Selling an ecommerce business can be a great way to make 6 figures or more from a company that may have been running for a couple of years or more. Potential buyers are interested in purchasing profitable businesses with good cash flow. However, if you are looking at selling an ecommerce business, there are certain steps you need to take to ensure your business is sales tax compliant.
Sales tax compliance should be regularly checked and monitored from the moment you start your ecommerce business, so even if you are not ready to sell yet, but would like to have an exit and are thinking about selling an ecommerce business, this article will help you make sure you take the correct steps early to prevent any issues when you are selling an ecommerce business in the future.
What is Sales Tax Compliance?
In the US, there is a consumer tax called sales tax, which is similar to many other countries’ VAT. If you were to purchase items from a physical store, you would find that nearly all goods have sales tax added.
However, when you are selling online, through an ecommerce business, things start to change. Each state has its own sales tax rate, with over 11,000 different jurisdictions with their own sales tax rates, making sales tax compliance difficult.
The first thing to know is that you are not required to collect and remit sales tax to all states. You are only required to collect and remit sales tax to the states where you have reached sales tax nexus.
Steps to Stay Sales Tax Compliant:
- Sales Tax Nexus Survey
- Sales tax registration with the states where nexus is reached
- Sales Tax Filing
- Ongoing Economic Nexus Tracking
Sales Tax Nexus Survey
When starting an ecommerce business and establishing sales tax compliance, it’s important to determine where you have reached the sales tax nexus.
Sales tax nexus is a connection a business has with a state that allows the state to determine that the business should be registered to collect and remit sales tax.
There are different ways a business can reach sales tax nexus:
Physical Nexus
This is the first one that should be assessed for your business:
- Physical office or business location
- Storing goods in warehouses or third-party fulfillment centers
- Employees working in a state
Economic Nexus
When an ecommerce business just starts, it’s unlikely that it will reach the sales tax nexus for a month or so, depending on the volume of sales. This allows new stores to remain compliant when starting. Economic nexus is a connection to a state that is met by reaching a threshold of sales or transactions, e.g. $100,000 or 200 transactions. The thresholds differ from state to state.
It’s important that this is monitored regularly, with third-party software being very useful at doing this for you, so you don’t have to worry.
Clickthrough and Affiliate Nexus
A connection with the state that is reached by having an in-state affiliate or marketing relationship within a state.
This type of nexus varies greatly depending on the state, with some states having no rules written in their legal work (although this constantly changes).
Examples of clickthrough nexus include:
- You offer commission and affiliate links to influencers who refer multiple businesses to you.
- A blogger refers multiple businesses your way via affiliate links.
- A personal trainer links your supplement products in all their videos and content.
Generally, there is a sales tax threshold that must be reached by your ecommerce shop first before nexus is established. The following states have confirmed compliance rules written about clickthrough and affiliate nexus:
- New York
- California
- Connecticut
- Illinois
- Pennsylvania
- Arkansas
- North Carolina
Thresholds typically range from $10,000 to $50,000 in referred sales per year.
Marketplace Nexus
Marketplace facilitators, such as Amazon, collect and remit sales tax on your behalf for all states. It’s a common misconception that there is therefore nothing to do with sales tax when using these platforms.
Looking for more help with sales tax and nexus? Reach out to the experts at RJM for a free consultation.
IMPORTANT
If you are looking at selling an ecommerce business, it’s important to know that in most cases, sales tax liability follows the business activity, not just the business itself. So it’s very important to stay compliant from the beginning. Failure to do so could:
- Cause the sale to fall through
- Cause the original sales price to be significantly reduced, depending on the liability
- Lead to your buyer requesting a successor liability waiver
The reality is, buying a business involves significant legal due diligence. Most reputable buyers will conduct a full sales tax nexus survey, or hire someone to do it, and if it’s clear you aren’t compliant, have no sales tax records, etc., there is a good chance the sale won’t go through. So, make sure you consider this when selling an ecommerce business.
Sales Tax Registration
Once you have determined where you have reached the sales tax nexus, it’s important you register for sales and use tax accounts to avoid sales tax liability and ensure your ecommerce shop stays within compliance. Once you reach nexus, some states require you to be registered by the next sale, with some giving more time, such as a month, to get registered.
You then need to ensure you are collecting sales tax on all sales to that state (unless your products or services are sales tax exempt). If you fail to do this, you’ll still be responsible for remitting the sales tax out of pocket.
Most states are free to register, but some states do charge a one-time fee, ranging from $5-$100, to get the license.
RJM offers sales tax registration services for your ecommerce business for every state to ensure you are adhering to the state’s sales tax compliance policies.
Sales Tax Filing
Once registered and collecting sales tax in the states where you have sales tax nexus, it’s important you stay up to date with your sales tax filing.
The state will also assign a sales tax filing frequency. This could be monthly, quarterly, semi-annual, or annual, and is generally based on the number of sales you make. The states review this regularly to ensure compliance, and may change your ecommerce shop’s sales tax filing frequency to be more or less frequent depending on your sales tax returns and how much sales tax you are paying.
Each state has its own sales tax filing deadline, typically the 20th of the month, although some states could be earlier or later.
Failure to file on time can result in late filing penalties and interest, even if no tax is due. So it’s important to stay on top of your returns.
RJM offers sales tax filing services to take care of all your sales tax filing needs so you can focus on the more exciting parts of your business. By ensuring your sales tax needs are met, you will have a smoother time running your ecommerce business and, if you’d like, selling it.
Economic Nexus Tracking
Once you have all sales tax registrations complete and have your sales tax accounts set up and ready to go for your ecommerce business, it’s important to have something in place to track economic nexus to ensure you are in compliance with the thresholds.
If you are selling on one platform, like Shopify, it’s straightforward and simple enough to manually track the economic nexus. However, once you sell on multiple platforms, it quickly becomes very complicated and time-consuming to track.
There are multiple third-party software providers that can do this for you, offering a clean dashboard that notifies you whenever you reach a nexus. The issue is, many of these third-party platforms charge you based on the number of transactions. You could end up paying $100s, or even $1000s, just on the software alone.
RJM is one of the few solution providers that includes economic nexus tracking free of charge in any of our sales tax filing plans. So you don’t need to worry about fluctuating monthly costs and inflated software prices. Just simple prices by RJM.
Final Thoughts
The most common mistake people make is failing to get sales tax compliance correct from the get-go — they only think about it when they are looking at selling an ecommerce business.
It may cost a small amount initially to get sales tax compliant, but it has the potential for saving you $10,000s if you are looking at selling an ecommerce business in the future. RJM can help with all your needs to get compliant — reach out to us at support@rjmtaxexemption.com or book a free discovery call.
