E-commerce taxes in the US: 5 mistakes to avoid
Taxes in the US differ from state to state and even from city to city, and it may be challenging to keep track of every detail. So today, I will tell you about 5 of the most common pitfalls you need to pay attention to.
Mistake #1. Forgetting about sales tax
In 2018 the US Supreme Court ruled that each state can set its own sales tax rules. And even though it’s been 4 years since then, many owners of e-commerce businesses haven’t updated their tax practices. Moreover, some SaaS and digital merchants are mistaken that they are freed from this tax because of what kind of product they sell. Yes, regulations move slower than technology, but today 20 states tax SaaS (software as a service) products:
The good news is that it’s normally much better if you initiate the communication with the department of revenue rather than they find your mistake themselves. So if it may be your case, you should contact a State and Local Tax consultant to make a plan for your past and future taxes.
Mistake #2. Don’t track nexus
Nexus is the minimum threshold after which the collection and payment of sales tax become mandatory for the business. Until 2018, this threshold was based primarily on the sale of tangible items, but now it has the form of gross sales and the number of transactions.
If you don’t track nexus limits for your region and overcome them without collecting sales tax from your customers, you’ll have to pay it out of pocket.
Mistake #3. Forgetting about all your sales channels
When you need to make a report and pay taxes, it may be complicated to gather all the data from all the different sources in one place. What do I mean? Well, imagine you sell your products on the following platforms:
- Your website
- Amazon
- Google shopping
- Facebook marketplace
If you forget to consider your sales and revenue from the Facebook marketplace, for example, and don’t include this data in the report, you may get a fine for tax evasion. Moreover, it’s getting even more complicated when we remember that every state has different rules, and some of them include marketplaces into nexus, and others do not.
Mistake #4. Misclassifying products
Your taxes quite often depend on what products you sell, and the classification not only varies from state to state but also can be not so obvious. Here are just a few examples:
- In New York, a bagel is tax-free as a grocery staple. But if you cut this bagel in halves, it will be classified as prepared food and taxed at 8.75%.
- In Iowa, Pennsylvania, and New Jersey pumpkins are freed from a sales tax, but only if they will be eaten and not carved.
- In Illinois, candy that has flour in the composition is taxed as food at 1%, and candy without flour is taxed as candy at 6.25%.
Mistake #5. Missing deadline
Depending on the size of your business and its location, you may have monthly, quarterly, and yearly filing due dates. Most states will ask you to file on the 20th day of the month after the taxable period. However, rules are different in every state, so you need to double-check your deadline. Here are some recent and upcoming deadlines:
- March 15, 2022 — Partnerships and S corporations due
- April 18, 2022 — C corporations due
- April 18, 2022 — Sole Proprietorships due
- April 19, 2022 — C corporations due for Maine and Massachusetts
- October 17, 2022 — Extended tax returns due
- April 17, 2023–2022 taxes due.
And that’s it for today!
I hope that now you are better prepared for tax filing and will avoid these typical mistakes.
