Now is the Best Time to Start an E-Commerce Business
Any e-commerce business aims to generate profits, not leads, sales, revenue, clients. It is in profits. You have a choice as to what to do with your profits for your family and others.
Unfortunately, 95% of e-commerce businesses fail within 5 years, 50% or more the first year, unless you are raising a lot of money, where profits may not be necessary. In fact, it was 14 years (58 quarters) before Amazon made a profit (that is an extreme exception).
Why will the Lack of Sales Tax Compliance Potential Result in Current Amazon Sellers Go Out of Business?
Cash flow is the oxygen needed to sustain your e-commerce business. Sales generate cash flow, and eventually, you will need profits to survive. There are plenty of successful e-commerce businesses with plenty of cash flow, but they still lose money each year. Eventually, if you cannot turn a profit, in most cases, the writing is on the wall, which will lead to going out of business.
If you are looking to start selling on Amazon or another third-party platform, where competition is a big concern, most will not financially stay in business if they are behind on sales tax.*
In the end, whether you are selling $1-million per month or $10K per month, losing 10% on 40%-60% of every sale will dramatically affect your cash flow and the life of your business. What’s worse is ignoring sales tax issues and dealing with sales tax liens, audits, and fraud charges, killing most e-commerce businesses long-term.
The Best Part for a New Seller concerning Sales Tax Compliance
New sellers are not behind 1-3 years with sales tax. You might be behind 2-4 months, which is very common, and that is economically tolerable as a seller.
This is great news for you as a new seller because most 3rd party sellers (an estimated 70-80%) are either not in compliance at all or are behind on collecting sales tax.
Yes, your competitors have a huge advantage in reviews, product listing ranking, and experience… but not complying with sales tax will eventually crush most Amazon sellers, even ones with millions in sales per year. Sales tax is a percentage of your sales, and the percentage owed grows as your sales grow.
The amount you owe in past sales tax, penalties, and interest will grow very quickly. It should be no surprise: the state with the largest population, California, will likely be responsible for most of your sales compared to other states, causing California to increase their efforts to get the money that is owed. This has resulted in California having a legal binding agreement with Amazon to obtain the list of sellers from 2017, including basic account information, such as your mailing address.
In 2019, more CPAs and Tax Firms were Better Educated About Sales Tax Compliance and Requirements.
Today, sales tax compliance is much clearer than two 3-4 years ago, especially since the U.S. Supreme Court Wayfair vs. South Dakota case from June 2018. This forced more CPAs and other tax professionals to quickly get up to speed with physical sales tax nexus created by inventory and economic nexus created by sales or transactions in several states.
Past Sellers Still Operate in Denial, hoping that Sales Tax Compliance will go away.
The group of sellers facing the biggest risk to their businesses is the ones who have been selling for 1, 2, 3+ years, who have never dealt with sales tax compliance, and are holding on to pure hope that someone, Amazon, or the federal government, will rescue their business. You may agree, and so do we, that sales tax compliance has been very burdensome for smaller sellers; but that does not change the rules’ current enforcement.
How Long Can Your E-Commerce Business Lose 10% on Every Sale (Where The Business has Sales Tax Nexus)?
The most seller cannot afford to give up 10% of every future sale (especially if they sell in a price competitive niche) to every state where they have sales tax nexus, nor do they have the cash flow to come up with 1, 2, 3+ years of back taxes, penalties or interest, plus service fees for compliance. In the end, many sellers are not able to financially afford to stay in the game, which opens great opportunities for the new sellers to have a big advantage when they comply soon after they are up and selling.
To make an accurate evaluation, this is the best time because most of you will be filing U.S. federal tax returns on either March or April 15th (or an extension). This means you need to have your books to determine a profit and loss for the previous year. If you are a foreign seller, you may not be filing a federal return (or you may be filing a protective U.S. return to help with treaty benefits with your country.
In either case, you should have your bookkeeping or e-commerce accounting up to date to make important decisions moving forward as a past seller. Your decision is likely to either get into compliance with sales tax or wind down the business and still get into compliance to avoid tax liens in the future, which will triple the expense and time to remove from your financial life.
Both options will be costly with support, service fees, past sales tax, penalties, and interest, plus past returns that will be required.
If you are looking to stay in business, continue selling on Amazon…you may need to utilize Amazon lending to get the cash for compliance. You may find it might take 1, 2, 3+ years to get back to break even, but if you are building a long-term brand, this may be the best decision.
If you are looking to close out the business, this too will be costly with compliance, past sales tax, service…and you will not have the future cash flow to use to pay these costs, but you will be putting the “cap” on the financial nightmare that is likely to follow you for years to come.
This leads to why inexperienced new sellers, who have access to better training and knowing what the rules are for sales tax compliance, may have the best advantage yet with starting their Amazon business. In the end, compliance will separate the “hobbies” from real businesses looking to grow and scale.
As a new seller, do you need support with future compliance, growing your brand, or winding down your business to put a “cap” on future “financial nightmare”?
Sales Tax System can help. Reach out to our team at [email protected] with your situation, and we will follow up with your best options for moving forward.