Now that the holiday rush has worn off and online retailers are settling into a new year, a huge obligation looms on the horizon: filing business taxes. The ecommerce tax landscape has undergone major changes in the last few years, leaving both new and experienced sellers with their heads spinning. These relatively new sales tax laws impact all ecommerce operations, but it’s the small businesses who feel the biggest pinch. That’s why sellers running startups should take special care to organize their taxes now so they’ll be ready to file in the spring.
Better yet, business owners can implement ecommerce sales tax best practices year-round and enjoy the peace of mind that comes with being ready at any given time. Just like brushing your teeth, getting your sales taxes in order is best done the whole year long—not right before you go see the dentist…or CPA. Here’s why it matters and what you can do to make the process easier.
South Dakota vs Wayfair: What it Means for Ecommerce Sellers
In a historic decision made in 2018, the United States Supreme Court changed the sales tax landscape forever with South Dakota vs. Wayfair, Inc. Previously, businesses were required to have a certain level of physical presence in a state in order to be required to collect sales tax from those customers. However, the Wayfair decision set a new mandate in place for the collection of sales tax, regardless of physical presence.
Now, remote or online sellers are subject to economic nexus laws, which make it possible for states to collect sales tax from remote sellers, even if they don’t have any physical presence in the state. The Wayfair decision also phased out inconsistencies sellers had regarding their sales taxes: giving customers notice, collecting taxes, and standardizing tax practices.
While these nexus laws have been adopted by much of the country, the courts left states with the ability to set their own revenue and/or sales volume thresholds that establish nexus. The open-ended nature of the ruling means it’s likely the laws will continue to change and adapt to an ever-shifting marketplace.
So, what does this mean for your small ecommerce business? Let’s find out.
The Sales Tax Skinny for Small Ecommerce Businesses
Here’s the bottom line: Economic nexus laws can have a severe impact on smaller online businesses, which usually don’t have the same level of accounting support as their bigger siblings, and so can easily become overwhelmed keeping track of changing sales tax legislation. What’s more, startups often also don’t have as much financial back-up, which means any tax fines or penalties incurred are going to pack more of a punch.
As sales tax laws continue to fluctuate, businesses of all sizes need to monitor the changes implemented across different states, understand the thresholds in place, and be familiar with the correct filing protocol. It’s a complicated and time-consuming process, especially for smaller online retailers.
The good news? Managing your sales taxes as a small ecommerce business can seem daunting, but there are plenty of ways to stay organized year-round so you’re not scrambling when it’s time to file. If that scenario sounds hauntingly familiar, here are four tips that will help keep you on the straight and narrow.
Tip #1: Educate Yourself on Sales Tax Laws
As the saying goes, “The best offense is a good defense,” and the best way to “defend” your business from tax-related penalties is to be aware of the most up-to-date nexus laws. A solid foundation of tax knowledge will improve your relationship with your accountant because you’ll better understand the advice you’re being given. Additionally, knowing what your customers pay in sales taxes can help inform your pricing strategy.
There are two ways to get educated: teaching yourself and learning from an accounting professional. Whether you prefer an interactive guide to state-by-state tax laws, accountant-approved YouTube videos, or a simple Google search, there are a wealth of resources for DIY learning. Otherwise, ask an accounting professional to give you an overview. Chances are you already work with one.
Once you’re familiar with the basics, the rest won’t seem so overwhelming, and you’ll be more motivated to stay organized—even when it’s not tax season. One way to help? Ditch the shoebox of receipts and look for an ecommerce accounting automation solution that can help you digitize your books.
Tip #2: Capture and Review Sales Tax Data
With so many accounting software choices on the market, it’s more important than ever to pick one that best fits your company’s unique needs. Software like QuickBooks can help organize your books, but they often require hours of manual data entry as you sync data from your online sales channels. And many small ecommerce businesses can’t afford to outsource this busywork, especially when they’re growing.
Accounting automation software integrates with programs like these to record data from your online sales channels, and it captures the variable tax rates as you do business in multiple states. Using this type of platform ensures timeliness and accuracy when filing season rolls around, and will save both you and your accountant a fair share of headaches.
It’s also essential to review all of your sales tax data regularly to ensure your business is compliant across the board. You should be monitoring this data on a regular schedule that’s paired with the filing dates in the states where you do business. Don’t let this review lapse—by staying on top of your data, the rest of the process will be streamlined when it’s time for tax season.
Tip #3: Work with Accounting Pros for Best Results
Keeping track of your the sales tax requirements for each state can be mind-boggling , so it’s useful to have accounting experts on deck to answer questions and help keep your business compliant. Here are some best practices for working with your chosen accounting professional:
Always ask questions! Good accounting professionals want you to be engaged and informed throughout the filing process. The more knowledge you have about your own business and the tax laws that affect it, the more effectively and successfully you’ll be able to collaborate together
Maintain a proactive mindset. Be involved in taking action when it’s required—your willingness to get ahead of any potential compliance issues on the horizon will ensure that you can continue to grow as a business.
Set realistic time limits. In the midst of all of this, it’s also essential to set realistic time limits for filing your business’ taxes. Don’t procrastinate—give your accounting professional plenty of time to process your company’s data for an accurate filing. Using an ecommerce accounting automation platform will take the guesswork out of this process and make the entire transaction much easier for everyone involved.
Tip #4: Review and Update Annually
Sales tax laws are constantly changing to adapt to an ever-evolving marketplace. By staying up to date on changes, working closely with your accounting professional, and maintaining detailed records, your business will stay sales tax compliant— securing your future business health. Also, consider taking advantage of technology to remove the guesswork that comes with complicated shifts in economic nexus laws.
Leveraging these resources will help you and your accountant keep your business compliant, avoid unnecessary fines, and foster growth, no matter where your future customers are located.
By guest contributor Taylor Knauf