The most common questions I receive from online merchants pertain to sales tax collection and business expenses.
In the offline world, sales taxes are collected whenever physical - “tangible” – property is exchanged. The sales tax amount is determined by the jurisdiction in which you do business. For example, if you run a store in Chicago, Illinois, you are required to collect 9.5% sales tax.
If you provide a service such as copy-editing or styling you are not required to collect sales tax.
There is a misconception that online sales are free of sales tax. That is not completely accurate. You must collect and remit sales tax if you have “nexus” – or a connection – to that state. Each state has its own rules for determining nexus, so sales tax collection has the potential to become complicated.
You may have nexus in a state if you sell a product to someone in that state AND:
- Live in that state,
- Have an employee in that state,
- Travel to that state for business purposes (including for trade shows or conventions), or
- Have a store, warehouse, or distribution center in that state
The most common scenario is that you live in the same state as someone to whom you sell a product. In that case, you are required to collect sales tax. If you sell products to customers in other states, no sales tax is required to be collected.
Business Deductions for eCommerce
Business owners are generally allowed deductions for ordinary and necessary expenses. This includes things like advertising, supplies, and utilities. To see a complete list, see Schedule C, Part II of the Form 1040.
In addition to these general business expenses, online business owners may be able to deduct fees associated with e-commerce, including:
- Listing fees or commissions paid to online retail agents
- PayPal fees
- Credit Card transaction fees
- Domain name purchase and registration, website hosting, and other costs associated with running an online store
What if an expense is both business and personal, like the cost associated with your internet connection? A portion of this expense can be deducted if you use a “reasonable method” to divide personal from business use. For example, if you generally spend 8 hours a day online for business and 2 hours online for personal reasons, you can allocate 80% of the cost of your internet connection to your business.
Good Recordkeeping is essential in claiming these deductions, so be sure to document your purchases! If you don’t have a separate bank account for your business, be sure to review bank statements monthly to track which expenses are business-related and which are personal.
Please reach out to me with any questions! You can contact me on my site or in the comments below.
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