In our fast-evolving world, the online marketplace is the center of operations for many new and burgeoning companies. eCommerce sales are up due to the changing consumer landscape and demand. And as small businesses, individuals, and corporations make more money via online channels and varying business structures, tax-related questions begin to emerge.
Let’s take a look at how an accountant help tech startups and new businesses with eCommerce and other tax questions.
How an Accountant Can Help Tech Startups
The United States leads the world in the number of startup companies that initiate their operations every year. The number of startups in the U.S. currently is about 71,153 and about 69% of new startups begin as home businesses. Many of those home businesses are operating completely online, using eCommerce and other online venues to host their companies and serve as their storefronts.
Most emerging startups strongly lean into digital technologies, fintech industries, and other fields such as life sciences and healthcare, artificial intelligence, and gaming. Many of these companies involve some kind of eCommerce or online purchases or transactions, which can get complicated when it comes to tax liabilities.
Common Tax Challenges for Online Businesses or Startups
There is no question that online businesses have been growing consistently and exploded in the past two years. According to Mckinsey, eCommerce has grown two to five times faster since the pandemic. This unprecedented spike in online sales and incoming revenue via online channels have completely changed the consumer landscape. However, things get complicated when you consider the addition of sales tax, shipping to people across the nation or across the world, and new remote work structures.
Questions Revolving Taxes and Ecommerce Businesses
Small businesses, startups, and sellers must often untangle new challenges that emerge as the marketplace and consumer behavior change. Let’s take a look at some of the most pertinent ones.
What are the implications for sales tax compliance with eCommerce?
This question has been the source of some confusion as online sales ramp up. When a business ships an item or goods across the country, they might be responsible for collecting sales tax, depending on where the item ships to. The ship-to address becomes the point of sale. So, if your business makes a sale in a different state, you are responsible for that sales tax.
How does remote work affect tax compliance?
During the height of the pandemic, a good chunk of the workforce was relegated to working from home. The remote work trend was already growing before 2020, but once the pandemic hit, companies scrambled to make this structure work for their company.
- Companies can establish their headquarters or company nexus in a state where they have at least one employee.
- For online businesses that provide eCommerce infrastructure, tax implications state that the company that facilitates online transactions is required to collect taxes.
- Remote workers living in states outside of their company’s jurisdiction might have a tax liability to the state where they reside. Depending on your state of residence, how long you worked, and where the company is located, there may be a need to file more than one tax return.
What are the complications of interstate tax?
A business has to collect sales taxes in states where they have economic nexus. Tax nexus refers to where a business is headquartered or the level of connection between a business and when tax obligations kick in.
These questions and many online retailer-related questions were addressed by the U.S. Supreme Court case South Dakota vs. Wayfair. The case established that eCommerce retailers were subject to sales tax. The decision puts the legal responsibility of state taxes on the vendors, which—many have argued—can affect small businesses disproportionately.
Business Daily reported that in 2018 there were 619 standard sales tax rate changes. This translates to a lot of legislation for the average business owner—preoccupied with running their business—to keep up with.
Small businesses have to deal with the complications of many tax compliance prerequisites, the different state rules, and the frequent changes in rates. Since the Wayfair ruling, many states are changing their rules to accommodate small sellers or remote businesses. Nevertheless, eCommerce compliance has become a force to be reckoned with for many small online businesses.
Tips for Small Businesses in Dealing with Tax Compliance
Whether you are an online business, a tech startup, or a brick-and-mortar shop, tax compliance is part of your yearly responsibility. To stay ahead of the game, make sure to adhere to the following tips:
- Get a tax advisor: They provide tax planning and strategies that keep you in compliance but maximize your earnings.
- Familiarize yourself with tax deductions: Tax deductions are your friend. The more you know along the way, the better you can plan. These deductions include things like marketing, mileage, etc.
Get Help With Tax Compliance for Your Growing Business
Whether you’re a new tech startup or have changed your structure due to coronavirus, dealing with complicated tax rules in this new paradigm requires time and patience. A tax advisor can help you navigate questions regarding your eCommerce small business, dealing with remote employees, or tax obligations to different states.
Do you have questions about taxes for your company?