Most successful e-commerce businesses face financial growing pains as they navigate periods of growth. Your business is likely no different. To facilitate growth of your e-commerce business, you need timely, quality financial reporting to facilitate data-driven decision making. Your growing business also requires additional sales tax compliance planning, understanding nexus to ensure the proper sales tax filings as it establishes nexus in new states. Fully understanding the needs of a growing e-commerce business can help you chart the path to success for your business.
Data-Driven Decision Making Requires Quality Reporting
How do your business’s financial reports drive your decision making? Are you able to see your true revenue, returns, discounts, and credit card processing fees versus the net cash deposits that hit your bank account from Shopify or Amazon? Can you tell which sales channels net the highest margins? How many months of inventory do you have on hand as you ramp up for your next marketing push? Do you know your true cost per product?
With help from experts familiar with your industry and business accounting, answers to these questions can be readily available for ongoing strategic planning and execution. You might be able to follow your gut for the initial ramp-up of your business but as your sales and costs grow and become more complex, this detailed information becomes crucial to your success. And if your long-term strategic plan includes a sale of the business, having quality accrual reporting in place will drastically improve the efficiency of your sell-side diligence and assist with maximizing your deal value.
We recommend utilizing the following best practices in your monthly and quarterly reporting:
- Customized chart of accounts and reporting segments for multiple sales channels and gross versus net revenue reporting
- Analyze and calculate landed cost for Inventory and Cost of Goods Sold to understand true product margins
- Utilize technology to maximize data integration from your shopping cart to your financial reporting
- Reconciliation of revenue to sales channel cash receipts
- Accurate reporting of orders paid versus orders shipped and understanding the financial impact of backordered items
With custom management reports, e-commerce-specific dashboard reporting with key performance indicators, and cash flow forecasting to manage growth, you’re able to measure whether you are on target with your desired trajectory.
Potential Sales Tax Nexus Pitfalls Grow as Sales Increase
As the sales of your business grow, the list of states where you’ll be required to collect and remit sales tax likely also grows, due to the economic nexus rules resulting from the Supreme Court’s June 2018 Wayfair decision. Thus, once your sales are over a certain dollar volume threshold in a state, you’ll likely be required to collect and remit sales tax in that state. Most states have an economic nexus threshold of $100,000 of gross sales in the state over a 12-month period. As soon as you exceed that threshold of gross sales, you’ll be required to collect and remit sales tax in that state.
Failing to begin the collection and filing process in a timely manner can be quite costly as businesses are responsible for sales taxes they fail to collect. With failure to file penalties up to 25%, simply not filing is not an option. Thus, proactive sales tax reporting is key to continued e-commerce growth.
Typical best practices for e-commerce clients who want to be proactive in managing their sales tax footprint include the following:
- Review of your sales tax nexus footprint quarterly
- Implementing sales tax determination software and plugging in with your Enterprise Resource Planning (ERP)
- Register to collect sales tax as soon as you trip the nexus thresholds (usually $100,000 or 200 separate transactions)
- If you’ve established nexus and have delayed your registration, consult with a sales tax expert to determine if a Voluntary Disclosure Program may be beneficial to you.
We Can Help
Our Elliott Davis State and Local Tax Practice has a team of dedicated sales and use tax consultants specializing in sales tax nexus and reporting for e-commerce businesses. Please contact us for more information about how to make your e-commerce thrive.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.