Ecommerce Taxation: How To Be On Top Of Taxes in 2022
In 1999, the United States’ total internet retail sales were around $15 billion, or roughly one-half of one percent of all retail sales.
In 2016, total digital retail sales grew to $394.9 billion, representing 8.1 percent of retail consumer spending in the country’s 50 largest metropolitan statistical areas (MSAs).
Among them were San Francisco and New York City, which boasted a market share of more than 10 percent.
To comply with federal and state law, retailers must collect taxes on these remote transactions.
Let’s first discuss Ecommerce Taxation Issues.
Taxation in ecommerce
Regarding nations, the difficulties surrounding tax loss and tax evasion are critical. ecommerce parties are hesitant due to uncertainty and double taxation, which hinder growth.
The fundamental rule for collecting sales tax from online purchases is as follows: If your company has a physical presence, or “nexus,” in a state, you must charge applicable sales taxes from online consumers.
If you do not have a physical presence, you are not required to collect sales tax on internet sales.
Tax authorities are struggling to keep up, whereas the new opportunities brought by ecommerce have exacerbated this tension.
The sale of goods on the internet is increasingly being recognized as a tax event which triggers the requirement to levy VAT or GST on the value of that item.
There are additional taxes in specific locations and towns. In California, for example, the overall sales tax rate was 7.25% in 2021, with local jurisdictions permitted to impose their own extra sales taxes.
A vendor must be aware of local tax rates and collect them from customers. Many states that collect sales tax exclude certain items—typically groceries, books, and prescription drugs—from state-level tax.
Further Reading
The Nexus between a seller and the state must be perfect.
The term “nexus” is used in the tax code to describe a connection that sellers must have with a specific region before they are required to charge and collect taxes for online sales there.
There are various ways to interpret this connection. However, most people think that if you have a business or office in a state, you must collect and submit sales taxes in that jurisdiction.
Many states have legislation explaining the eligibility requirements, so start there.
Check with your state’s taxing agency if you aren’t sure whether you have a significant presence in a form for sales tax purposes.
Sales Tax Compliance
Once you’ve concluded that you have Nexus in a state and are selling taxable goods in it, your next job is to become compliant:
Obtain a sales tax permit
Before you do anything else, get compliant by obtaining a sales tax permit in your nexus state.
You accomplish this by contacting your state’s taxing authority, often known as the “[State] Department of Revenue.”
The state will ask you for personal information and information about your company’s operations and activities.
It is illegal to collect sales tax without a permit in all states.
In addition, if you don’t have a permit and collect sales tax without informing your customers, you are implying to them that you are collecting sales tax but keeping the money for yourself.
Before collecting, ensure you have a valid sales tax permit.
When your state issues your sales tax permit, it will also set a filing frequency for you. This is usually monthly, quarterly, or yearly.
Each state’s Department of Revenue will analyze your sales and request you to file a sales tax return and remit the revenue it generates. If your business is large enough, they’ll be required to do so annually (unless exempt).
Further Reading
Collecting sales tax
Then, set up and start collecting sales tax for your online shopping carts and marketplaces.
Sales tax is collected on all items purchased using an Alibaba shopping cart or marketplace.
However, some sales tax collection engines are more effective than others.
It’s essential to be able to collect more than one sales tax rate per state because it helps with the complexity of determining where your company owes taxes.
A lot goes into what you sell and how much profit there is from each item, so having different rates can make everything seem less complicated when trying to figure out if they owe anything!
Report and file sales tax.
Your state set a sales tax filing frequency for you after it granted you your sales tax permit.
Depending on the date your sales tax is due, you’ll get your payment at least monthly, quarterly, or annually.
Remember that each state’s sales tax payment deadlines are different.
States vary when they want to hear from you. Some allow for a response on the last day of your tax period; others prefer answers before it’s too late and post-dated checks are issued (15th), while some require that allotments made by taxpayers be reported immediately after being verified with them.
Some states have relatively short waiting periods between March 15 through April 15, where filers must respond if any information within their annual returns needs updating or correction.
But things get more complex. When your payment date arrives, you must provide information on how much sales tax you’ve collected in each state.
Figuring out how much sales tax you collect in each state, city, and county can be daunting.
It’s essential to keep track of this information because it determines the amount to be paid when filing taxes with your government entity!
It may be tough to produce a unified sales tax report if you sell on multiple platforms and have to integrate many sales tax reports.
For further reading:
- The Complete Guide To Ecommerce Accounting In 2022
- Ecommerce Inventory Management: 16 Best Practices
- Why You Should Invest In Bookkeeping In 2022 (Forecasting Provided)
- How To Find an Ecommerce CPA For Your Business
How to achieve the most ecommerce tax deductions
To take advantage of these deductions when the next tax deadline arrives, make a mental note of the ones that apply to your store and save your receipts and tax records for each deductible business expense throughout the year.
We’ve put up a list of ecommerce tax deductions that are frequently available to internet retailers:
#1- Your Business Inventory Storage
You can deduct costs for the business use of your home without meeting the stringent exclusive use test required for a home office if you store inventory for your ecommerce firm in your house.
To be eligible, you must pass all of the following checks:
- You rely on the storage area daily.
- The space you’re using is a distinct place ideal for storing stuff.
- As a franchise or business owner, you may sell items at wholesale or retail.
- You keep the things or product samples at home.
- The only constant location of your business is your home.
You may deduct rent and other expenses from the rental fee if you rent a storage container or warehouse space to store your inventory.
#2: Business meals and entertainment
A tax deduction of 50% of all business dinners and entertainment expenses is allowed.
On the other hand, business entertainment costs are a highly scrutinized deduction. To show that they are genuine business expenditures, you must document the following information for each expense:
- The identities of the individuals who incurred the cost.
- The reason for the cost.
- Where the purchase was made (name of the restaurant/cafe)
- The amount and date of the expense.
A business dinner that is lavish or excessive isn’t deductible by the IRS. A specific dollar amount doesn’t determine whether a meal is extravagant or extravagant—it all depends on the situation.
#3: Shipping costs
Shipping expenditures to consumers can be subtracted from your taxes.
This covers postage, packing materials, mailing subscriptions, envelopes, and delivery fees.
To keep these expenses as low as possible, read our guide on how to lower shipping expenses.
#4: Domain and hosting
You’ll need an online store to operate a successful ecommerce business, so these expenses are tax deductible.
Similarly, any software bought from WordPress, the Shopify theme you used to modernize your website, and the iPhone app you need to monitor your competitors is deductible expenditures as long as they are employed in your company.
#5: Internet & Cell phones
Your store’s internet expense is tax-deductible.
If you use part of the cost of your business’s connection for household purposes, you’ll have to determine and deduct a percentage.
You may also deduct the portion of your cell phone bill that relates to your ecommerce firm if you use it for these purposes:
- Talking to vendors.
- Doing interviews.
- Business customer service.
#6: Working with freelancers
The cost of the services an independent contractor provides to create your website, write web copy, or photograph your goods is a tax deduction.
Before you begin working together, get a Form W-9 from the contractors.
It’s easy to obtain the contractor’s name, address, and taxpayer identification number using Form W-9.
You’ll need this information to prepare a 1099-NEC for any freelancer you paid more than $600 in taxes during the year.
Remember that the IRS is constantly looking for owners who attempt to avoid paying additional taxes by misclassifying workers as independent contractors.
#7: Bank fees and interest
Any interest you pay on a credit card or take out a small business loan to fund your company is deductible because it’s an expense incurred by a business.
Any bank costs you incur while keeping track of your finances are tax deductible.
#8: Traveling expenses
Do you drive your car for business activities such as delivering packages, conducting meetings, or conducting other commercial transactions?
For vehicle use during the business, you may claim various deductions.
If you only use the vehicle for business, you can deduct the entire cost of running it.
If you use your car for commercial and personal purposes, you’ll need to figure out how much of the expense was for business usage.
You can deduct business mileage in one of two ways:
- What you spent for gasoline, oil changes, and other vehicle-related expenses while using your automobile for profit.
- The base amount for the standard deduction is $0.575 per mile in 2020 and $0.56 per mile in 2021, which should be recorded using a mileage log or other mobile app throughout the year.
You can deduct these expenses as business travel expenses if they are connected to your job.
These costs, such as parking fees, conference tickets, transportation, cabs, and tips, can all be categorized as business travel expenses and deducted from your taxes.
How Free Cash Flow can help
FCF helped many ecommerce businesses take control of their financials and manage their cash flow, invoices, payments, and budgeting.
You’ll deal with savvy CPAs with prior experience with your situation and achieve the most tax deductions for businesses like yours.
Book a complimentary call now.
FAQ
What are the taxes that ecommerce stores must pay?
A sales tax is a tiny amount of a transaction charged to the customer by an internet retailer. Sales tax is a “consumption tax,” which means that consumers are only taxed on purchases made at retail.
Is it possible to calculate sales tax using WooCommerce?
If you’re selling through WooCommerce, a free add-on will compute the correct tax rate based on your customer’s location. However, if you have several places to sell or want further tax assistance, you must rely on a third-party tax solution.
How much tax should I charge my clients?
The sales and use tax rate varies by location of purchase or usage. The statewide sales and use tax rate is 7.25 percent. In addition to the statewide sales and use tax rate, certain cities and counties have voter- or local government-approved district taxes.
What is the formula for calculating sales tax in ecommerce businesses?
Total Sales Tax = (Cost of the Item) * (Sales Tax Rate)
Is there any cost associated with using Shopify?
Shopify is not legally required to collect and remit sales tax on behalf of its sellers. Shopify is not a “marketplace provider” like Amazon or eBay, unlike other marketplaces like eBay.
As a result, Shopify isn’t subject to marketplace facilitator rules that force companies like Amazon and eBay to collect and remit sales.
How much income can I generate tax-free?
If you are single or married filing separately, you may sell your principal residence without paying capital gains taxes on the first $250,000. This exemption is available only once every two years.
Is IRS aware of PayPal’s activities?
PayPal must disclose the aggregate payment volume received by US account holders whose commercial transactions exceed $20,000 from sales of goods or services in a year under IRC Section 6050W.
Is it necessary to pay taxes if you sell on Facebook?
Because Facebook is required to collect and remit sales tax on MPF states, sellers on Facebook or Instagram are no longer obligated to pay it.
Is it taxable to resell something?
When resellers purchase items, they must pay sales tax; however, when those items are sold to the final consumer, they are responsible for collecting them.
Because a firm is “physically present” in a state if it has a location, resellers are accountable for sales taxes on things they sell within that state.
If you’re serious about getting the most tax dedication for your business, Download our free E-book Now, 9 Most Crucial eCOM Tax Deductions The IRS Doesn’t Want You To Know.
