Sales Tax for Online Sellers

I can confidently say that Sales Tax is the most challenging obligation that E-Commerce business owners deal with when it comes to recurring bookkeeping & accounting work. In the United States alone, there are more than 13,000 sales tax jurisdictions with rules that you are required to abide by. This blog is going to kickoff a blog series on the concept of Nexus, so that you understand the basics when it comes to the connection between a taxing jurisdiction and your business.

Know Your Nexus

You may or may not have heard of the term “Nexus” floating around on the interweb, but what exactly is it? Nexus is the connection between your business and activity in a state that requires your business to register, collect, and remit sales tax. There are five well-known types of Nexus, and each state has its own rules and definition of those types of nexus, sothe first step in understanding your sales tax obligation, is to first identify which states you have nexus in. Factors such as the location of your business, where your products are stored, and where your customers are located can impact your nexus. If you fear you may have unknowingly hit nexus in a state, we can complete a nexus analysis for you to help you determine if nexus has been hit, as well as what your current sales tax liability may be. 

Understand Sales Tax Rates

Nexus is the easy part. You also need to understand sales tax rates, as they can vary significantly between states, counties, cities, and districts. Each state has different rules on the location a sale is made, determining that sales tax rate. This process can be complicated, as filing sales tax returns often require you to remit sales tax to the individual jurisdictions, so to make this process easy, we recommend using a sales tax software such as Avalara.  

Keep Accurate Records

Accurate record-keeping is essential for sales tax compliance. The most common mistake that we see business owners make in their bookkeeping is combining their sales tax with their gross sales. Though this is fundamentally incorrect the impact on your sales tax filings varies between state to state. Some states consider this mistake and allow you to deduct the sales tax when included, and others do not. Either way, it is vital that you work with a professional bookkeeping firm to ensure that the books are clean and match your state returns. 

Remit Sales Tax on Time

E-commerce businesses are required to remit sales tax on a regular basis, depending on the state’s rules. This can be monthly, quarterly, or annually. Each state has unique sales tax filing requirements and deadlines, so to avoid unwanted penalties and interest, it is important to stay on top of the rules for each individual state that you’re filing in. Sales tax software often alleviates this challenge. 

Use Sales Tax Software

Now, I understand that we’ve brought sales tax software up numerous times already, but I feel that this last item is important and worthy of a repeat: USE SALES TAX SOFTWARE. It will make your life easier. Sales tax software, such as Avalara, automates your sales tracking process for you and ensures that you are remitting sales tax to the correct jurisdictions. States are aggressive when it comes to sales tax audits, so skip the mistakes and get your business set up from the beginning. 

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FBA and Physical Nexus

As E-Commerce continues to rapidly expand and business owners take advantage of Amazon’s FBA services, e-commerce sellers must understand the physical nexus rules and the varying definitions of it.

For e-commerce sellers, physical nexus can be created in several ways. A physical nexus indicates that a state has decided that your company has enough of a presence to be responsible for collecting a remitting sales tax from your customers within their state. For this type of nexus, we focus on two main indicators of nexus: People and property.

People vs. Property

People can trigger a physical nexus by way of:

Employees – You have employees working in a state separate from your business’ registered address

Traveling Salespeople – You have salespeople traveling and landing sales for your company

Contractors – A third-party service provider that is providing a service on behalf of your company (dropshipping) can cause a physical nexus.

Property can trigger physical nexus by way of:

Warehouses – Your business owns property in a state, you have an asset with a physical location in a state.

Office Buildings – Your business has an office in a separate state from your business registered state and you likely have employees or contractors working on behalf of your business there.

Inventory – Your inventory is stored in a state that is separate from your business’s registered address (FBA).

Understanding physical nexus is important for all e-commerce sellers, though we want to put an emphasis for those of you that are selling on Amazon AND other marketplaces/platforms. You’ve just learned that using FBA services can possibly trigger a physical nexus in a state beyond your home state. So, what does that mean? If you discover that Amazon is holding your inventory outside of your state, you will need to register with that state that has a property-triggered physical nexus to begin collecting and remitting sales tax for your customers on other platforms. You will then need to make sure that you are collecting sales tax from your customers in those states and remit on the filing frequency determined by that state. It is important to note that you will need to register in a state to begin collecting sales tax from their residents, first; this could trigger other legal requiremnets determined by that state.

Determining Where Your Inventory Is Held

There are two easy methods to determining the location of your inventory within your Amazon seller account.

Method 1

• Log into your Amazon Seller Central account

• Go to the “inventory” tab in the top navigation menu

• Click on “Manage FBA Inventory”

• Scroll to the “Fulfillment Center” column and identify the location code (a three-letter prefix representing the country code, followed by a series of numbers and letters that identifies a fulfillment center)

Method 2 – Inventory Report

• Log in to your Amazon Seller Central account.

• Go to the “Reports” tab in the top navigation menu.

• Click on “Fulfillment.”

• Select “Inventory” from the drop-down menu.

• Choose the date range for the report and click “Request Download.”

• Once the report is ready, you can download it as a CSV file, which will include the location of your FBA inventory.

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Accrual vs Cash Accounting

Psst… You should be using accrual!

For any business, keeping track of the financials is crucial for success. While cost accounting or cash accounting may make sense to many business owners, if you own an e-commerce business, you should run your books using accrual accounting. Yes — cash basis is much simpler and easier to track, but accrual will give you the tools your business needs, to run a smooth behind-the-scenes financial tracking system. 

So, what is accrual basis accounting? Using accrual accounting, revenue, and expenses are recognized when earned or incurred, regardless of when cash is received or paid. This method differs from cash basis, which focuses on recording the sale or expense when the cash is in hand or paid out (think about your bank transactions here!). 

Now to the critical part — Why am I claiming the importance of accrual accounting for e-commerce businesses?

Here are a few reasons:

Accurate financial reporting 

Accrual basis accounting records the transition of monies when a sale is earned or when an expense occurs. A great example of this would be the purchase of a yearly subscription. Rather than recognizing that expense in total (as you would on the purchase date when using cash accounting), you realize the monthly value of that subscription when it is used. So, using this example, if you purchased a subscription for $120 in January, you would recognize that expense over 12 months at $10/month. Why would you want to do this? Accurate representation. Cash basis financials can easily be skewed and manipulated. Using an accrual basis, you will better understand the actual monthly operational costs, the correct COGS to sell your products, and a better idea of your debts. Those are easy examples — the critical point is accurate records = more informed decisions to implement financial strategy. 

Inventory Management

For most e-commerce businesses, inventory is likely your largest asset. The accrual basis allows you to accurately track inventory costs and changes in inventory valuation and will enable you to appropriately track your quantity on hand vs. sold to ensure you are ordering correctly to restock. 

Complying with accounting standards

Accrual accounting follows GAAP (generally accepted accounting principles or international financial reporting standards (IFRS). If you plan to obtain future funding or go public, you must comply with these standards.

Enhanced financial reporting and insights on financial health

Accrual accounting accurately depicts an e-commerce business’s financial health, allowing business owners, investors, and creditors to assess the company’s liquidity, solvency, and overall financial stability. This information is crucial for making strategic decisions and evaluating the business’s long-term viability.

In conclusion, while cash basis accounting may seem more straightforward for e-commerce businesses, accrual-basis accounting offers several benefits that can help you better manage your finances, inventory, compliance, and financial health. Accrual basis accounting will give you a more accurate picture of your business’s financial health and help you make more informed decisions about your business’s growth and financial strategy.

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DISCLAIMER: The information provided in this blog is intended for general informational purposes only and should not be construed as professional tax advice. While efforts have been made to ensure the accuracy and completeness of the information, tax laws and regulations are subject to change, and individual circumstances can vary.

The content of this blog is not intended to be created, and the receipt of it does not constitute a professional-client relationship. The author disclaims any liability for any loss or damage arising directly or indirectly from the use of or reliance on the information provided. This blog does not constitute, and should not be considered a substitute for, professional tax advice. It is crucial to consult with a qualified tax professional or accountant to obtain personalized advice tailored to your specific situation and needs.

Users of this information are encouraged to verify its accuracy and seek professional advice before making any financial or tax-related decisions.

How Taxes Work for LLCs

Running a Limited Liability Company (LLC) brings with it a myriad of advantages – flexibility, limited liability, and a simplified management structure. However, when it comes to taxes, understanding the intricate dance of regulations and obligations is paramount. In this blog, we unravel the complexities of how taxes work for an LLC, providing a comprehensive guide for business owners.

The Basics: What is an LLC?

A Limited Liability Company is a popular business structure known for combining the liability protection of a corporation with the simplicity and flexibility of a partnership. From a tax perspective, LLCs offer a unique “pass-through” taxation model, meaning that business profits and losses flow through the company to the individual tax returns of its owners, known as members.

Tax Classification Options for LLCs

1. Single-Member LLCs:
   • A single-member LLC is considered a “disregarded entity” by the IRS. In simpler terms, the business is not taxed separately, and all profits and losses are reported on the owner’s personal tax return using Schedule C.
2. Multi-Member LLCs:
   • Multi-member LLCs are taxed as partnerships by default. The profits and losses are passed through to each member’s tax returns based on their ownership percentage. Members report their share of the LLC’s income on Schedule E.

Electing Corporate Taxation: The C-Corp Option

While most LLCs prefer the pass-through taxation model, some may opt to be taxed as an S-Corporation to take advantage of certain benefits, such as deductible wages. However, this decision requires careful consideration of the overall financial strategy and goals of the LLC.

The Role of Self-Employment Taxes

Owners of LLCs are generally considered self-employed and are responsible for paying self-employment taxes, which include Social Security and Medicare taxes. Members report these taxes on Schedule SE along with their tax returns.

Key Tax Filing Obligations for LLCs

1. Forming the LLC:
   • When establishing an LLC, the business owner must file Articles of Organization with the state and obtain an Employer Identification Number (EIN) from the IRS.
2. Annual Reports:
   • Some states require LLCs to file annual reports or pay franchise taxes to maintain good standing.
3. Estimated Taxes:
   • LLC members often need to make quarterly estimated tax payments to cover their income and self-employment tax liabilities.
4. Employment Taxes:
   • If the LLC has employees, it must withhold and pay employment taxes, including Social Security and Medicare taxes.
5. Tax Deductions:
   • Certain LLCs are eligible for various tax deductions, including business expenses, health insurance premiums, and retirement plan contributions.

The S-Corp Advantage

1. Tax Savings:
   • S-Corps often provide potential tax savings by allowing business owners to receive both a salary and distributions. The salary is subject to employment taxes, while distributions are not, offering an avenue to reduce self-employment taxes.
2. Deductible Business Expenses:
   • S-Corp status allows owners to deduct reasonable business expenses, including health insurance premiums, retirement contributions, and other qualified business expenses, potentially resulting in additional tax benefits.
3. Pass-Through Taxation:
   • Similar to the default LLC taxation, S-Corps also feature pass-through taxation, ensuring that profits and losses flow through to the individual tax returns of the owners, avoiding double taxation.

Seeking Professional Guidance

Given the complexity of tax regulations, consulting with a tax professional or accountant is advisable for LLC owners. They can provide personalized advice, ensure compliance with tax laws, and help maximize available deductions.

In conclusion, understanding how taxes work for an LLC is pivotal for its financial health. By navigating the tax landscape with insight, LLC owners can make informed decisions, optimize their tax positions, and lay the foundation for long-term success. Remember, when it comes to taxes, knowledge is power – and a well-informed LLC is poised for financial resilience and prosperity.

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DECODE YOUR PROFIT & LOSS LIKE A PRO

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Understanding this statement is not merely a financial nicety; it’s a strategic imperative for any business leader navigating the path to sustained success.

At its core, the P&L statement unveils the financial health of a business, presenting a snapshot of revenue, costs, and expenses over a specific period. It’s the heartbeat of financial analysis, providing insights into profitability, operational efficiency, and overall business viability.

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THE art OF CASH FLOW MANAGEMENT

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Cash flow management is the lifeblood of any small business. The ability to monitor, analyze, and optimize the movement of money in and out of your company is essential for sustainable growth and success. In this ebook, we’ll explore the importance of cash flow management, its key components, and practical strategies for small business owners to maintain a healthy financial flow.