Running an ecommerce business is a game-changer. You can now process paperless transactions and send them worldwide within the four walls of a room. Even so, it doesn't come with zero challenges.
Sales tax ecommerce laws are constantly changing and diverse. The money comes from multiple sources, and each has a different tax law. As a result, keeping up with them is difficult, and even the smallest mistakes can cost you dearly.
So before you end up with a big fine, let's have a quick discussion about tax data management. What are some good practices to keep up with the ever-changing policies? How will you track all locations and platforms where your money goes?
When you put an item on sale, it will charge a sales tax. The tax will then be added to your client's final invoice, and you will act as the middleman who collects and remits these taxes to the appropriate authority. Quite simple, isn't it?
But when you're an ecommerce seller, some complications will apply. You'll have multiple sources of transactions that come with different sales tax requirements. If you can't manage that properly, you'll fail at data accuracy and tax compliance.
Read these seven practices to avoid getting your small business in trouble.
Let's begin with the sales tax nexus, which connects a business owner to a taxing authority. You automatically get a nexus in your home state as an online seller, but that's only one of the many nexuses. You can also have nexus based on the shipping destination.
It's important to be aware of this because it affects your sales tax data. For instance, you need to recheck which sales are taxable in which state; this will be a good way to categorize your data and avoid confusion.
If you sell your products on various marketing platforms like Amazon or Shopify, learn about their tax programs and take full advantage of them. These programs either take over tax collection or help you with hassle-free sales tax information management.
For example, Amazon automatically applies appropriate taxes to transactions and lets you manage tax-exempt purchases. Meanwhile, Shopify automates sales taxes and provides easy calculations but doesn't file and remit them for you.
Add sales tax to your invoices automatically using an ecommerce shopping cart solution with an automated calculation feature. This way, you can keep up with the sudden changes in product taxability and provide your customers with appropriate rates.
This calculation tool should be as fast and efficient as the abrupt changes in the sales tax rate. These changes include tax exemptions, shipping destinations, and remittance of returns. This way, you can ensure your customers that you're paying for products that are taxed correctly.
Ecommerce platforms have their own tax exemption policy. Some require integration with your ecommerce platform, while others charge you for a tax-exempt system. But they all have one objective: to let you seamlessly collect, validate, and manage exempt data and avoid costly penalties.
Shopify, for instance, allows sellers to set tax-exempt customers. Meanwhile, the Amazon Tax Exemption Program (ATEP) lets you accept exemptions from buyers (also ATEP-enrolled) and automatically process these transactions in your account.
You may be good at numbers, but we don't recommend self-reliance for ecommerce mathematics. You never know when the rules and rate might change abruptly or blow up like crazy—you won't have time to process what you see! To avoid getting into such trouble, invest in the right tax technologies.
There are plenty of tax data management and accounting tools available—some of the best examples are Quickbooks and Taxjar. They calculate sales taxes and generate reports easier and faster to help you comply on time and avoid unnecessary fees.
You sell on multiple sales platforms to grow your customer base. That's a great strategy, but it also adds complexity to your sales tax data. But the good news is that accounting software and tax calculation tools allow integration with multiple sales channels.
Now, you can collect and manage all your tax data (e.g., POS, marketplace, or social media sales) in one accessible platform. Furthermore, you'll also reduce the hassle of tax compliance since they're automatically updated, calculated, and organized. So when looking for software, don't forget to check the integration feature!
You can always do your research to learn more about sales tax for ecommerce businesses. However, it's understandable if you still can't get a good grasp of the concept. After all, you're no financial expert, and the subject itself is generally tricky.
If you find sales tax management too confusing to handle, it's time to ask for professional help. Look for a reliable bookkeeping team like Unloop to help you produce clean and accurate books. You may also hire accountants to assist you with managing sales tax collection and tax compliance.
The sales tax landscape is constantly changing, so it matters to have a management plan that can help you quickly adapt to these changes. Otherwise, your business is at risk of huge financial trouble.
If you're feeling lost in the pool of information on sales tax for ecommerce, consider the seven tips we discussed. These will help you understand where most of your sales come from and handle them with ease.
Should you need further assistance, Unloop can walk you through everything one at a time. We will help you understand tax nexuses, integrate your sales platforms with the best tools, and collaborate with partner CPAs to ensure tax accuracy and compliance. Book a call with us today!
Unloop is the first and only accounting firm exclusively servicing ecommerce and inventory businesses in the US and Canada. With the power of people and technology, our team dives deep into COGS and inventory accounting. You are paired with a dedicated bookkeeping team that prepares accurate financial statements, financial forecasts, and can also pay bills or run payroll for you. Come tax time, everything is organized and ready to go, so you don't need to worry. Book a call with an ecommerce accountant today to learn more.