5 Sales Tax Considerations for E-Commerce Businesses
Updated: Jan 27
E-commerce has grown into a multi-million dollar industry following the rise of internet users. But as businesses leverage the rise into another form of B2C sales, it is important to understand e-commerce taxation issues. More sales inevitably attract more tax regulations; hence, the need to understand e-commerce tax considerations.
E-commerce tax considerations are different from those of physical businesses. However, you can have an insightful understanding of e-commerce taxes by making the following considerations:
Whether the products are subject to sales tax
Where to store your inventory
Timelines for the taxes
Location of your customers
Here are important tax sales considerations you should make for your e-commerce business.
1. Wayfair and economic nexus thresholds
In the South Dakota v. Wayfair court case, the Supreme Court ruled that states can require businesses meeting a specified minimum threshold to collect and remit sales tax. The court set the South Dakota threshold at $100,000 gross sales or 200 transactions. The ruling set off a domino effect that swept across all US states.
You should be paying attention to the number of transactions and sales you make, as well as the state in which you are making the sales, to determine if your online business is liable for sales tax. It is also important to know the economic nexus threshold in your state. Once you cross the thresholds, register and start collecting and remitting sales tax.
2. Product taxability
Another important consideration to make while addressing e-commerce taxation issues is your products' taxation rate and in your state. Each state may tax particular products differently from other states, and some may even provide tax exemptions or offer tax holidays. It is vital to understand the general taxability of your products so you can prepare accurate records for taxations.
3. Exempt customers
Your e-business also needs to be in a position to handle a customer who presents a tax exemption certificate when making purchases. You, or your sales team, need to determine whether it is the correct documentation and if it applies in your state. Keeping in mind that a tax audit will be due in the near future, you should understand the general rules and pitfalls of e-commerce taxes and exemptions.
4. Software and automation
Your e-commerce clients expect a near-instant check-process when they make purchases from your online store. You would have no chance to calculate and apply sales tax if you didn't resort to a tax calculation software. The software should account for e-commerce sales tax rules and your online customers' e-commerce income tax.
5. Managing work
You are not out of the woods yet with a tax calculation software in place because it won't solve all the e-commerce taxation issues, such as tracking economic nexus, managing exemption certificates, and addressing tax notices. You may have configured the software to handle every e-commerce transaction over the internet, but automating everything sales tax isn't realistic.
You still need people to work out all the tax-related responsibilities to avoid hitches. Hiring an office manager or an additional accounting staff may go a long way to streamline your sales tax responsibilities, especially if your e-business is growing in leaps and bounds.
If you aren't able to handle and manage the complexities of e-commerce taxation issues, you may need to outsource the services to accounting professionals. At Right Choice Accounting Solutions, we can take out the anxiety of dealing with the complicated issue of sales tax in e-commerce businesses. We can help you determine the taxability of your products, the tax rates in your particular state and assist in the filing of your tax returns. Contact us today for more information.