State & Local Tax Blog

4 Sales Tax Challenges Ecommerce Businesses Must Know How to Address

Managing an ecommerce business comes with a number of challenges and responsibilities. Here are four of the most common sales tax problems online sellers face and what you can do to work through them.

Knowing Where You Have Nexus

To achieve compliance, you have to know what your total liability is. And if you don’t know what your liability is, or where you have that liability, you could be in trouble.

The only way to address this is to know precisely what the total exposure was. And to know that, you have to identify where you have sales tax nexus.

Nexus is a link or connection to a state that allows that state to impose a sales tax responsibility upon you. There are two types of nexus:

  • Physical nexus is when your business has a physical presence in a particular state.
  • Economic nexus gives states the right to force out-of-state sellers to collect and remit sales and use tax if they meet or exceed a state’s economic threshold.

The best way to solve this problem is to conduct a nexus review which will estimate your nexus footprint and in which states you have a responsibility to collect tax.

The problem is that ecommerce moves fast. Your business could make thousands of sales across a dozen channels to consumers in nearly 50 states in a single day. This makes tracking nexus particularly challenging for online businesses.

If you’re going to get compliant – and stay that way – you’ll need a way to manage all that complexity and know exactly what your liability is. That’s no easy task.

Because of this, most sellers outsource this responsibility to tax automation software, a sales tax specialist or a combination of the two.

Keeping Up With New Legislation

The world of sales tax is complex and fast-paced. From marketplace facilitator laws to the latest on economic nexus, the rate of change is staggering. The regulations your business faces today are fundamentally different (and more confusing) than they were a year ago.

But staying on top of these regulations is essential if you’re going to stay compliant and reduce your total liability. For this reason, many ecommerce sellers work with a sales tax specialist. This helps them get up to speed quickly and keep their compliance up to date.

Filing Tax Returns

Filing sales tax returns requires discipline and diligence. States and local jurisdictions set their own rules for sales tax collection and how that tax is remitted, which means there are hundreds of rules for forms, dates, frequencies, and processes. If you have nexus in a number of states, you may have to file dozens of tax returns monthly, if not more. That will demand a significant amount of your time and resources.

To manage it properly, you’ll need a partner or system that can help you file accurately and on time. This is critical to keeping your business compliant while avoiding underpayments, overpayments, late penalties and interest.

Using Automation Software (Correctly)

Sales tax automation is a powerful tool. Automation software provides very accurate tax rate calculations and taxability determinations for online transactions. And it can do so at staggering speed. You can also integrate it to your online store, seamlessly managing tax calculations and remittance on every transaction.

But some online sellers over-rely on it. Automation software tends to miss the complex yet crucial details that only a trained specialist can find.

For example, one of our clients once got an automated nexus assessment of $1 million. We were able to find that their actual liability was next to zero dollars.

If you take automation software at face value, it could quite literally cost you a million bucks.

Conclusion

Managing an ecommerce business is challenging. If you’re looking for ways to get compliant and reduce your liability, trying out a number of solutions is likely to yield success. And if you need more support and resources, it’s worth setting up a consultation with a sales tax consultant as a next step.

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