How Do I Handle Sales Tax As A 7-Figure eCommerce Business Owner? (Shopify, woo-commerce, Magento)
Want to know how not to get entirely SCREWED by State Sales Tax this year as your business reaches 7 Figures and above? Here we go!
In this lesson, we want to dive deep into the world of sales tax, especially if you are in the range of 7 figures +, and I will tell you why this is a big concern, and it has everything to do with a word that starts with the letter “T”: Threshold.
Specifically individual state thresholds.
But first, let’s start with the fundamentals.
So what is sales tax?
Sales tax is the Consumption tax imposed by the government on the sales of goods and services. So in the US, sales tax is charged to the ultimate user, usually the product’s consumer, unlike VAT which you frequently see in European countries, which is taxed at each stage of the production cycle.
For example, in VAT countries, you would get taxed if you buy cotton from someone, then taxed if you make it into a T-shirt to sell it to a distributor, and then that distributor will get taxed the marginal difference from packaging the T-shirt to sell to the retailer and so on. In the US, tax is just at the end consumer.
Sales tax is all done on the state and local level and nothing on the federal level, which makes it extra crazy since each state has its own stakes rate.
How Do I Keep Up With So Many Sales Taxes?
So you may be asking, ok, I guess that’s not too bad, so I have to keep up with about 45-50 state sales rates, right? Yeah, I wish it was that simple… what’s even more insane, most states allow the cities, counties and districts to create their own sales tax rate too, which means there could be over 900-1000 sales tax rates you may need to keep up with!
This ruling changed the game for online businesses. On June 21, 2018, The United States Supreme Court ruled 5-4 in South Dakota v. Wayfair states that states can mandate firms without a physical presence in a state with more than 200 transactions or $100,000 in-state sales, collect and remit sales taxes on transactions in the state.
What Is Nexus?
What does it mean? Nexus is a connection or affiliation to an area that triggers sales tax. That’s all. There are two main ways that you can start NNexus. One is a physical presence, and the other is an economic condition.
Here are some everyday activities that will trigger Nexus.
- Office, store or other location in a state
- Employee, salesperson, contractor, etc.
- Owning a warehouse or storage facility
- Storing inventory in a state (i.e. Amazon FBA warehouses or other 3rd party fulfilment centres)
- Having a 3rd party affiliate in a state
- They temporarily do physical business in a state for a limited time, such as at a trade show or craft fair.
So understanding the threshold and when they trigger as it is different for each state is HUGE. You can put tens of thousands of dollars of profit back into your pocket if you understand each state’s threshold better and break it down.
As you can see, by doing this, you can potentially save so much money as a 7 figure ecom owner by understanding
1. When you have to register and pay sales tax.
2. When you can avoid paying certain states’ sales tax by understanding the triggers that would force your business to register in that state.
Ultimately, it is essential to be compliant so you don’t get slapped with heavy fines and penalties; in Some states, that can be as high as 22% of your revenue figures. That would not help with your profit margins one little bit.
If you like to learn more in-depth about topics like this, check out our link in the bio for our online course titled Tax Free Ecom: Hyperdrive your after-tax profit to know how you can save tens of thousands on your taxes every year and business strategies that will open your eyes on all the advantages you should be using that billion dollar company utilize to grow their business.