Tax Considerations for E-commerce Accounting and an Introduction To Harmonized Sales Tax

Michael Pignatelli
Sep 09, 2021

For most sellers, e-commerce accounting is an exciting new platform for vast marketing opportunities. Thanks to technology, businesses can now bid manual financial data management goodbye. Data storage, access, and processing are now faster and more flexible than ever. 

However, e-commerce accounting brings new challenges too. Difficulty in handling financial data is still present. If you use the wrong tool or use the right one incorrectly, you're at risk of financial trouble. If there's something you should be putting a close eye on, it's tax compliance. 

Regardless of having a physical store or not, taxes are compulsory. Moreover, the variety makes it challenging: each state or country has different tax laws. Since e-commerce allows you to expand target selling locations, you'll have to pay meticulous attention to the tax requirements and comply.  

It is a challenging aspect of e-commerce, but you can overcome it with a clear understanding of tax considerations. This article focuses on tax compliance and harmonized sales tax (HST). So if you're selling to Canada, this is the perfect time to learn about it.

tax compliance concept on world map

E-Commerce Accounting and Tax Compliance

The tax rules made a drastic turn since the South Dakota v. Wayfair, Inc. in 2018. The law allows states to require e-commerce sellers for sales tax collection and remittance.

In addition, states implemented a nexus based on the level of sales or transaction. Nexus links a state and a business that involves sales tax registration, collection, and remittance. 

The Challenge

Since tax collection and remittance are no longer dependent on physical footprint, e-commerce sellers have to catch up with the ever-changing state policies. Unfortunately, the laws per state differ, so e-commerce businesses have a hard time adjusting. 

In addition to this overwhelming shift, the pandemic also pushed sellers to rely more on digital presence to keep the business running. As a result, businesses reevaluate and implement operational changes to keep the opportunities coming.

Canadian Tax System: An Overview

Canadian sales taxes are primarily divided into the federal sales tax (GST) and the provincial sales tax (PST). This is the traditional tax system, and many Canadian provinces today still use it.

However, due to the differences in the sales tax rates of each province, the HST was introduced. GST and PST rates are combined into one standard rate (HST) across the Canadian regions. 

Canadian dollars behind harmonized sales tax spelled out on keyboard buttons

What is the Harmonized Sales Tax?

Some new to HST might be searching for "Harmonized sales tax meaning” to get a gist of what it's all about. Here's what you need to know. 

A consumption tax

HST is a retail consumption/consumer tax imposed at the point of sale. The Canada Revenue Agency collects it and remits the remaining amount to the involved provinces. A consumption tax is levied on a purchase and comes in different forms (e.g., tariffs, excise, and sales taxes). 

It doesn’t cover all of Canada.

As mentioned earlier, not all provinces in Canada collect HST. Many of them still use the traditional system, and only five provinces currently follow the harmonized sales tax act. These provinces are (including their total tax rate):

  • New Brunswick: 15% (updated as of July 2016)
  • Newfoundland and Labrador: 15% (updated as of July 2016)
  • Nova Scotia: 15% (since 1997)
  • Ontario: 13% (since 2010)
  • Prince Edward Island: (15% since 2013)

How does it work?

Depending on what your province collects, you must register your business for a GST/HST account. Once you do, you'll be given effective dates (monthly, quarterly, and annually) to start sales tax collection and report. 

An important note: You only need to register if you no longer qualify as a small supplier. For example, you haven't sold more than $30,000 worth of products and services in the past four quarters. 

Rates vary depending on where you sell goods and services.

It's not easy for Canadian businesses to sell to another territory. You must follow the rate from where your business resides, but you also have to distribute the charge per the rate of the shipping destination. 

For example, you have an Ontario business (harmonized sales tax in Ontario is 13%), and you ship to Manitoba. In that case, you must charge 5% GST from Ontario and 7% from Manitoba as part of its retail sales tax requirements. 

Meanwhile, if the destination is outside Canada, none of the three taxes are applicable for transaction charges. 

Tax Considerations: Tips to Manage E-commerce Taxes

Now that you understand the basics of tax compliance, it's time to learn how to ride the wave without sinking into a heap of financial trouble. It's not easy, but what matters most is that you know where you stand. Here's a quick checklist for you:

  • Choose an automated platform that adjusts state tax rates correctly.
  • Look for a solution that helps you manage omnichannel sales.
  • Find a solution that supports international bookkeeping and accounting. Some of these include converting foreign currencies and managing sales tax liability.
  • Look for a solution that manages exempt sales (entities making a purchase with sales tax exemption) to avoid slowing down the buying process. 
  • Conduct consistent research or consult accounting experts to stay updated with sales tax laws.
  • Track every hard-earned dollar spent and earned so that you know where your sales are coming from.
  • Be alert with tax due dates per state. An accounting service provider can introduce a tool to help you in this aspect.
  • The procedure of e-commerce sales tax remitting varies per state or country. You must learn about these processes.
  • Avoid penalties by understanding them. Know what happens when you pay late or incorrectly.
  • Consult an expert before everything takes a toll on you and your business finances. 
two businessmen calculating taxes

Consult the Unloop Team for Tax Compliance!

If you're serious about growing your business, sales tax compliance is a significant matter you should focus on. Avoid getting an unexpected sales tax bill with Unloop! In partnership with Taxjar (a tax compliance company), we keep your sales tax intact with the following action plans. 

  • Determine your business status with associated Nexus
  • Register your business for tax permits
  • Set up automatic and accurate sales tax rates on your e-commerce shopping cart
  • Help manage sales tax filings
  • Keep you updated with sales tax compliance

We provide sales tax preparation services for Canadian businesses. Monitor the ins and outs of sales tax from provinces you owe, speed up the cash flow, and ensure you are properly registered in each province.

If you want a reliable bookkeeping and accounting partner for your business, consult us today

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About unloop
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.
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