Accounting Tips to Benefit Your E-Commerce Business 

E-commerce marketplaces popped up in the early 1990s and have been on the rise ever since. In the last decade, we have seen a surge of brick-and-mortar stores take advantage of this additional consumer channel. What has become commonplace has also become confusing for owners to navigate the complex regulatory environment. How can accountants keep your business on track as this landscape continues to evolve?  

Know if You are “Doing Business” in Multiple States

With digital goods and services, comes additional regulations and complexities as states struggle to keep up with changing technology and markets. Be aware that any activity in other states has potential to create issues and opportunities for your business. Have a trusted tax advisor available to assist with the complexities and compliance of multi-state issues.

In 2018, the playing field changed. Before this, businesses generally needed physical presence in a state to be subject to its tax. The precedent-setting decision in South Dakota v Wayfair, Inc. changed this when the United States Supreme Court upheld South Dakota’s economic nexus law, allowing states to collect sales tax on transactions in the state, even without physical presence. Since this decision, nearly all states have implemented economic nexus thresholds for sales and use tax. Although the decision was for sales and use tax, the economic nexus principles have also been applied to other state franchise and income taxes.

E-commerce sellers must now consider whether their business has “economic nexus” in a state, creating a sales tax obligation based on the level of economic activity within the state, typically measured by sales revenue, transaction volume, or a combination of both. Since there is no universal bright-line test to determine economic nexus, sellers are required to monitor activity and economic nexus rules on a state-by-state basis. Most states are hovering around $100,000 sales threshold and/or 200 transactions, while Kansas is currently enforcing sales and use tax on all applicable sales to the state, and California has one of the highest dollar economic nexus thresholds at $500,000.

Many states and localities have adopted a layer of economic nexus provisions as an economically attractive revenue generator for income and franchise taxes. This does not necessarily replace the existing regulatory and physical presence tests, but instead adds an additional layer to consider when determining nexus. A state’s economic nexus thresholds for income tax purposes are often different from thresholds applied for purposes of sales and use tax in the same state. For instance, a taxpayer is considered to be “doing business” in California if sales exceed $610,395 in 2020 (rather than the $500,000 sales and use tax threshold), or if California-source sales are greater than 25% of total sales, even with no other connection to the state, and different dollar amounts apply to property and payroll.

Another common change among states as they adjust to the new global marketplace is the switch to single sales factor apportionment and market-based sourcing for income and franchise taxes. These rules can vary not only by jurisdiction, but by industry, type of revenue, and other fact specific criteria. An accountant knowledgeable in state nexus is crucial, not only to comply with regulations, but to identify opportunities to reduce the overall tax liability of the business. Sometimes, small changes can have a significant impact.

Accountants can help you determine nexus by completing a nexus study to figure out which states you may have filing requirements, how to apply the appropriate provisions, and identify potential exposure to risk and planning opportunities. They will determine the applicable tax rates, how much you owe, and prepare your state tax filings accordingly. 

Consider the Cost/Benefit of Doing Business Internationally 

Reaching global markets through digital marketplaces has become increasingly easy. However, the tax structures in other countries are different than the U.S. and should be considered and discussed with an advisor before entering these markets to ensure compliance.

Over 100 countries use the VAT (value-added tax) system, where tax is applied at each stage of the entire supply chain, not just at the point of sale to the final customer. This means that everyone from suppliers, manufacturers, distributors, and retailers all collect VAT on taxable sales. They also all pay VAT on their purchases as well but can receive a credit on their tax return, so it is important to document all VAT paid on purchases.

When shipping internationally, businesses are required to pay an import duty, which is a tax placed on imports by customs authorities in the destination country of shipment. Duties vary from country to country, which adds more complexity to the transaction…and cost.

A recently developing area is the digital stamp tax. Some countries have adopted the application of a stamp taxes as a means of capturing tax on the electronic transmission of documents and other digital goods.

International activity can also have US income tax implications. These issues are multi-faceted, and an advisor well-versed in these issues can help calm the stormy international waters for business owners.

In addition to calculating taxes owed in various international tax structures, e-commerce sellers should consider measuring profitability when selling internationally as well. As mentioned above, there are many new considerations and expenses to weigh. An accountant can help by putting together a projected revenue report to determine if selling internationally is right for your business. 

Leverage Accounting Software to Streamline Bookkeeping

Skip the shoebox. Skip the Excel spreadsheet. Online sellers need an accounting software to manage the ins and outs of ongoing transactions. Integrating an accounting software solution into your e-commerce marketplace will sync and compile transactional details necessary to keep track of the financial health of your business. The platform will offer a more transparent view of your business and capture trends and patterns that will allow you to forecast, develop strategies, and implement automation for the future. 

When choosing the right accounting solution, it is best to go with software that has features specific to e-commerce businesses. You will need this to efficiently track your transactional data, inventory levels, sales tax, expense tracking, shipping costs, and more.  

Not all accounting software solutions are created equal. An accountant can help you identify the right software that best compliments your business and show you how to run valuable analyses and reports beyond the standard balance sheet, income statement, and statement of cash flow.

Small businesses can partner with some of the largest marketplaces to increase their product exposure, reduce marketing costs, leverage third-party logistical operations, and even partner with multiple channels as part of their selling strategy. From Amazon to Alibaba, each marketplace is different, so it is important that you learn how to use the marketplace reports and integrate them into your accounting system for financial reporting purposes to reduce time spent reconciling information and reduce opportunities for errors. Retrieve the information necessary to efficiently manage your internal controls, inventory, orders, customers, sales tax, and shipping.

Your accountant can review your marketplace reports with you, show you how to reconcile those reports into your system, and extract insightful data on areas of profitability and improvement. 

Manage Inventory Across Sales Channels and Borders

E-commerce inventory management often comes with an extra layer of complexity because your inventory may not all be in one place right in front of you. Products may be stored in warehouses scattered across the country or even overseas, may be owned by you, provided through third-party logistics fulfillment centers, or held on consignment. Managing that inventory requires ongoing oversight and maintenance so you know what products are overstocked, understocked, in stock, and out of stock. Your business depends on the accuracy of your inventory. 

When it comes to taxes, you will need to work with an accountant to calculate the value of the inventory. The value of inventory for tax purposes depend on the size of your business, your industry and products, and your election of a valuation method. In addition, you will need to be aware of and track inventory shrinkage, which could result from errors, fraud, and obsolete or damaged items. Maintaining accurate records of your inventory will allow you to track patterns and streamline operations moving forward. Clean information also contributes to internal efficiency and reduced professional fees. 

Next Steps

Many e-commerce sellers find accounting and bookkeeping burdensome and could put it off until month end or even year end. This delay could be an expensive mistake and result in avoidable errors. By working with an accountant and implementing clear accounting policies, you will be able to extract valuable information that may just be the key to success in your business. 

Contact us at (805) 963-7811 to learn more about the tax implications, bookkeeping, third-party report reconciliation, and inventory management for your e-commerce business.