When selling online, you must manage many tasks, from finding the right products to providing excellent customer service. Tax compliance is one area that some people overlook when starting their e-commerce journey.
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What You Need to Know About Taxes in E-commerce
Traditional businesses generally only have to understand local laws, regulations, and taxes. When you set up a website, however, your potential market includes hundreds of countries. While having millions of potential customers worldwide is nice, it also means you’re subject to complex regulations and taxes. In this guide, we’ll look at how to stay compliant and keep up with tax laws when selling to customers worldwide.
Learn Where You Have to Collect Sales Tax
Fortunately, you don’t have to collect sales tax from everybody. Two main factors determine this.
- Your location. Even if your business is online, you need a legal address to register and pay taxes. If you are based in the United States, you need to check your state’s guidelines for collecting sales tax.
- Your sales. Getting many sales from a specific location may make you liable for sales taxes. These rules vary by state and country, so you must be aware of the laws of any place with a high volume of orders.
Get a Sales Tax Permit
Get permits in those states when you’ve determined where to collect sales tax. This ensures that you can collect taxes and helps you avoid penalties. You can usually complete this process online.
Some Platforms Track Taxes Automatically
Sales tax is usually collected automatically if you sell on platforms such as Amazon, eBay, and Etsy. However, this can vary depending on the state or country where sales are made. E-commerce tax reporting is more complex if you use multiple platforms. You are responsible for collecting if you sell through your website or use online shopping carts.
Understanding International Taxes
You may be liable for certain international taxes if your customers are worldwide.
VAT (Value-added Tax) and GST (Goods and Services Tax)
While most states in the US have sales tax, there is no VAT or GST. However, many countries, including those in the European Union, the UK, Canada, and Australia, impose these taxes. VAT and GST taxes are based on the value added to products at each stage of the supply chain. The two terms have similar meanings, and countries usually use one or the other. These taxes can currently be as much as 27% of an item’s value.
For example, if you sell a product transported through several borders, you may be charged multiple VAT/GST taxes. Some countries have minimum thresholds for international taxes. For example, Australia allows up to $1,000 (AUS) in tax-free imports. By contrast, Canada’s threshold is much lower, $40 (CAD).
VAT Refunds
In some cases, businesses can get refunded for VAT/GST taxes. To be eligible, keep thorough records, including VAT identification numbers. These policies vary by country. The European Union website has information on applying for a VAT refund from EU countries.
Guidelines For Tax Compliance
Here are some tips to simplify tax compliance.
Consider Your Market
Consider your target audience and where your customers live. If you do paid advertising, you can manage which countries see your ads. For example, some vendors focus on countries with lower VAT/GST taxes.
Calculate Taxes Using Automation
E-commerce sellers unfamiliar with international trade may find it bewildering to worry about calculating taxes that differ in many US states and other countries. Fortunately, there are automated tools that make this fairly simple. Many good software tools let you automatically calculate sales tax. Many of these can be synced with e-commerce platforms like Amazon and Shopify.
You can use free online VAT calculators. However, you’ll have to look up the VAT rate for the country you’re shipping to.
Track Taxes Throughout the Year
Employees typically file taxes once per year. However, it’s better to track taxes all year round when you have a business. Sales taxes should be filed quarterly. Not paying taxes on time can cost you money in penalties. Even when a filing is far off, you’ll be ahead if you track taxes consistently. That way, you won’t have to scramble at the last minute when you need to file. Shopify and other services have tools to calculate sales taxes automatically.
Use the Right Tools
Tax compliance software makes your life easier. When comparing tools, consider these points.
- Find something that covers all your needs. For example, if you sell globally, you need help calculating international and US sales taxes.
- Make sure it integrates with your platforms. This may include accounting software or ERP (Enterprise Resource Planning) systems, as well as e-commerce platforms.
- Choose software that’s user-friendly. You want a tool that’s easy to use and offers ample support.
- Look for transparent pricing. Before signing up, make sure you understand exactly what features are included. Many services have different tiers, so you have to be clear about what you need.
Keep Up Changes in Tax Laws
Tax laws and rates are always changing. When doing international commerce, you must keep up with the latest developments in global tax policies. This is often determined by organizations such as the EU. You want to be prepared for any changes that will affect your business. E-commerce platforms usually send out notifications about major changes. If you use Shopify, for example, check their frequently updated sales tax for Shopify sellers page.
Taxes Are Part of E-Commerce
Tracking and collecting taxes aren’t anyone’s favorite part of business. However, they are a reality you have to contend with. Once you set up a system of automating as much as you can and keep up with tax policy developments, you’ll find it’s just another detail of running your e-commerce business.
