E-commerce has provided opportunities for business to enter the market place. This newer model of doing business has eliminated barriers and connected consumers and companies worldwide. As traditional boundaries such as location have disappeared, and as e-businesses have created new revenue models that involve service-by-subscription, new challenges have arisen for these businesses.
Here are two of the most prominent such challenges E-commerce business are facing.
Collecting Sales Tax
This is by far the biggest issue facing e-commerce merchants and their accountants and bookkeepers. For a traditional brick-and-mortar business, there are clear jurisdictions for sales-tax liability that are defined by its physical location: city, county, state, federal. As e-commerce expands a business’ reach, though, it also expands potential sales-tax exposure to an almost overwhelming degree. There has been recent changes and legislation that further complicate this issue.
As businesses confront the issue of e-commerce and sales-tax liability, state and federal courts have had a hard time defining what it means for a company to have a nexus (sufficient physical presence), in any given state for sales tax to apply. Some states have redrafted their parameters defining what economic nexus means, these states are arguing that any company achieving a certain level of online sales in a their state should have to pay sales taxes, even if the company has no physical presence in that state and in many cases may have never set foot in the state.
Amazon announced in 2017 “it will start collecting sales taxes on purchases in the last four states where it wasn’t doing so,” according to CNN. Meanwhile, a new state law in South Dakota is trying to get the U.S. Supreme Court to settle the issue at a federal level. South Dakota is indicating their immediate intent to require collection of sales taxes by remote sellers, and permitting the most expeditious possible review of the constitutionality of this law.
Proper Accounting for Subscription Services
E-commerce has also sparked a rise in the number of businesses that offer services by subscription. Companies that don’t understand the proper accounting regulations for this type of business model face various pitfalls.
For example, let’s assume you start a business assisting those who wanted to increase their presence on social media and gain more followers. If you collect this fee at the beginning of the month, that money doesn’t legally belong to you until the service has been rendered — in other words, at the end of the month. You need to properly account for this type of revenue to recognize your income properly, also resulting in proper business valuation. If you sell one-year subscriptions, you have to recognize your revenue periodically over the subscription period, when applying this subscription to revenue.
Businesses Need Stay in Compliance (More than ever)
With the regulations and complexities governing e-commerce business, and the potential penalties for noncompliance, it is more important than ever for any company that does business over the Internet to have capable bookkeeping and back-office support. Make sure you’re covered.