Accounting 101 for eCommerce Companies - Tips from a Specialist

Getting Started with an eCommerce Specialist

At Profitwise we break eCommerce down into 5 major categories.

1. Etailers
   Etailers are retailers mainly selling physical goods online. Most of them have a website, but not all of them. They usually sell on one or multiple sales channel, such as: Amazon, eBay, or Best Buy
   
   
2. People selling online informational products
   An example of that would be some type of digital content. Maybe an on-line course or eBooks.
   
   
3. Bloggers
   Bloggers create content on their site. Most of them generate income through providing affiliate links.
   
   
4. People selling software
   It might be traditional software, web-based, or it might be software as a service.
   
   
5. Providers that service the eCommerce industry
   It might be a web-designer or someone in social media, maybe somebody that manages affiliate programs. We group all of those together in our definitions of online businesses.

How Does Profitwise get started with a new eCommerce client?

We start with a new client by going through a lengthy checklist to fully understand how they’re business is structured and how it works. Then we ask about sales tax, such as what states are they currently collecting sales tax in?

Beyond that, we get into general accounting questions. How do they handle their book? Who does their bookkeeping? What does their tax situation look like? Are there opportunities to reduce tax?

It’s also important that we understand their future business projects. Are they growing quickly? Does it make sense to change their entity structure? Does it make sense to incorporate in a different state?

Does Your eCommerce Business Even Need Accounting Help?

At Profitwise, we have our initial qualifications for our sales process. Then we have a list of 100 questions we review once we engage a client as part of our onboarding process.

We’re relationship based, which means we’re looking for a client that really needs a variety of accounting services. We excel at providing a fuller array of services. This means a small business. In terms of revenue, most clients typically fall in startups to about ten million a year.

The next thing we look at is what type of help they need. So we’re looking at helping support the bookkeeping function. We can do some of the bookkeeping for them, or maybe they might need more of a high-level controllership review. Sometimes businesses have us reviewing things and doing the monthly financials to make sure everything is being done correctly. And then we handle the year-end tax planning and tax return preparation as well.

If a client needs help in those four different areas, it’s typically a good fit. If somebody says, “Hey, I just need advice on this one specific issue,” or “I just need someone to do my tax return for me.” Then that’s not a good fit, because we’re looking at really engaging people more of an on-going basis.

We provide more value as kind of having our hands in different pots and being able to look at the 40,000 foot level and say, “Hey, you’re doing this over here. Let’s be thinking about this.” The quality of our advice can be much better, in the sense that we can have a fuller view of everything going on.

What You Need to Know About eCommerce and Nexus Tax Laws

Nexus is determined by whether or not a state considers your entity as conducting business in that state. There are different levels of Nexus; There’s Income Tax Nexus and Sales Tax Nexus. It is possible that you’re triggering Nexus for sales tax purposes but not for income tax and vice versa.

Each state is a little bit different in terms of the questions that they ask to determine that answer. We have one client who has employees in 8 different states. They do trigger Nexus for income tax purposes, so we have to prepare 8 different state tax returns. Sometimes people do that by accident. They don’t know, and they think, “Okay, we’re a virtual business. People can work anywhere for our company.” And by having employees in different states, unbeknownst to them, they’re creating Nexus.

Let’s say they have to register their corporation within these states. Then they have to file payroll tax returns associated with the different states and also an income tax return. This creates much more of a burden on the business owner. It’s less of an issue for larger companies because they have more resources and larger budgets. Some even have their own tax department to help them manage all this. The tricky part is when a small business starts venturing into this area, and they’re not really aware of it, they can create a whole host of problems for themselves.

A lot of small businesses don’t even realize they’re doing this. They might have potential exposure to those states by not filling out an income tax return and not reporting, even though they are conducting business activity in that state.

For some companies, a sales tax liability can be substantial and even put them out of business. It’s important to know it’s being handled correctly.

What about Amazon, FBA, and Taxes?

When selling on Amazon, it can happen two ways. Amazon actually sells some of their products. Others are sold through the seller network (third parties). If Amazon is selling something directly, then taxes would depend on where Amazon has Nexus—its warehouses, its operations would dictate the state that it has presence in. On the individual seller side, it’s a state fulfilled by Amazon, it would come down to the nexus of the sellers as well.

Selling on Amazon comes with challenges. Their warehouses can create Nexus for the sellers. This issue is debated in the industry, but it definitely leans more towards the sellers having a similar Nexus—since they are technically storing products in Amazon’s warehouses. Then they’re looked at as warehousing their products in different states.

If you take an Amazon seller that was originally just in Texas, now they potentially have 14 other states, depending on how many warehouses Amazon has at any given time in different states. That means this seller in Texas could potentially have to do 14 different sales tax returns.

The situation gets tricky, especially when there’s also use tax. For example, in California, if you go out and buy a $2,000 computer on Amazon from someone who doesn’t have Nexus in California, then you don’t pay any California sales tax. California still wants the use tax, which is like a sales tax, for the privilege of using that equipment in California.

If you don’t pay California sales tax on that $2,000 computer, then the state wants you to fill out a use tax return reporting that $2000 purchase and paying the 8% on that—so roughly $16 would be remitted to California as your use tax.

It’s a complex situation. There’s a lot of people who are not in compliance with that. Some smaller businesses disregard that. And it’s less of a potential issue for them if their numbers are relatively small, but as the company gets bigger and the transactions are bigger, then that liability increases. So let’s say you bought a million dollars in computer equipment, 8 %, that’s $80,000 and pretty significant.

And in a lot of cases what the states do, and what California does, they have various partnerships with different sellers like Egghead, and they get information from different sources. Sometimes a client will get a letter from the state board that says, “Hey, we believe you might owe use tax,” and maybe they had never even heard of use tax. And that’s the first they found out about it. All of the sudden, it’s like, “What do I do?” They have to pay the sales tax to California in that situation, so it’s an important area to be aware of and handle it correctly.

How far does Profitwise go in managing all of this?

That depends on the complexity level. If there’s a handful of states, we might help them directly. If they had 50 states, we wouldn’t handle all of that ourselves. There are other third party companies we bring in that help manage that. There are different software packages and technology platforms that are built for something like sales tax.

Let’s say you do have sales tax in a bunch of states, maybe 20 or 30. It’s pretty unrealistic to think that one person can manually track all of that, because sales tax laws change frequently. Items are taxed differently in different states, and it becomes complicated fairly quickly. The good news is that there is software out there that can help manage and automate that process. For clients that get more sophisticated, it typically makes sense to do that. The companies that are dealing with that now are typically larger companies too, so that helps a little bit in the fact that they usually have more resources to help manage that.