fbpx

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 total retail spending by consumers 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.

In order 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

In terms of nations, the difficulties surrounding tax loss and tax evasion are critical. ecommerce parties are hesitant due to factors like uncertainty and double taxation, which stymie 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 in that state.

If you do not have a physical presence, you generally 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.

Alan Chen

Free 30-Min Strategy Session

By the end of this Strategy Session, you will have a clear understanding of the next steps you can take for your business to take advantage of the tax deductions you are missing out on.

There are additional taxes in certain 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 his or her customers. Many states that collect sales tax also 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 certain 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 that explains the requirements for eligibility, so start there.

Check with your state’s taxing agency if you aren’t sure whether you have a big presence in a state 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 which is often known as the “[State] Department of Revenue”.

The state will ask you for personal information, as well as 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 you begin collecting, make sure 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 on an annual basis (unless exempt).

Further Reading

Collecting sales tax

Then, set up and start collecting sales tax for all of 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 important 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 figure out if they owe anything or not!

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 responses in time 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 fairly short waiting periods between March 15th through April 15 where filers must respond if any information within their annual returns needs updating or correction.

But things get more difficult. 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 collected in each state, city and county can be a daunting task.

It’s important to keep track of this information because it determines the amount that needs paid when filing taxes with your government entity!

It may be especially difficult to produce a unified sales tax report if you sell on multiple platforms and have to integrate many sales tax reports.

For further reading:

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 on a daily basis.
  • The space you’re using is a distinct place that’s ideal for storing stuff.
  • As a franchise or business owner, you may sell items at wholesale or retail.
  • You store the items or product samples at home.
  • The only constant location of your business is your home.

If you rent a storage container or warehouse space to store your inventory, you may deduct rent and other expenses from the rental fee.

#2: Business meals and entertainment

A tax deduction of 50% of all business dinners and entertainment expenses is allowed.

Business entertainment costs, on the other hand, 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 expenditure.
  • The reason for the expense.
  • 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. There isn’t a specific dollar amount that determines 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 costs for 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

To operate a successful ecommerce business, you’ll need an online store, so these expenses are all 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 are 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 of the cost.

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 provided by an independent contractor 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 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.

Keep in mind that the IRS is constantly on the lookout 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 also 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 in the course of business, you may claim a variety of deductions.

If you only use the vehicle for business, you can deduct the entire cost of running it.

If you use your car for both 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 and oil changes, as well as 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 costs, cabs, and tips, can all be categorized as business travel expenses and deducted from your taxes.

How Free Cash Flow can help

FCF helped tons of ecommerce businesses to take control of their financials and manage their cash flow, invoices, payments and budgeting.

You’ll deal with savvy CPAs that have prior experience with your situation and achieved the most tax deductions businesses like your business.

Book a free 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, there’s a free add-on that will simply compute the correct tax rate based on your customer’s location. however, if you have several locations to which you sell or want further tax assistance, you’ll need to rely 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 state-wide 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 such as eBay.

As a result, Shopify isn’t subject 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 is required to 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 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 it.

Because a firm is “physically present” in a state if it has a location there, resellers are accountable for sales taxes on things they sell within that state.

If you’re serious about getting the most tax dedications for your business, Download our free E-book Now 9 Most Crucial eCOM Tax deductions The IRS Doesn’t Want You To Know.

Share on twitter
Share on linkedin
Share on email

Free E-book for E-Commerce Entrepreneurs

9 Most Crucial eCOM Tax Deducations The IRS Doesn’t Want You to Know
Share on facebook
Share on twitter
Share on linkedin

Explore More

Boost Your E-Commerce Business Now

drop us a line and keep in touch

Take Less Than 60 Seconds To Share What You Love

Share on facebook
Facebook
Share on twitter
Twitter
Share on reddit
Reddit
Share on linkedin
LinkedIn

Let's have a call

Things Getting Confused? Book A Free Consultation Call With Alan Chen, CEO of Free Cash Flow