When launching an e-commerce business, there are many factors to consider, such as product development and marketing strategies. One crucial aspect that often demands early attention is sales tax. Addressing sales tax obligations at the right time is essential for maintaining compliance and avoiding potential pitfalls.
6 Tax Compliance Considerations
- At the Outset of Your Business: Startups should consider sales tax requirements from the inception of their e-commerce business. Before your e-commerce website goes live, it is important to proactively research and understand the sales tax rules and regulations in all states, especially those that will apply to your business. Understanding the sales tax requirements ensures you are well-prepared to integrate accurate tax calculations into your platform on a timely basis to avoid potential exposure.
- When Navigating Nexus: Nexus is defined as the connection between your business and a state or local jurisdiction that has a sales tax requirement. Prior to South Dakota vs. Wayfair, companies were required to collect and remit sales tax only in states where there was a physical presence. Post South Dakota vs. Wayfair, nexus can be established by physical presence, meeting certain economic thresholds, or even the use of third-party services. Each state that has enacted economic nexus has established thresholds that went into effect on varying dates and may have been reduced or updated over time. As you expand your reach, selling to customers in different cities and states, you will need to evaluate where your nexus is and if it necessitates sales tax collection.
- Before Reaching a Threshold: The transaction and revenue thresholds, before collecting and remitting sales tax is required, differ in many jurisdictions. It is important to keep a close eye on the volume of your sales in each jurisdiction to be prepared for registration and future filing. Furthermore, some states have provisions that allow local city governmental entities to impose their own sales and use tax requirements, which may require additional collection and remitting responsibilities.
- Understand Your Product and Customer: Understanding the tax law surrounding reporting requirements for sales tax is crucial when operating an e-commerce business. However, understanding your customers and the taxability of your product is even more important. Not all states will tax the same products or services, and some states may have varying rates based on the nature of the products. Additionally, some customers may have applicable sales tax exemptions that apply which should be taken into consideration.
- During Fundraising or Investment Rounds: If your e-commerce startup is seeking funding or investors, sales tax compliance can be a critical factor. Potential investors may scrutinize your sales and use tax practices, so having a solid sales tax strategy in place can instill confidence in your business's financial health.
- When Expanding to New Markets: When expanding your e-commerce operations, it is important for a business to stay on track, remain compliant, and understand that new markets may require additional tax requirements. Each jurisdiction has its own laws, regulations, and collection rates, so be sure to research, speak to an advisor, and adapt your tax strategy accordingly before entering these markets.
Takeaways
In conclusion, sales tax should be on your radar from the outset of your e-commerce startup journey. Understanding the sales tax landscape, identifying nexus points, and staying informed about thresholds and regulations are steps that need to be taken to ensure your business remains compliant as it grows. By addressing sales tax considerations at the right time, you can navigate the complexities of tax regulations and focus on building a successful and legally sound e-commerce business.
Authors: Courtney Easterday, MSA | [email protected]; Jordan Ghaffari, CPA | [email protected]; and Ryan Schupp | [email protected]
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