Tax is one of the most inevitable parts of a business. If it is not managed with due caution, it can potentially drain energy and time like anything. We had the opportunity to speak with many marketplace owners and vendors to discuss how they operate. Interestingly, when we asked them about the pain points, more than 84% mentioned tax related activities.
So, this figure clearly tells us that tax is one big hassle for the sellers. And they need handy tips that will help them to overcome the bottlenecks of tax. In this article, we tried to put together some of this important points and discussed them in lengths. If you are a marketplace owner, or a vendor, or an eCommerce platform developer, this article is for you.
Find Out Your Sales Nexus (Inside USA)
Nexus refers to “physical presence” of respective online business and it defines the seller's responsibility to collect tax as per that jurisdiction. Therefore, a seller must identify his sales nexus and apply for tax license accordingly. If he fails to do that he will face a penalty or serious charges from the legal authority.
The physical presence of the business can include your office, location of your employee or your warehouse. But the scope of nexus is continuously being expanded these days. Now a wide range of activities like deliveries, service calls, third party involvements etc. also falls under the definition of nexus.
Now keep this in mind if you are operating in the USA. No matter what, you will have a sales tax nexus in your home state. That means, if your business is based in Boston- whenever you sell your taxable product inside Boston- you must charge your customer. However, if you have a nexus in Boston but you make a sale to a customer in Dallas, in this case, you do not need to charge tax to the Dallas customer.
Wherever you find a tax nexus, you must register for a tax permit and charge tax from buyers. But bear it in mind that the scope of nexus and sales tax do vary throughout different states. This article will be useful for you to understand the tax nexus in different US states.
But What About Non-US eCommerce Sellers?
In Europe, the nexus rules are not applicable. Wherever in Europe, your stocks are held, you have a requirement to register for Value added tax or VAT. Once you are done with the registration, your sales to a local customer or to other EU countries are administered by EU VAT distance selling rules. They have set the following minimum sales thresholds to facilitate the vendors:
- Euros 35,000 (or equivalent) in All EU countries, except:
- Euros 100,000 (or equivalent) in Germany, Netherlands, Luxembourg
- £70,000 (or equivalent) in the UK
So, you do not need to overburden yourself with tax compliance unless you meet this threshold.
Many countries including South Africa, Australia, Switzerland, New Zealand etc. are following this VAT model for marketplace companies.
Do NOT Collect Sales Tax Without Permit
It applies for both US Sales Tax or VAT or any other form of tax. You must have to register for a permit at where your nexus is located (for US) or your stocks are held (for Europe).
Collecting sales tax without a permit is punishable in the eye of law. Because that means you are using your state's name to feed your pocket. In extreme cases, you might have to face lengthy jail times.
After you are done with registration, the office will provide you a unique identification number and a tax filing frequency. It can be monthly, quarterly or annually depending on the expected volume of sales in that region.
Organize and Collect Tax Smartly
So you have the tax permit ready. Now your job is to start collecting tax from the buyers. The marketplace platform you are using must have tax management feature or you have chosen a recipe for failure. I really hope you have thought about that before you built your marketplace or joined one. We have compared some of the top notch eCommerce solutions in this article, give it a read for more information.
Some of the items might be non-taxable in the region you are working in. For example, you can not collect tax for selling books in England or Ireland. Therefore, you must have a smart approach of organizing the tax conditions that apply to your products and collecting tax from customers.
Another thing, shipping charges are taxable in some places. If you are not keeping a tab, your profitability will be hampered and business will not see desired growth.
Prepare Detailed Break-down of Taxes
If you are living in a country where tax regulations are not stringent, then you do not need a detailed break down of tax collections.
But many countries and most of the US states require a vendor to submit a detailed tax report. If you ask me how much detailed, I will just say- “as detailed as it can get.” It should specify the tax collection according to buyer's location, sales channel, product wise difference and other relevant factors.
This will be really cumbersome if you have to keep these accounts manually. It can potentially result in productivity loss as well as erroneous performance figures for your company. There comes the importance of tax automation features in your marketplace. And it is relatively cost effective than hiring a tax consultant to look after these hassles.
So, the bottom line is you need to prepare yourself and present a detailed tax collection sheet before your government. The calculation has to be thorough and without any mistake. Invoice compliance is a major requirement of any online business.
File Your Tax Return and Relax!
So you went through all the steps. Now, this is the time you finish off your tax related activities for this period and relax. In most of the countries, you can file your sales tax or VAT return through online.
Many people think that they are not required to file tax return if they haven't collected any tax in this period. But this is a misconception. You are still required to file a “zero return” that means you do not have any tax amount to submit them. Forgetting to file a “zero return” is punishable in many countries, so make sure you are keeping your tax files clean!
Tax filing is not just about clearing your pocket. Many states offer a lucrative discount scheme for businessmen who pay the taxes on time or early. Make sure you know about these early tax discounts. It can be a good way to have some extra cash if you have a steady revenue generating source.
So, how are you dealing with your tax activities? Share your experience and concerns with us!