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Tax Considerations For Selling Online

December 22, 2020

One of the key words for businesses in 2020 has been “pivot.” During this time of travel restrictions and limited face-to-face transactions, adding e-commerce as a sales channel has become an effective way for businesses to pivot and adapt to the changing sales climate. According to a local economist, at the start of the year it was reported that about ten percent of total retail activity was conducted online and within months that number jumped to seventeen percent.

The manufacturing industry, which traditionally hasn’t engaged in e-commerce, is finding it necessary to go directly to the consumer in light of retail restrictions and decreased sales through traditional retail channels. In many ways, this change was probably inevitable, but the pandemic has expedited the process. Successful e-commerce ventures provide increased revenue and the ability to reach customers from across the U.S., or even international buyers. Adding or expanding an online retail presence can help your business, but you don’t want to overlook the tax obligations.  

Which states require online sales tax?

In recent years, a Supreme Court case determined that a seller’s physical presence was not the only requirement to create nexus in the state resulting in the requirement to register and to collect sales tax. A merchant’s physical presence, including delivering the product, holding inventory, and/or engaging a salesperson, in a state still creates sales tax nexus, but states are now able to base nexus solely on economic activity. This is called economic nexus.

States vary in their economic presences guidelines. Be sure to check the nexus requirements for each state in which you are selling to determine if nexus may be established. If you’ve met the nexus obligation, you’ll need to check the registration requirements to do business in that state and then apply for a sales tax account with the state’s revenue agency. Pay particular attention to states with vendor use tax accounts, where the use tax rate is different from the sales tax rate (e.g., Missouri), as this will impact the rate you should be charging and collecting from your customers.

How do online sales affect my income taxes?

Just like sales tax nexus differs state to state, so do the income tax nexus rules.  To make matters worse, each state generally has different rules for what creates sales tax nexus versus what creates income tax nexus.  But there currently is a federal law that restrains states from subjecting sellers of tangible personal property to state income tax if the following apply:

  • Your only business activity in the state is the solicitation of orders, and
  • Sales are approved outside of the state, and
  • Filling and shipment are performed outside the state.

E-commerce sales alone will not create an income tax nexus. This means even if you are required to remit sales tax on a sale, it does not necessarily mean you are also subject to income taxes in the state where the sale was made.

Keep in mind that this rule is only for sales of tangible personal property and only applies to state income taxes, not sales taxes or non-income based taxes such as franchise taxes. Also, if there are other services you provide in the state, like maintenance, training, or installation, the exception does not apply, and those activities may create income tax nexus in the state.   

Evaluate e-commerce platforms

If you decide to expand to online selling, finding the right e-commerce platform is absolutely crucial to success. If your company doesn’t have the resources to build from scratch, there are many third-party options, each with different features. Evaluate how each one treats criteria such as user experience, inventory, search engine optimization (SEO), and more. If you need help evaluating or implementing a platform, our technology team can help, but for the purposes of this article, let’s focus on what to look for with regard to sales tax.

  1. How is the delivery address tracked?

    Most states (but not all) determine sales tax based on delivery destination; however, the rates aren’t strictly based on ZIP codes. Some systems utilize geolocation, basing rates on the exact location of the sale.

  2. How does the system track tax-exempt sales?

    If selling to a large number of exempt customers, does the system validate certificates? Does it store the certificates for future transactions?

  3. Does the system track sales and sales tax by state? 

    The system should track and pay sales tax for every state in which it has economic nexus.

  4. Does the system help with collecting and remitting sales tax?

    Look for a platform that can collect and remit the appropriate taxes automatically rather than manually.

Making the move to selling online isn’t a quick process. It takes time to plan and execute an e-commerce strategy that works for your business. But like all good things, there are rewards— and an additional revenue stream is one of them. Whether your business needs help evaluating or implementing an e-commerce platform, understanding tax consequences, or exploring related considerations, we hope you’ll reach out to us. At MarksNelson, we love to help businesses pivot and succeed.

About THE AUTHOR

Nicole Eshnaur assists business owners with a wide range of accounting needs, including their financial statement preparation, sales tax consulting, tax planning, cash flow management, payroll advising, and budgeting for future financial growth. She enjoys partnering with her clients to better understand their organization, their... >>> READ MORE

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