Growing with Magento? Here are 4 signs you need to rethink sales tax.
- Industry Insights
- November 15, 2017 | Avalara
What’s new with your business on the Magento ecommerce platform? If it’s any of the below, then congratulations are undoubtedly in order. And, while we certainly don’t want to put a damper on the wrap party for your latest launch, we do want to pipe in with a quick tax nugget: New business growth often leads to new sales and use tax obligations.
When you’re busy growing and promoting your business using Magento, it’s easy for such obligations (known as nexus) to sneak up on you. But never fear. We’re here to help you better understand the potential sales tax implications of four of the most common — and exciting — ways your ecommerce business may be expanding.
If you’ve recently or will soon engage in similar activities, it’s a sure sign it’s time to rethink what nexus entails for your own Magento business.
Adding new products to your lineup? They may be taxed differently from the items or services you already provide. Updating products, such as altering the material makeup, may change the product taxability rules as well.
Say you’re a jewelry retailer who wants to add clothing accessories to your product mix. In some states, individual clothing items priced below a certain threshold are not taxable, but those priced above the threshold are. In other states, all clothing is taxable.
There are many nuances in taxability rules from state to state, and the more products you sell the more complexity you encounter — especially given there are more than 16,000 tax jurisdictions in the U.S. alone.
New sales channels
Are you a manufacturer? Things are even more complex for you. For years and years, you sold exclusively to resellers — transactions on which there is no sales tax because you’re not selling to the end user, i.e., the final consumer. But with a Magento web store, you now sell directly to that very audience, giving you a mix of customers — those who do not pay sales tax and those who do.
As a result, not only have your sales grown, your sales tax complexity has too. You now need to be mindful of who to tax and who to exempt on every sale.
Similarly, if you’re an online retailer setting up your first brick-and-mortar location, you’ll have new sales tax issues to deal with, such as accounting for sales tax refunds when someone returns an online order in the store. These and a slew of other scenarios are best addressed in the planning stages to help minimize tax missteps from the outset.
New go-to-market efforts
You’re likely planning to make sure news about what’s new with your business travels fast. Say you’re an Illinois company planning to attend a New York trade show and launch an online advertising program in both New York and New Jersey. If you sell your products or services at that trade show, you’ll create nexus for yourself in New York. Moving forward, you’ll need to collect sales tax on all transactions to New Yorkers, and that includes online sales.
Both New York and New Jersey are two of about 20 states with click-through nexus laws. So if those online ads lead to a certain amount of sales and commissions, you’re further expanding your nexus into New Jersey. (New York nexus was already established with the trade show sales.)
There are other ways to create nexus, too, which is why it’s so important to conduct regular nexus studies — particularly every time your business tries something new.
As your company grows, you make it a point to maintain the same high level of customer service you’ve had from the start. To do so — as well as to expedite order delivery — you may strike up a deal with a fulfillment center or a drop shipper. The former would store your inventory for you, packing and shipping products when a new order arrives. The latter would manage its own inventory, packing and shipping products you sell but don’t actually stock. Both can create new sales tax obligations for you.
Fulfillment centers, for example, may disperse your inventory to various warehouses across the U.S. If you store inventory in a state, even through a third party, you typically have nexus in that state. With drop shipping, both your own nexus and that of the drop shipper’s may come into play.
Remember, if it’s new to your business, it may be creating new nexus for you. Activities like expanding your product line, advertising online, contracting with a drop shipper, and more can all have a positive impact on your bottom line. But if you don’t understand how they affect your sales tax obligations, the negative impact can be staggering.
An audit, for example, costs an average of $100,000, according to Wakefield Research. Just think if multiple states audit you in the same year, each fining you for not correctly identifying and/or managing your nexus responsibilities. It’s simply too much to risk. That’s why it’s better to address nexus as part of every growth initiative. If you plan ahead, you can oftentimes minimize trouble with nexus and audits. If not, you may soon realize that your business growth came at too high a price.
How do you handle sales tax while conducting ecommerce on Magento?
Get your free copy of the Evolving for Growth whitepaper for more tips on evolving — and automating — your tax compliance strategy as you grow into new areas with Magento.