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 with.

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 regulations.

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 facilitator laws.

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.

Conclusion

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.