This article was updated June 15, 2022
Technological innovations continue to shape the future of e-commerce, especially in data infrastructure and cloud computing for businesses of all sizes. How can you enhance your operations, protect sensitive data, and develop strategic plans to stay competitive and grow?
Strategies to satisfy customers and generate business are key, but prioritizing backend operations of your platform that account for major tax, finance, and cybersecurity implications can also help drive your success.
E-commerce companies can take these steps to face common challenges:
- Use Data to Drive Business Decisions
- Manage Your Tax Liability
- Focus on Big-Picture Strategies
- Implement Tactical Guidance
- Take Care of Your Customers
1. Use Data to Drive Business Decisions
Before you can take full advantage of your technology, you should assess how you can enhance your current system or identify and implement a new one if necessary.
Automating processes can provide a significant advantage in driving strategic decisions and establishing long-term goals based on business trends. Employing multiple enterprise resource platforms (ERPs) can help:
- Reduce your software challenges
- Eliminate manual reporting processes
- Expand the use of data for planning and decision making
ERPs can provide a comprehensive view of all areas of your business in real-time with insights to planning, budgeting, forecasting, consolidations, reporting, project management, and inventory control and management.
Transforming spreadsheet-based processes into a streamlined set of dashboards and reporting tools using applications can leverage predictive analytics to quickly identify key performance indicators.
Systems can also be customized and scaled to support your company’s needs as they change, allowing you to monitor and adapt processes, improve user experience and brand loyalty, and tailor products and experiences to meet customer demand and reporting needs.
To learn more, read Unify Your E-Commerce Business with NetSuite Cloud-Based Solutions or Determine if SuiteCommerce Is Right for Your Business.
2. Manage Your Tax Liability
Most e-commerce companies provide goods and services to customers in multiple US and international tax jurisdictions. Local tax laws constantly change, but it can prove difficult to stay ahead of evolving legislation.
E-commerce companies can move quickly from reporting tax losses to reporting significant taxable income. It’s important to manage your exposure from state and local income and franchise tax filings as you grow by managing your tax base complexities, apportionment planning, and structuring.
Review your filing methodologies and employ new planning and restructuring to help:
- Drive down risks of penalties and interests
- Keep filing processes seamless
- Bring down operation costs that you can reinvest into the company
State and Local Tax and Wayfair
A large tax footprint can expose your business to state and local tax issues in varying jurisdictions, including economic nexus statutes in all states that impose a sales tax except Missouri.
The 2018 South Dakota v. Wayfair, Inc., ruling introduced the concept of economic nexus. If a business sells a certain dollar value, number of items, or completes a certain number of transactions within a tax jurisdiction, the business is considered to have nexus in that jurisdiction. This means taxes will be collected on transactions made in that location.
Thirty-two countries follow this rule as of July 1, 2021. When your business expands to global markets, the countries you sell goods in will look to you to collect taxes and duties on those transactions.
Countries in the European Union as well as the United Kingdom have a zero-dollar threshold; if you sell $1 in these locations, you have nexus in that jurisdiction and are required to pay taxes there, subject to some transaction value thresholds.
Even if you’re familiar with filing requirements and collect and remit sales tax, determining exacting tax liability can be a demanding process unique to every company.
To learn more, read State & Local Tax Considerations for E-Commerce.
Generally, local business taxes are a flat minimum. However, certain jurisdictions with significant consumer markets calculate their business licenses based on the company’s gross receipts, net income, or payroll. Notable examples include Cincinnati; Los Angeles; San Francisco; and Fairfax County, Virginia.
This can pose barriers for uninformed businesses. Unfortunately, a jurisdiction’s ordinance often lacks guidance on how an e-commerce company would calculate its business license tax.
For example, does the tax apply to a business that doesn’t have an office, warehouse, or fulfillment center in the locality? Also, does the local business tax apply to activities the business performed within and outside of the jurisdiction?
To address your local tax obligations:
- Determine what your local business license allows
- Assess opportunities to mitigate your business license obligations
- Prepare for your business license filing
Companies that hold inventory in multiple states to address shipping costs and customer needs could face personal property tax on inventory in certain states. Property tax rates can reach as high as 3%.
On the lien date, these states often provide an exemption for certain inventory sold to customers in states other than the inventory’s location. Maintaining property tax obligations and negotiating this benefit with the tax authorities can help maintain compliance.
States vary in how they tax businesses, such as how they impose taxes for gross receipts, capital stock, and net income.
There can also be differences for computing tax based on the activities of a single entity or group of entities, such as a unitary combined group.
How you structure your business can help create efficiencies for state income and franchise tax, which vary based on state.