More than 200 years ago, Benjamin Franklin remarked that nothing in the world is permanent—aside from death and taxes. Hundreds of years into the future, the adage remains true. Many changes have happened. For instance, horse carriages have been replaced by automobiles powered by gasoline and electricity. Despite all these changes, taxes remain.
According to a 2022 forecast, ecommerce sales in the United States will reach the one-trillion-dollar mark. Given these statistics, no one can deny how large of an industry ecommerce is. Governments have noticed this and have started regulating the industry by imposing sales tax collection. For instance, each state in the US implements its respective tax laws.
Read on and learn what else you need about sales tax for ecommerce!
What Is Ecommerce Sales Tax and How Does It Work?
Are you a remote seller? Besides manufacturing costs, you also have to consider taxes as part of your expenses. You may already know that taxes (like income tax) are inevitable in any transaction you make. In turn, the government uses the collected tax as funds for building infrastructure and providing social services.
So how does the government collect sales tax from remote sellers like you? It’s a bit complicated and can vary depending on where you have an economic presence. In the United States, states collect sales tax. As a result, you should research what the tax-related regulations are in the state you are in. Tax management services can help you navigate through this tax mess.
The Good: It Helps Fund State and Local Projects
Have you heard about corporate social responsibility (CSR)? Corporate social responsibility lets businesses, big or small, effect positive societal changes. For instance, they can use a portion of their profits to initiate a feeding program or plant trees. Nevertheless, if you are a small business owner, you don’t need either of those grand gestures to help society.
As an ecommerce entrepreneur, you can be a force of good in the world by collecting sales tax from ecommerce sales and paying other related taxes. The taxes you help the government collect will later be used to fund different government projects. Depending on how tax funds are allocated, the collected sales tax can even fund local projects around your community.
The Bad: It’s Confusing and Difficult to Comply With
“Confusing” is an understatement when describing taxation. If you make mistakes, don’t worry because you are not alone. Figuring out taxes makes everyone scratch their head. In the United States, you must know what jargon like economic nexus and sales tax nexus means. Consequently, new entrepreneurs seek professional help to get their books and taxes in good standing.
In the United States, the sales nexus becomes the primary determinant of whether you get to collect sales tax for the transaction you make. After finding out where your sales nexus is, you have to determine which products from your online sales are taxable and what tax laws apply to them. Unfortunately, it can be very complicated and involve combing through layers of tax laws.
The Ugly: It Hurts Small Businesses and Consumers
Despite taxation's noble goals, consumers and entrepreneurs see it as a bane. Taxes increase the prices of products for consumers. At the same time, it also hurts entrepreneurs by cutting into their profits. Whether you buy goods or sell them, taxation seems to be an added burden for you to shoulder.
According to economics professor Austan Goolsbee, billing for sales tax equates to raising the prices of goods and services. When the prices increase, consumers will buy less as a consequence. The professor stressed that ecommerce sales could go down by about a quarter due to sales tax. While it is our moral and legal duty to pay taxes, it will sting.
How to Be Better Prepared for Sales Tax (Ecommerce)?
New online business owners like you may find themselves lost and confused regarding sales tax. While taxation, in general, isn’t easy to figure out on your own, you can do some things to prepare yourself and your business for tax compliance. So how can you help your business to become 100% tax compliant? Here are actionable steps you can start doing right away.
1. Register for a Sales Tax Permit
Have you identified which state has your sales nexus? Doing so can be tricky as you need to tick off a few checkboxes before you pin down your sales nexus or the state where you have an economic presence. However, you should seek a sales tax permit from the concerned tax authority after doing so. The permit will allow you to collect taxes on taxable goods and services.
2. Collect Sales Tax
This part can be tricky and vary, relying on which ecommerce platform your business is on. If you are on Shopify or Amazon, you can use their respective automated systems to do the collection for you. For instance, Amazon collects sales tax on your behalf through the Market Facilitator Act. Do take note that this can vary depending on your sales nexus.
3. Report and File Sales Tax
After you were granted your sales tax permit, you would have also been made aware of when and how to file your sales tax. The frequency could be every month, every quarter, or once a year. You should have your documentation ready at whatever frequency you are required to fulfill your sales tax obligation. Automated software can make things a whole lot easier for you.
Is There an Easy Way to File Sales Tax Returns?
As a fledgling online seller, you should allocate 100% of your attention to running your business. But when tax season is around the corner, it’s easy to get yourself frustrated and rummaging through receipts and documents in your office. Forget about that and seek tax management service from Unloop! Let Unloop’s team of professional bookkeepers and accountants do the heavy lifting for you. Call us today—we’d love to help you out!