Welcome to another episode of Women Powering e-Commerce, where we dive into the world of entrepreneurship, particularly for women in e-commerce. Today, we'll shed light on a somewhat mysterious topic that affects many e-commerce businesses, especially those based outside the United States – US sales taxes and understanding economic nexus. If you're a Canadian entrepreneur or anyone grappling with US sales taxes, stay tuned as we demystify this complex subject.
My journey into the world of US sales taxes began with an unexpected notification from our e-commerce platform, Shopify. One morning, it informed us that we had reached something called "Nexus." At that moment, I realized I had a lot to learn about US taxes. The burning question was, "Do e-commerce businesses based in Canada need to pay US sales taxes when most of our sales occur in the US?" The answer, as I soon discovered, is both yes and no. The key to understanding this duality lies in the term "Nexus."
Economic Nexus is a concept that e-commerce entrepreneurs need to grasp. It means that if your business, located outside of a US state, conducts a certain amount of business within that state, you are obligated to collect sales taxes there. Each US state has its own specific rules for when economic nexus applies, making it a bit challenging to navigate. The roots of economic nexus trace back to a significant Supreme Court decision in 2018, the South Dakota vs. Wayfair case. Prior to this decision, only businesses with physical stores or offices in a state had to remit taxes. After the Wayfair case, online sellers were also required to collect sales taxes if they reached a certain threshold in a state, even without a physical presence.
One common question that arises is, "What if we don't comply?" While striving to be legally compliant, this question may cross your mind. If you fail to collect sales tax when you should, you may eventually have to pay it yourself. Moreover, if authorities discover the discrepancy, you could face extra fees, amounting to as much as 30% of the tax owed. Clearly, non-compliance is not a route to take.
Determining when you've reached nexus can be complex, especially if you attempt to track it manually. However, many e-commerce platforms, including Shopify, can automatically track this for you. Alternatively, you can seek assistance from tax experts or accountants to manage this aspect. Additionally, various tax programs and online tools, such as Avalara, exist to streamline the process.
Once you discover you've reached nexus in a particular state, the next step is to ensure compliance. To start, you must identify the states where you need to pay taxes. Typically, if you make $100,000 in sales or conduct 200 transactions in a year in a particular state, tax obligations kick in. However, keep in mind that each state may have different thresholds and rules. Some states like Texas and California have higher thresholds, making it crucial to research the specific requirements for each state where you do business.
After identifying your tax obligations, you'll need to pay them. Each state has its own tax website with varying due dates and rules. Some states require quarterly payments, while others mandate monthly or yearly filings. To ensure accurate compliance, it's advisable to utilize tax professionals or software solutions like Avalara. Automating tax compliance not only improves accuracy but also reduces costs compared to hiring a tax professional.
When it comes to selecting the right tools for tax compliance, there are several options available. For smaller to medium-sized e-commerce businesses, automated platforms like Avalara, TaxValet, or TaxJar can be excellent choices. These solutions can handle the complexities of tax compliance without the need for extensive human intervention. While automated platforms may lack the personalized touch of a tax professional, they efficiently get the job done.
In summary, my journey into the realm of US sales taxes taught me a valuable lesson: international e-commerce doesn't exempt you from tax obligations, especially if you reach economic nexus in various US states. It's essential to keep a close eye on your sales, explore the thresholds and rules of each state, and utilize the right tools or experts for compliance. While taxes may not be the most exciting topic, addressing them proactively ensures your business remains legally sound and financially secure.
Thank you for joining me on this episode, and I encourage you to explore further, rate, share, and subscribe to this podcast as we continue to empower women entrepreneurs in the e-commerce industry. Together, we can navigate the challenges and seize the opportunities in this dynamic landscape. See you next time!