SALES TAX Guide For Your eCom Brand
Hook: Is your ecom business growing at a rapid pace, but now you can’t sleep at night worrying about your sales tax compliance situation? Don’t panic! Follow these tips below and not only will your be in compliant but you save yourself tens of thousands of dollar a year with our sales tax nexus strategies!
Hey guys, Alan Chen, CPA, here. Sales tax is always a pain in the butt issue and we always get very panicky questions from our client this time of the year about tax preparation and compliance topics, so we thought it might be a good idea to share some knowledge and sales tax planning tips on this topic for this group so that we will have a very calm and prosperous tax season this year!
So just to get the warning out of the way before we get started-
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
First of all, I want to emphasize this points:
- Don’t Panic! For most of you guys, you won’t have to worry about sales tax registration in every or even in most states.
- Even if you do forget one, it’s ok! Most states will understand if the small business owners are very forthcoming about their tax situation and a call from your CPA/Accountant can smooth a lot of things over on your behalf.
Now for the Top 3 Sales Tax Planning Tips to have an amazing sales tax season!
- Along with Point A above, don’t worry too much when you start noticing you start to have a lot of customers all over the place. Most States have set thresholds before they start coming after you. For example:
-California: Sales Tax Threshold is $500,000, requires immediate registration if you cross this figure.
-Kentucky: Sales Tax Threshold is $100,000 or 200 transactions, whichever happens first
-Mississippi: Sales tax threshold is $250,000
-Neveda: Sales tax threshold is $100,000 or 200 transactions, Nevada requires a remote business to register to collect and remit Nevada sales tax starting on the first day of the first calendar month that begins at least 30 calendar days after it crosses the economic nexus threshold.
-New York- $500,000 AND 100 transactions
There’s plenty of smart planning you can do around this area once you understand the threshold of every state to ensure that you could sometimes defer your sales tax payment until a future year to give you more cash flow flexibility now to invest in your business or in yourself. Definitely, something important to educate yourself on or seek professional help in.
Action Item– Don’t panic if you are just starting out, make sure to watch for the threshold for each state
- Think about the State you are living in: Are you living in a high Sales and local state tax right now such as California (8.66% +) or Tennessee (9.53%) ? With how physical nexus works right now, the state you live in, you will 100% need to REGISTER for a sales tax permit as that is the easiest state to get in trouble with. But also think about how since you run an online business and how much tax savings it would be if you can move your headquarters to a lower sales tax state like Wisconsin (~5%) or Wyoming (~5%) even better a STATE WITH NO SALES TAX (Two options that comes to mind are Oregon and Montana even with their own pros/cons to evaluate).
Action Item– Look to strategically moved around your online business to states that offer better sales tax protection for your nexus planning
- Make sure you or a professional you hire is able to perform a sales tax anomaly report along with a customer concentration report each year or even better per quarter. This way you will have an outstanding awareness of 1. How your revenue mix is and what area of the United States is the majority of your sales and where perhaps you should centralize your attention toward 2. It gives you incredible visibility on when your sales tax will trigger certain revenue levels and thresholds from those states. This is a very important study and on the surface will involve just the shipping address of the customer. But on a more in-depth level, it could also be traced to the location of their IP address, if the item was a gift where to allocate that revenue, and if there is affiliate income involved. The last point is worth emphasizing as if you have an agreement with another business and collect a fee or affiliate income, certain states, like California, would consider that as evidence of “nexus” and that could trigger a need for sales tax registration in that state.
Action Item– Hire or plan out your sale tax strategy ahead of time so you can realize incredible tax savings at year-end as your business grow into the 7 figure range and beyond!
I hope this helps get your mind moving in the right direction as you think about where your business is at and if you should handle this yourself or seek professional help. One final point I want to end this with is to make sure you also consider your employee’s location and inventory presence. Those are also factors that can trigger physical nexus, so make sure you think about the problem on a holistic level.
Thanks for reading and if you have any questions that I can answer as non-clients that won’t construe as binding advice, I am happy to do so in the comments. Cheers and Happy Hunting Everyone!