Digital Tax Planning: Navigating Online Sales and E-Commerce Taxation

Businesses that have been around for a while have a handle on the tax dynamic for in-store sales, but online business taxes can be more complex and challenging to navigate. Rates, thresholds, and rules differ by state and change regularly. That’s why a well-thought-out strategy is vital to ensure the success of your business as you go digital. An exceptionally fantastic fact about Tax Planning for Small Businesses.

Getting your sales tax right can be daunting, but it’s necessary for businesses that want to scale efficiently and avoid under or overcharging customers. Using the right technology makes compliance more accessible and provides the flexibility you need to grow and compete in today’s e-commerce landscape.

As you work toward compliance, getting the guidance of a trusted adviser is essential. A CPA or other accounting professional familiar with the challenges of economic nexus laws will help you understand your nexus status and the impact on your sales tax collection obligations. You may also consider a solution provider specializing in assisting businesses to comply with economic nexus laws. These providers can help you with your assessment and provide a solution to manage your nexus requirements through an automated platform.

The first step in your digital transformation should be identifying the states where you have a physical presence. This includes locations where you ship goods or services, such as a warehouse, office, storefront, or fulfillment center. Then, determine the nexus criteria used by each state. In most cases, it’s based on the total revenue generated in the state, which can be calculated through various methods. The next step is to identify how your nexus status will impact your business operations and what steps you need to take to comply.

Suppose your nexus status triggers sales tax collection obligations. In that case, you’ll need to ensure your software solution can accommodate your shipping and handling policies for all states where you have a physical presence. It should also support your exemption certificate management requirements. If you can’t accommodate exempt sales, your customers will likely go elsewhere. Luckily, some solutions will integrate with your ecommerce platform and allow you to collect, validate, and manage exemption certificates in a streamlined way that supports compliance.

Finally, your ecommerce solution should be capable of identifying the correct sales tax rates to apply to each order, even as you add new products and services. The ability to do this automatically eliminates manual errors and saves time and money. Avalara AvaTax uses geolocation, not ZIP codes, to determine appropriate tax rates and enables you to charge the right amounts for each product or service.

Including tax planning early in your digital transformation process — rather than trying to address it after the fact — will save you valuable resources and mitigate disruption from future audits. Learn how to do so by downloading our guide, Digital Tax Planning: Navigating Online Sales and E-Commerce Taxation.

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