Six Points on Handling Taxes for your ECommerce Business
The e-commerce business is becoming more of an interest to governments, especially because many brick-and-mortar businesses have moved to the cloud. Various governments are looking at better ways to make e-commerce businesses pay taxes like brick-and-mortar business. You can handle tax related issues for your e-commerce business by taking note of the following:
1. What type of entity did you register your business as in your country?
Are you operating as a sole proprietorship, a partnership, or a corporation? How you are taxed in your country depends on how you structure the business. If you operate as a sole proprietorship, all its income will flow directly to you as personal income. In the US you will report the income as self-employment income, and you can also deduct business expenses. How you are taxed as an individual depends on your income tax bracket. If you are a partnership, you will report tax on your share of the partnership income. If you operate as a corporation, you need to look at what your tax laws say. The tax laws of some countries require a corporation to pay tax on its net income and withhold tax when distributing profits to shareholders (for example in Nigeria 10% withholding on dividends apply). In place of withholding on distributions, taxation can be based on the tax rates of your income tax bracket or be subject to reduced rates of taxation (for example in the United States, Qualified dividends are taxed at a lower rate other types of dividends are taxed at ordinary income rates). In other countries, you are allowed to credit taxes paid at the corporate level when distributions are made to you (for example in New Zealand, companies may attach an “imputation credit” for taxes already paid at the corporate level when distributing profits to shareholders). In some countries, you get the credit when paying personal income taxes (for example Canada).
2. Design a system that takes note of important compliance dates:
If you do your taxes yourself, you should design a calendar plan for paying your taxes and filing your tax returns. This ensures you don’t miss dates prescribed by your tax authorities for compliance which can lead to fines and penalties. If a professional does your taxes, they will design such a system for you. However, double check with them because tax compliance is your personal civil obligation.
3. Determine the location of your customers:
Are your products purchased by customers within your country or do you have a customer base outside the country the business is registered. You have to know your customer base. Why? Because a government will claim the right to tax you based on the level of economic connection you have with their jurisdiction. If you operate in a country where the federal system of government is practiced, look to see what taxes are imposed by the federal government, as well as the states or provinces and local councils.
4. Are most of your customers located abroad?
If this is the case, you need to update yourself on the changes in the international landscape as it relates to the e-commerce business. To get a head start, you can read my articles on what governments want from digital corporations and a snapshot of countries implementing a digital service tax on the revenues or income of digital corporations. In the end ,you may just find yourself liable to pay tax in a foreign country especially when your e-commerce store offers products that can be downloaded or digital goods.
5. Determine the type of tax you are likely going to pay:
You do this after determining the location of your customers. Usually, if your customers are located only within your country, you will pay corporate income tax if your business is registered as a company, or personal income tax if it is registered as a sole proprietorship or partnership. You may also find yourself paying state and local income taxes especially if your country is a federal system of government. After that, you need to check indirect taxes that apply to your business. Some indirect taxes include Value Added Tax (169 countries of the world currently implement a VAT. You may need to register and get VAT IDs to collect and pay VAT), and sales tax which is levied in the US (You need to register and get a sales tax permit to collect sales tax in the states your customers are located). Note that if your business is registered in the US, you are still obliged to collect sales tax as a remote seller in states you have no physical presence based on the Supreme Court decision in South Dakota and Wayfair.
6. Handle the administrative process:
The whole process of tax compliance may be overwhelming for you. At this point, you need to consider engaging a professional. If you have no money to do so, you can do the following: depending on the payment infrastructure you use, you can set the rate of indirect taxes to be collected on your product. The rate depends on where your customers are located. You can determine your customer’s location by setting the criteria (on your payment dashboard) as the billing address of your customers or the IP address of your customers. Ecwid’s online store allows you to do this. As for computing your taxable income, accounting software like QuickBooks can help you quickly prepare your monthly revenue and expenses. Once you takeout the expenses your tax law permits you to deduct, you arrive at your taxable income. When choosing accounting software research on what it can do for you.
Tax compliance can be a complicated part of running your e-commerce business. However, with professional help and/or the right processes for monitoring your revenue and expenses, the burden can be a lot lighter.
This article was inspired by a question on Quora about how to handle taxes for an e-commerce store.
Modupe O. OTOIDE is an International Tax Consultant and licensed attorney in the State of New York and Nigeria. She has a graduate degree in International Taxation from the New York University (NYU) School of Law. With her vast knowledge of regulatory and tax law, she has worked assiduously to structure commercial and corporate transactions to ensure profitability of business enterprises in various sectors of the Nigerian economy and the US. She currently works with a Fortune 500 company where she researches, develops, and executes international tax planning strategies for taxable and tax-free mergers and acquisitions,