the collected amount back to the states that fall within your responsibility. Currently, 45 states and Washington D.C. all have a sales tax.
Whether or not you have “nexus” in a state determines when and from which customers you need to collect sales tax. To quickly explain, sales tax nexus is the degree of an ecommerce seller’s connection to a state. If you meet certain thresholds (physical presence or a certain volume of online revenue), the seller is then required to collect and remit sales tax in the state.
Online retailers will always have sales tax nexus in their home state, but can certainly have sales tax nexus in other states depending on business activities. Once you’re deemed nexus in a state, you are legally required to charge sales tax to your consumers and remit it back to the state.
Follow a Compliance Checklist
Tax audits are stressful, time-consuming, and can be costly if you’re found to be out of compliance. As I previously mentioned, because of budget shortfalls and the surge of ecom sales, states will be auditing to ensure they’re collecting sales tax wherever possible. Having a solid checklist to refer to can help make sure you are squared away on all things tax related.
- Review
your compliance practices:
- Understand your filing requirements
- Make sure you can justify product taxability or exempt sales
- Make accurate tax rate calculations
- Keep detailed sales records that can be easily referenced
- Be proactive instead of reactive. You
can decrease your chance of being audited or avoid facing uncollected tax
fees/penalties by:
- Conducting a nexus study (review your business activities in various states and determine whether or not they create nexus)
- Staying up to date with rate, rule and boundary changes
- Reporting consumer’s use tax
- Replacing manual process with software solutions such as TaxJar, Avalara, etc.
Outsource for Help
Tax compliance can be overwhelming, but the good news is there are professionals that can work with you to relieve your stress, save you time and save you money. As an online retailer, it’s important to work with an accountant that specifically specializes in ecommerce accounting (an ecommerce CPA). These professionals will learn the ins and outs of your business in order to strategize what works best for you. Having a professional plan in advance will guarantee that your business is complying with tax obligations, and also minimize the chance of a sales tax audit going south.
Chris Rivera founded the E-commerce Accountants in 2019, which specializes in tax, accounting and business structuring for ecommerce companies including Digital Marketers, Drop Shippers, Amazon Automation, Amazon FBA, and Internet Coaches/Gurus. Rivera works with some of the most high-profile and influential individuals and businesses in the ecommerce space. Prior to the start of his firm, Rivera spent six and a half years with Ernst & Young specializing in tax and accounting for retail consumer products and service companies. During this time, he worked entirely with multinational businesses (both public and private), providing services including business structuring, accounting consulting, auditing, tax compliance, and tax planning. Rivera graduated from the University at Albany and is a New York State Certified Public Accountant.
