5 Tax Savings Tips for Those Selling Online
*Disclaimer: This blog applies to U.S. taxes and should be used for informational purposes only.
Although selling online can be more cost-effective than needing to pay overhead for a brick and mortar store, it doesn’t come without its tax requirements. Especially when you begin selling products across multiple states in the U.S., it’s important to know what taxes may apply to you and where you can potentially save money.
Tip #1: Understand Sales Tax in your State
First, consider the state laws for where you are doing business. If you have a physical location, you will be required to collect sales tax. A physical presence is defined as “some business facility” in that state. This could mean a storefront, an office or a warehouse. Most laws state that if you have this physical location, you will be required to collect and submit sales taxes in that state. Of course, if you aren’t sure whether the second bedroom in your condo counts as an “office,” check with a local CPA or your state’s specific tax laws.
Tip #2: Research Your Distribution Channels
If you are selling across multiple states without a distribution channel (such as Etsy or Amazon), then you don’t need to worry about this. However, if you are working with a large, online company that helps you distribute your products, you may need to collect additional sales taxes. According to Intuit Turbotax, this type of relationship would “typically require you to collect sales tax from customers in other areas where [the distributor] does business.” To find out more, review the partnership agreement you have with your distribution channel.
Tip #3: Deduct Business Losses from Online Sales
As long as your business is officially registered per your state’s business license requirements and is not considered a hobby (more on that in a moment), you can deduct business expenses such as the cost of materials, advertising and even shipping. A certified public accountant can determine the exact deduction that it owes to you, but in general, if you are experiencing a business loss from your sales because of these expenses, you can deduct them to reduce your taxable income.
Tip #4: Keep Detailed Business Records for the IRS
You probably started a business because you wanted to make money. And although not every year may be profitable, as long as you are making a profit in three out of five consecutive years, your business is classified as “successful” by the IRS. If you do not meet this threshold, then your business becomes – by IRS standards – a hobby. Hobbies are not eligible for tax deductions, nor do they receive the same tax benefits as businesses. It’s important to keep detailed financial records and receipts as well as have a formalized business plan in order to avoid an IRS audit and the classification as “hobby” by the IRS.
Tip #5: Pass on Sales and Shipping Costs to your Customers
Your customers are absolutely expecting a sales tax and will likely not be surprised (although maybe a little bummed) by an additional shipping fee when they shop online. Be sure to accurately calculate your shipping costs and sales tax to each customer. On the flip side, a benefit of doing this could include special promotions throughout the year to boost sales. For example, you can promote free shipping during the month of May (Small Business Month) as a thank you to customers for shopping small.
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