Owning an online business can be fun and very profitable. The expansive nature of the internet can mean more sales, and reaching more potential buyers than a local business. It can also be more convenient for you and your customers. If you own an e-commerce business or are thinking about doing so, there is quite a bit you should know.
It may seem easier to hold responsibility of the taxes for your business when you have an e-commerce; however, there are important details and rules that you should be aware of. Many times e-commerce businesses can have even more complicated tax ramifications than local businesses.
If you’re not aware of the law and if you aren’t withholding correctly, here are some things to look out for when dealing with taxes for your online business:
Businesses of all types must pay income taxes, so even if you own the smallest e-commerce business and are self-employed, you still must pay income taxes. Failure to do so is illegal and may cause you fines and criminal penalties.
If your e-commerce is selling tangible products, you have to collect sales taxes from your buyers, which then must be remitted to the government. Taxable products may vary from state to state, so it’s imperative that you know the tax law for the states you are operating in. Usually, items such as groceries, medications, and services are not taxable.
Sales Tax Nexus
Sales Tax Nexus is when you have some kind of relationship between your online business and a state (hence, you will always have nexus in your state). However, establishing sales tax nexus is not limited to physical presence. It can also be related to sales volume, employees that travel or independent contractors and even online referrals.
With that being said, it’s important to understand the tax rules in the states that you hold the relationship. Below are a few ways sales tax nexus can be created and a brief description of each.
- Physical presence: You are considered to have physical presence in another state when there’s an office, warehouse, store, factory or other locations that impact the logistics of your business.
- Personnel: That would be anyone who is performing work for your business; it can be an employee, a salesperson, a contractor or others.
- Affiliates: Someone who has a cut of the profits that they helped you earn; for example, an advertiser.
- Inventory: There are states that considers inventory to cause nexus.
- Drop shipping relationship: This is when there’s a person/supplier in another state who is shipping inventory to your customer.
If you have nexus in a state, you may be required to have a sales tax permit before taxing your products, with Georgia being included. As a matter of fact, Georgia and many other states consider it unlawful to collect sales tax in their name without having a sales tax permit.
If you think you may have sales tax nexus in more than one state, we recommend that you talk to your accountant to make sure you are following the law and paying all of your taxes.
For more questions or assistance regarding your business, contact us!
Are you looking for a quick guide to help you prepare for this tax season? We have one here.
By Merye Gobernate and Darian Betosky