In 2021, eCommerce sales were over $720 billion. This number continues to increase because online shopping is a more convenient option. Innovations in eCommerce continue to bring more businesses opportunities.
New tax laws are an inevitable consequence of a change in the way that people make purchases. Paying taxes is an essential part of managing any business, and it’s equally true of eCommerce business. The eCommerce tax business owners pay will vary depending on the state.
Do you want to learn more about tax compliance for online sellers? Keep reading to know the basics of eCommerce tax.
What Is an eCommerce Tax?
Tax is the money people and businesses give to the government. It pays for the improvement and maintenance of public infrastructure. It also pays for public services like schools, emergency services, and welfare programs.
Businesses pay taxes to the government to help them maintain their duties. It helps provide resources to the police, firefighters, and the army. The same principle applies to eCommerce tax.
Paying taxes is one of the things businesses should include in their financial plans. Not factoring in taxes is one of the common mistakes with starting a business. This mistake could result in fines.
How Is eCommerce Taxed?
Paying the eCommerce tax depends on your home state. Each state can make its own sales and tax rules. Different locations can impose “origin-based” or “destination-based” sales taxes.
Origin-based taxes charge the tax rate from the state or location of the seller. It includes all the tax levels in the country or city.
Destination-based taxes mean the rate will be according to the customer’s location. You can base the tax rate on the shipping address for physical products. For digital products, use the customer’s billing address as a reference for tax rates.
Online Sales Tax Requirements
Online sellers in the US need to pay an eCommerce tax.
Businesses with a physical presence in a state need to pay sales tax even for online sales. It includes offices, stores, or warehouses. These businesses also need to collect taxes from online customers from that state.
The first step is to determine where you have sales tax nexus. Online sellers will always have sales tax nexus in their home state.
A way to have sales nexus in a state is to determine the location of the employees. The business has sales nexus if their employees work in that location. They also qualify for nexus if they have inventory in that state.
Some businesses working with affiliates qualify for nexus. Affiliates advertise products for a cut of the profit. This relationship creates nexus for these online businesses.
When an online seller participates in a trade show, it creates nexus. Dropshipping or third-party business relationships also qualify for nexus.
Online Sales Tax Compliance
As an online seller, you must register for a sales tax permit. Do this in your nexus state by contacting the state’s taxing authority. You will give them your business information and business activities.
Before collecting online sales tax, you need to have a valid sales tax permit. Most states consider tax collecting without a tax permit illegal. After they issue a sales tax permit, they will tell you the sales tax filing frequency.
The frequency of tax filing can be monthly, quarterly, or every year. Remember that the higher your sale in a state, the more sales tax you need to pay.
You can now set up and start collecting tax from your online sales. In the US, 29.7% of businesses are online. Each transaction pays an online tax to their nexus state.
After you collect the eCommerce tax from your online transactions, you can now file them. Most states need businesses to report on the 20th day of the month. They will also ask you to state how much sales tax you collected from your online customers.
Businesses can hire professionals for eCommerce sales tax registrations. Doing this saves businesses from time-consuming audits.
eCommerce Tax Deduction
Online businesses can file for eCommerce tax deductions. It can benefit online business owners who operate from their homes. You only need a few requirements to qualify.
Your work area should only be for your business to qualify. It should not be for personal use. The work area in your home should also be the principal place of business.
The IRS offers this tax deduction to those who meet these requirements. One way to avoid complications is by taking pictures of the home office. These photos will serve as proof that your home office is for business purposes only.
Another way to deduct eCommerce tax is by storing your inventory at home. You qualify if your home is the fixed location for product inventory. You should not have a warehouse or a storage unit outside.
You can also deduct expenses from office supplies and packaging. The list includes boxes, tapes, ink, and other essential office equipment.
If you use advertising to grow your business, you can use it for a tax deduction. You can write off the costs of running ads on social media and even in the local paper. The tax deduction may also include the fees you pay if you hire a designer or an ad producer.
Website fees for domains and web hosting also qualify for eCommerce tax deductions. You can also write off the costs you pay for upgrades to improve your website.
Know the Basic eCommerce Tax
These are the basic facts you need to know about eCommerce Tax. Follow this guide when applying for a tax permit for your online business. Remember that your location plays a role in paying eCommerce tax.
As an online seller, you need to focus on taxes. It will create a foundation that will allow your business to grow online.
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