5 Things You Should Know When Running an Online Business
Today’s digital age has ushered in a new breed of business
model—e-commerce. Before the year-end tax filing seasons arrive, here are some
things you need to know about e-commerce tax.
Wayfair increased the complexity of tax compliance
The prevailing Supreme Court decision on digital
sales tax has always been the Quill case. In this ruling, it was established
that the seller did not need to go back to collect and remit sales tax in areas
where they don’t have a physical presence despite having transactions there.
However, because of today’s present reliance on
technology, e-commerce has become the prevalent business model. Even before the
quarantine, the numbers of e-commerce businesses have sky-rocketed. Of course,
this caused the Supreme Court to revisit the ruling on Quill and decided that
it was no longer relevant in today’s society. Since then, the legislation on
sales tax has been continuously changing.
Because of the recent Supreme Court ruling in Wayfair v South
Dakota in 2018, states now have the power to impose tax against sellers without
physical presence. This development, while creating significant tax revenue for
the government, created complications for taxation, as taxpayers and tax
practitioners alike struggle to keep up with the changes, not only in
traditional sales tax but also with the inclusion of digital sales tax.
In that ruling, the “economic presence” of a
business was established. This provided a threshold for transactions to
determine whether an entity has to collect and remit sales tax, in a certain
State. In Wayfair, the threshold was set at $100,000 in amount or at least 200
transactions. This means, some business owners who have fewer transactions but
sell in higher value, could still qualify for the tax.
In order to determine whether you should apply
digital sales tax, first, you had to know whether the state collects digital
sales tax. Second, you need to find out if they tax based on the State of
Origin or the State of Destination.
This means the returns you will be filing could
multiply. For example, if you are operating in Salt Lake City, Utah, and you
made a sale to a customer in Provo, Utah, you will charge the applicable Salt
Lake City sales tax on the sale, which is the state of origin.
There are also “self-administered” or home rule
states which tend to have more complicated rules. In most jurisdictions, you
can just file and remit at the state level and the state handles getting the
appropriate amount of taxes back to the county, city, or district. But these
self-administered states would require you to go back and remit to each
individual county or city you transacted with. So, if you are in 20 states, and
you happen to transact with one of these self-administered states, that number
could easily double because you need to file per county or city you transacted
These changes have caused a lot of confusion for
the taxpayer and the practitioners alike. Thus, it is very important to stay on
top of IRS guidelines and updates.
How to prepare for a tax audit
Online businesses have steadily been the favorite enterprise the
average American ventures into. Even the big brands that have been around for a
long time are finding ways to exploit this new business model and get into the
game. Of course, like every new venture, if you want to take advantage of
this growing market, you will be opening yourself to more compliance
One of the issues we have had to face is classifying the business
between the physical and the online aspects. Will an audit treat them as a
separate or the same entity from a compliance audit point of view?
This is important because we have had clients that insist they
should be treated differently, but we’ve had auditors come in and say that they
shouldn’t be treated separately as both are essentially doing the same
business, selling the same products, under the same banner. What one legal
entity should comply with, the other must, too.
If you find yourself in the position of being audited, the important
factor is being prepared. Better bookkeeping will help you keep your records
organized. Once an audit occurs, you’ll know where to find what, and be able to
substantiate any claims.
Of course, there won’t be a universal solution, this is why it’s
important to keep a good relationship with your accounting team. You will need
a team who is able to understand the specific industry in which you operate in.
Staying on top of your tax legislations and guidelines will help
you be prepared for any audit. Especially in e-commerce which has experienced
more legislative changes in recent years.
How COVID 19 comes into the picture
All the changes caused by recent legislation are making sales tax
hard enough, but factor in the changes caused by the pandemic creates quite a
problem. To alleviate the situation, what the government has been doing
is implementing a sales tax holiday. It is a way to encourage people to go out
and spend their money to jumpstart the economy. These tax holidays are implemented
on a variety of things like school supplies for children, to make essential
items more affordable while encouraging people to spend their money. It even
applies to purchasing Energy Star certified products, if you purchase something
that is certified, you could reduce your taxes.
With all these tax holidays, you have to expect that the
government will need to do something to balance them out. A new tax source is
one imposed on Marketplace Facilitators. A marketplace facilitator is
essentially, a third-party website that helps owners to continue their sales
and kind of act as an expansion on their own e-commerce business. An example is
Amazon that acts as a platform that allows you to participate as an individual
seller. You place things up for sale and have others go in and purchase them.
We see it in the food industry too, where the trend is in takeout.
Platforms like Uber Eats store, Grub Hub, and Post Mates provide a space for
restaurant owners to exploit online orders despite not having their own website
or online store.
Because of this, there is now a unique set of tax laws around the
way individuals and companies are able to operate on these marketplaces. For
example, when an individual seller from these marketplaces doesn’t reach the
economic threshold, he wouldn’t need to pay the tax. However, since he is using
your platform along with other sellers, you would easily qualify for that
threshold, and it would be your responsibility to calculate the tax and make
sure that the appropriate tax is remitted as part of those transactions. This
way, the state can now run after some of these larger companies. They’ve
created a way to close the gap and collect sales tax using marketplace
What if you want to expand sales beyond US borders
If you are thinking of expanding to Canada or the European Union,
there will be another layer of compliance you need to be aware of.
You need an accounting partner who is able to tailor-fit the
solutions for your business. If you are expanding your business outside of
America, you have to consider some factors like, who’s the responsible party?
what do I need to be aware of, from a compliance standpoint? What you find in
the European Union is that the front-end compliance is a lot more simplistic,
for instance, prices are inclusive of their VAT.
The future of e-commerce is still rapidly
evolving even as we speak. Part of this change involves the concept of
capturing sales anywhere, anytime, and on any device.
From brick-and-mortar stores to online stores and
now, to developing apps, the race to digital presence has never been more
intense. Even physical stores offer some form of online service. For instance,
if the store does not have the item on-hand, but has it in a warehouse, they
can offer their online service to their customers right then and there. This
set-up allows the customer a better experience with in-store shopping while
maximizing customer service.
For your finance, things will continue to
progress and there will be countless solutions and programs that will come your
way. However, the best solution is the best fit. Don’t be blinded by the trends
or the cheapest options. You have to make sure that you are applying the most
suitable option for your business needs.