In the last decade, online retailers have become more common, and the demand for brick-and-mortar retailers to accept online orders has skyrocketed. This means that almost all businesses are exploring the online marketplace. This trend toward online selling is an exciting opportunity, but it can also be confusing, which is why it’s important to hire an accountant who can help you manage the change.
The e-commerce landscape looks a bit different than it did a few years ago. The courts recently overturned a long-held precedent stating that physical presence was required before a state could impose its sales tax filing responsibilities on out-of-state businesses. The 2018 Supreme Court case that overturned this ruling, South Dakota v. Wayfair, set a new tone for how online businesses collect and remit sales tax across state lines, making these calculations even more complex than they were before.
According to the new Wayfair doctrine, e-commerce sellers must now determine if their business has “economic nexus” — a financial connection — with a jurisdiction. If they do, they must collect and remit sales taxes on goods sold within those jurisdictions even if they have no physical connection to the state.
Accountants can perform a nexus study to help businesses see where they have filing responsibilities. Nexus studies are helpful because every state’s activity threshold is different for establishing economic nexus. States impose filing responsibilities when remote businesses make a certain dollar amount of sales, a certain volume of transactions, or a combination of these factors. An accountant can help make sense of all these different laws so that you’re certain your business is compliant.
Although the economic nexus doctrine under Wayfair only affects sales taxes, more and more states are expanding their income tax and gross receipts nexus policies to mirror their sales tax nexus policies to capture even more tax revenue from out-of-state businesses.
If you’re selling internationally, the tax landscape is constantly shifting as e-commerce surges across global markets. It’s important to work with an accountant to understand various international tax and remittance obligations, to manage currency exchanges so that online sales are profitable, and to navigate both direct and indirect taxes such as value-added tax (VAT), tariffs, and duties.
While many e-commerce sellers may be familiar with sales and use tax obligations in the United States, most other countries operate under the VAT system, a much different transactional tax structure. Under the VAT system, instead of tax being applied to the end user, tax is remitted at all levels throughout the supply chain, from manufacturers to wholesalers and retailers.
When shipping internationally, e-commerce sellers are also required to pay and document an import duty, which is a tax imposed on imports by the destination country. The cost will vary depending on where the product is being shipped and the value of the product.
Integrating Third-Party Reports
The rising sophistication of the e-commerce ecosystem presents online sellers with enormous selling potential, especially when partnering with some of the largest, most trusted online marketplaces in the digital space. If you sell using other businesses’ online platforms — such as Amazon, eBay, Etsy, or Walmart — you will need to know how to use those marketplaces’ reports alongside your own to manage your internal accounting controls, stay on top of cash flow, and track inventory.
Some e-commerce platforms will integrate with your existing accounting system, and some marketplaces — Etsy, for example — will even collect and remit sales taxes on behalf of their sellers, but not all provide this level of integration. An accountant can help make sense of these reports and can help establish a monthly or weekly routine for reconciling external reports with the business’s own accounting function.
E-commerce is all about transactions. For this reason, online sellers need a bookkeeping solution that captures all the intricacies of their business, such as transactional data, inventory, shipping costs, and sales tax, among others. An accountant can help you build a framework that organizes your books in a way that meets your unique needs. For example, if you sell products on various online marketplaces, it may make sense to have separate line items on your trial balance for each marketplace to make it easier to reconcile those values with the external reports you receive.
In addition, e-commerce sellers incur different fees than standard brick-and-mortar retailers. Costs associated with transactional fees, returned items, and lost packages can add up quickly. An accountant can identify ways to track and minimize these costs to put more money back into your pocket.
Due to the complex nature of transactional data, an accountant can also help you establish an accounting system that compiles transactional data into financial reports while preserving the detail. This allows the user to drill down into the data if there is a concern that requires further examination.
E-commerce sellers must actively manage inventory. Are you holding too much cash in products that aren’t selling? Did you miss out on sales because you were out of stock on an item? Managing inventory is essential for e-commerce businesses to streamline operations. For instance, it may make sense to house inventory in multiple states to make shipping faster and cheaper. Doing this could trigger new filing responsibilities, so talk to your accountant about the tax implications before making drastic operational changes.
Your business also depends on the accuracy of your inventory counts. Accountants will know how to count inventory for both book and tax purposes and can help you put reserves in place for shrinkage. Additionally, the cost of your products could fluctuate while sitting in a warehouse. If the price drops before you sell it, the value of your inventory just went down, and you may need to make an adjustment on your balance sheet for the change.
We all know that timing is everything. If you make a sale on a third-party website, when do you receive those funds, and when should you record that revenue? The answers to these questions depend on your chosen accounting method and revenue recognition policies. Your accountant can help you determine if your accounting methodologies are serving you.
Timing also affects cash flow, and cash flow is the key to success in any business. But did you know that there’s a big difference between cash flow and profit? Depending on the timing of money coming in and money going out, e-commerce sellers may report profits on their financial statements but have negative cash flow, or vice versa.
Leverage Your Accountant’s Expertise
E-commerce businesses are forced to constantly adapt and grow, and an accountant can provide tailored advice to help your business find balance. If you want to see how our CRI accountants can help your business, reach out to us today.