E-commerce Sales Tax

E-commerce Sales Tax.

Kruze’s tax team helps hundreds of startups cumulatively save millions on their taxes every year - even unprofitable startups can benefit from tax credits. See how much a tax return might cost your company at https://kruzeconsulting.com/startup_calculators/how-much-does-a-startup-tax-return-cost

- Sales tax has always been a really important revenue stream for states, but a couple years ago, the Supreme Court made a decision, Wayfair versus South Dakota that had really big ramifications. It used to be you only had to pay sales tax in states that you were domiciled or you had tax nexus and basically, that's like you have operations, you have people, you have assets, your have property, that's what determined sales tax back in the day. So you could be an e-commerce firm that didn't have warehouses in most of the states or didn't have employees or assets in most of the states and you only had to pay sales tax in a couple states.

- So the big thing is be aware. You wanna do what's called a nexus study in each state and typically all that requires is again that asset, people, property test. But also, you wanna break out your revenue by state and basically show your accountant, at Kruze we do this, at Kruze, we have a dedicated sales tax team that this is just what they do.

- There's also some really good software out there. Avalara, TaxJar, we tend to go with Avalara but TaxJar is a really good sales tax software, too.

Sometimes we see discrepancies in what we think should be happening with what Avalara thinks should be happening and so we'll actually have a conversation with Avalara and that happened recently where Avalara was basically understating what a company's revenue was in a certain state so the tax was gonna be lower but we actually, because we know the client so well and because we know the books so well, were able to figure out that actually Avalara had understated it incorrectly and so we were able to correct that.

And that's one of those things that if it's incorrect, it can come back and bite you a couple years down the road because the states will actually audit your company and audit your records and so if you see that you underpaid, even if it's not malicious and the companies we work with are very high-character people, founders and companies but you'll still owe penalties if you understated it. So it's just important to get it right. Again, if you haven't been filing your state sales tax items for your e-commerce business, and you realize you need to, the sooner you can do it, the better. And so that's basically how the flow works. One of the cool little wrinkles is that Avalara actually has a joint application or joint filing form for many, many of the states in the Union. Basically a lot of the smaller states realize that if they could standardize on a form, it would be actually more cost-effective for them. So Avalara does that and oftentimes, Avalara will actually do that for free, which is really nice.

Another thing you need to think about if you're selling through Amazon, you're an e-commerce provider and you're doing the fulfillment by Amazon, Amazon actually will give the states records showing what they sold and who the vendors were, like your e-commerce company if you're using Amazon fulfillment. And so even though, and the sales tax will be withheld at the checkout level with Amazon. So Amazon is submitting these records and also submitting the sales tax. You as a e-commerce company fulfilling through Amazon should also let the states know about that revenue. You don't actually make the payment 'cause the payment's already been made but you do need to just let the states know otherwise the states, they're gonna see what Amazon reported and they're gonna see what you reported and see they're different numbers and they will actually come after you, do an audit and try to get to the bottom of it. So that's really important. A lot of companies think if they're fulfilling via Amazon, they don't have to submit anything but you actually do.

So again, you could probably tell, sales tax is a pretty, for e-commerce companies, it's a pretty complicated thing and so just, even if you don't work with Kruze, work with a good accounting firm that knows its stuff, that understands it and a good accounting firm that does sales tax is gonna lean on a software solution like Avalara or TaxJar. So that's really nice. It's nice for you 'cause you have kind of a central point of truth, you have a system that automates a lot of it but you also have the advisor relationship with an accounting firm like Kruze that can talk you through things and make sure things are done correctly. So I hope that helps. Thanks so much.