The COVID-19 pandemic may have fanned the flames on the rise of e-commerce, but it was further building on an already increasingly popular trend. More businesses are looking toward online options for customers, but it can be easy to either underestimate - or overlook entirely - the necessary sales tax considerations to stay compliant.
Ensuring a streamlined and automated process for your e-commerce clients, along with connecting their transaction systems from every channel is essential to maintaining sales tax compliance. Incorrectly collecting and remitting sales tax could lead to compliance issues, unhappy customers and might make future business growth more difficult.
But how exactly do e-commerce sales impact sales tax? What do your clients need to know about compliance and how can they best prepare?
Ecommerce sales tax basics
As businesses expand their e-commerce presence, it can be increasingly challenging to manage all sales channels on which they are selling. For example, a retailer may be using a mix of marketplace facilitators and their own stores. The same product being sold to the same customer, but on a different channel could equate to different tax results. Selling on eBay will let you put in one tax rate, but Amazon does not. It’s important to know what part of sales tax your clients are responsible for and that customers are being charged the correct sales tax every time.
Marketplace rules can also vary from one state to the next, with economic nexus requirements also potentially varying across state lines. Additionally, economic nexus requirements can vary by jurisdiction within the same state. Do you know how much business your client is doing in one state? Are there different obligations for remote sellers versus marketplace facilitators?
Recognizing filing obligation changes due to physical and economic nexus is critical for accuracy in sales and use tax collection and remittance. Your clients need to ensure that data from all sales channels are properly funneled through their sales tax platform, ensuring that accurate information is delivered in real-time.
For a quick summary of sales tax considerations for e-commerce sellers, watch this video:
Understanding product taxability
It’s also essential for your e-commerce clients to fully understand the taxability for each of their products. Different jurisdictions could have different tax-exempt requirements. Using a gift card, digital/physical coupons or even rewards points could have varying sales tax implications. Depending on the jurisdiction, these payment methods may or may not reduce the taxable base along with the sales price. Furthermore, some states have sales tax holidays and others may have implemented temporary COVID-related tax changes.
For example, clothing can be taxed differently depending on the state. New York and Pennsylvania do not tax “normal wear clothes,” but costumes are taxed. Software-as-a-Service (SaaS) companies will also see their products and/or services taxed differently from one state to the next. Nutritional supplements are another common product that can be taxed differently depending on location.
Furthermore, how your clients label their product, and what their product description says will also be important. The documentation of each item can impact how state auditors may review your clients should they need to conduct an audit. Your customers need to know their product(s) and ensure a proper analysis of product taxability to remain compliant.
Using the right tools to stay compliant
Whether your clients are collecting tax on their sales, assessing tax on purchases, managing exemptions or facilitating returns, it’s critical to leverage a single source of truth for their tax data. You want to ensure that they are collecting what they should be collecting and are remitting what they actually owe.
Leveraging an automated tax engine configured to products and customers will help ensure consistency across the board. Having a single source of truth will help streamline support for inevitable audits. Your clients can build and foster customer relationships by making it easier for customers to conduct business with them. Getting sales tax wrong could make them look at other vendors.
Manual sales tax processes can quickly become overwhelming, especially as businesses continue to grow. An automated process can allow your clients to focus on other key organizational priorities, while still ensuring sales tax calculation accuracy. By simplifying sales tax reporting, they can reduce the time their internal teams spend on compliance and still rest assured that their company stays compliant.