Basics of E-commerce Finance with Guest, Leah Trudell of Max Profit Bookkeeping

I asked Leah some of the most common questions that I run into, or that clients as me, about business finance. Here is what she had to say:

My name is Leah Trudell, owner of Max Profit Bookkeeping. We provide remote accounting & bookkeeping services for small businesses, including e-commerce, all over the U.S. We help them gain clarity on their finances without the stress, so they can focus on selling more product/services. 

What are the basics of sales tax for ecommerce:

Sales Tax Nexus: The connection between a seller and its local jurisdiction (usually a state), which requires the seller to register, collect and pay sales tax. Most common connections are physical location & economic.

Physical nexus includes where you conduct business from (including where remote employees are), where inventory is kept, and can also include renting or owning property for business purposes.

Economic nexus varies by state. Many states use a threshold of $100,000 in taxable sales or 200 separate sales transactions. Some states have higher thresholds, and several states base economic nexus on sales revenue only. Additionally, some states include shipping fees paid as part of the sales totals. Also, in addition to the state sales tax, there may be an added county sales tax depending on what city the sale occurs in.

You will need to register your business in states where you have sales tax nexus. This is typically through the Department of Revenue for that state.

Marketplace vs. Platform: In states where Marketplace Facilitator Laws have been enacted, the marketplace is required to collect & remit sales tax on behalf of the seller. But in certain states, local taxes are not included in this. On platforms, the seller is required to collect & remit sales tax.

Bottom line: If you consistently only sell in certain states, it may be fine to collect & remit sales tax yourself. You can do this online with most states. But if your sales activity increases and you find you’re expanding into other states, you may want to look into sales tax applications, which can typically also register your business in new states for an additional fee. Every state & county is different & changes, which keeps it complex.

So what about if my business is registered in another state, like California, but I am moving to Florida?

Nexus is not solely determined on being registered in that state. Other contributing factors are having a physical presence, employees, holding inventory or making sales within that state. And whether you are selling on a marketplace or platform. It’s best to speak to a State and Local Tax (SALT) consultant in the applicable states.

How do you handle sales from multiple channels?

See above, under Basics of sales tax for ecommerce.

Best tax applications for Shopify? 

Tax Jar, Avalara & Taxify by Sovos are the big ones, that work well with ecommerce, including digital products. Typically, these applications will also send the seller an email notification if they are getting close to nexus in a new state. And can also help with registration in that state, for an additional fee. 

Do people have to charge sales tax on digital products? 

This varies in each state. Some states charge sales tax and others do not. If you use a sales tax application, this will be monitored by them.

Is Use Tax still a thing? Or has that changed?

Yes, Use Tax is alive and well. It’s the other side of sales tax. Sales tax is the responsibility of the seller, while use tax is the responsibility of the buyer, when sales tax is not charged. The problem is that it’s very hard for states and counties to monitor & therefore collect. This is a big reason why marketplaces started having to collect & remit sales tax.

When should someone sign up for QuickBooks?

This depends on the complexity of what you are trying to keep track of. You need to be able to track all funds coming in and going out, as well as the quantity & value of your inventory. If this involves multiple sales channels, payment processors, sales tax nexus locations, inventory locations and/or multiple checking/credit card and/or loan accounts, it would be best to utilize accounting software like Quickbooks. If you only need to keep track of a handful of these, an excel spreadsheet or google sheet may suffice as a temporary solution. 

Is it okay to use their personal account?

When first starting out, it’s understood (by your accountant & the IRS) that you’re not going to create a business entity right out the gate. You need time to grow the business. Because of this, it’s okay to use your personal accounts. That said, it’s recommended you open a separate personal checking account for all your side hustle transactions. And if needed, using a personal credit card solely for business transactions. This will help keep things separated properly for ease of tracking throughout the year & reporting to your accountant during tax time. You would report your side hustle as self-employed. Be sure to keep track of your income, but also related expenses. Also, make sure to set aside 25-30% of what you make to pay taxes.

When meeting with your accountant each year, talk with them to determine if it’s time to stop reporting as self-employed and move to creating a separate business entity. Revenue, what product/service you provide and what state you’re in all play a part in this.

Should I create a DBA (Doing Business As) if I’m just starting out?

First of all, it’s recommended you speak with your state Department of Revenue office to determine if creating a DBA is required or not. If it’s not, but you’re considering it anyway here are some pros and cons. It’s less expensive than creating a business entity. It keeps your personal information private. And it’s great for branding and marketing. But keep in mind, creating a DBA doesn’t protect you from someone else using that same name nor does it provide any legal protection/separation for you personally. You’ll also want to contact your accountant to see what they advise, as every state is different.

Can you help me with my business bookkeeping? 

We love helping small business owners, including e-commerce, truly understand their finances by speaking THEIR language, not ours. We track income & expenses via all sales channels & payment processors. And help with inventory tracking, sales tax management, payroll, accounts payable, accounts receivable, cleanups, catchups, advisory services and more. Email or call us for a free consultation: Leah@MaxProfitBookkeeping.com or (360) 888-9717.