Ecommerce startups often pour all their energy into finding the right product, perfecting marketing, and chasing growth. Sometimes success happens overnight—and before you know it, BANG: an unexpected tax bill appears that was never even considered.
Below are the top five tax mistakes we see ecommerce startups make—and how to avoid them.
Mistake 1: Not Understanding Sales Tax Nexus and Collection Obligations
Nearly everyone knows they need to pay income tax on their profits in the U.S., but sales tax? Not so much.
Selling online to customers across the country introduces new complexities when it comes to sales tax collection. The two most common mistakes are:
- Collecting sales tax in states where you aren’t required, or
- Ignoring sales tax nexus rules altogether.
The key to avoiding these mistakes is understanding when you’re required to register for sales tax; this is determined by sales tax nexus.
There are two main types to consider:
Physical Nexus
- Having a business office or physical location
- Employees working in a state
- Storing goods in a warehouse or third-party logistics (3PL) center
Economic Nexus
- A threshold set by each state: based on sales revenue, number of transactions, or both.
- Once you reach it, you must register and collect sales tax in that state.
Tip: Determine exactly where you have nexus and only register in those states. Never collect sales tax unless you have an active sales tax account for that state.
Mistake 2: Mixing Business and Personal Finances (and Poor Record-Keeping)
It’s quick and easy to form an LLC or corporation and launch a new ecommerce store overnight. However, many business owners become caught up in the excitement and overlook an essential step: setting up separate business accounts.
Instead, they use personal credit cards and bank accounts, making bookkeeping a nightmare later on.
Solution:
From day one, keep your business and personal finances completely separate.
Open a dedicated business bank account and business credit card.
This simple habit will save you hours of frustration and potential tax issues later.
Mistake 3: Never Re-Evaluate Your Business Structure
Starting with a single-member LLC is often the most straightforward and best approach for a new business.
However, as your company grows, it’s vital to reassess your structure with the help of a tax advisor.
At a certain level of profit or complexity, it may make sense to be taxed as an S-Corp or C-Corp. The proper structure depends on your unique circumstances, but reviewing it early can lead to significant tax savings and liability protection in the future.
Solution:
Schedule a review with a tax advisor annually, or whenever your business undergoes significant changes.
Mistake 4: Failing to Budget for Monthly and Quarterly Sales Tax Payments
As your business expands, your state sales tax obligations will multiply.
Unlike federal income taxes, sales tax isn’t always paid annually; each state sets its own filing frequency, which can be monthly, quarterly, or annual.
Sales tax can either be included in your product’s listed price or (more commonly) added at checkout based on the customer’s location. Either way, that tax belongs to the state, not your revenue.
There’s nothing worse than reaching the end of a filing period and realizing you don’t have enough cash set aside to remit what you owe, triggering penalties and interest.
Solution:
- Track your sales tax collections diligently.
- Deposit collected tax into a separate account to avoid accidentally spending it.
- Calendar your due dates to stay compliant in each state.
Mistake 5: Taking a ‘Tax at April 15’ Mind-Set Instead of Year-Round Planning
Many new ecommerce owners treat tax as a once-a-year event, something to worry about when deadlines loom. This mindset can create serious problems.
Ecommerce revenue fluctuates throughout the year due to seasonality, ad campaigns, and product launches. If you only think about taxes at year-end, you risk missing opportunities, unexpected liabilities, and cash-flow strain.
Solution:
- Review your tax position quarterly and your sales tax nexus monthly.
- Plan for changes in sales patterns and adjust state thresholds accordingly.
- Treat tax planning as an ongoing business process, not a once-a-year chore.
Final Takeaway
Taxes may not be the most exciting part of running an ecommerce business, but ignoring them can undo all your hard work.
By tracking your nexus, maintaining accurate records, selecting the proper structure, budgeting for payments, and planning year-round, you can stay compliant and profitable, no nasty surprises required.
Image by wayhomestudio on Freepik
