037 - US Tax Compliance for Cross-Border E-Commerce

Welcome to another episode of Women Powering e-Commerce, where we dive into the world of entrepreneurship, particularly for women in e-commerce. Today, we'll shed light on a somewhat mysterious topic that affects many e-commerce businesses, especially those based outside the United States – US sales taxes and understanding economic nexus. If you're a Canadian entrepreneur or anyone grappling with US sales taxes, stay tuned as we demystify this complex subject.

Welcome to another episode of Women Powering e-Commerce, where we dive into the world of entrepreneurship, particularly for women in e-commerce. Today, we'll shed light on a somewhat mysterious topic that affects many e-commerce businesses, especially those based outside the United States – US sales taxes and understanding economic nexus. If you're a Canadian entrepreneur or anyone grappling with US sales taxes, stay tuned as we demystify this complex subject.

Encountering US Sales Taxes

My journey into the world of US sales taxes began with an unexpected notification from our e-commerce platform, Shopify. One morning, it informed us that we had reached something called "Nexus." At that moment, I realized I had a lot to learn about US taxes. The burning question was, "Do e-commerce businesses based in Canada need to pay US sales taxes when most of our sales occur in the US?" The answer, as I soon discovered, is both yes and no. The key to understanding this duality lies in the term "Nexus."

Understanding Economic Nexus

Economic Nexus is a concept that e-commerce entrepreneurs need to grasp. It means that if your business, located outside of a US state, conducts a certain amount of business within that state, you are obligated to collect sales taxes there. Each US state has its own specific rules for when economic nexus applies, making it a bit challenging to navigate. The roots of economic nexus trace back to a significant Supreme Court decision in 2018, the South Dakota vs. Wayfair case. Prior to this decision, only businesses with physical stores or offices in a state had to remit taxes. After the Wayfair case, online sellers were also required to collect sales taxes if they reached a certain threshold in a state, even without a physical presence.

The Consequences of Non-Compliance

One common question that arises is, "What if we don't comply?" While striving to be legally compliant, this question may cross your mind. If you fail to collect sales tax when you should, you may eventually have to pay it yourself. Moreover, if authorities discover the discrepancy, you could face extra fees, amounting to as much as 30% of the tax owed. Clearly, non-compliance is not a route to take.

Tracking Nexus

Determining when you've reached nexus can be complex, especially if you attempt to track it manually. However, many e-commerce platforms, including Shopify, can automatically track this for you. Alternatively, you can seek assistance from tax experts or accountants to manage this aspect. Additionally, various tax programs and online tools, such as Avalara, exist to streamline the process.

Compliance with US Sales Taxes

Once you discover you've reached nexus in a particular state, the next step is to ensure compliance. To start, you must identify the states where you need to pay taxes. Typically, if you make $100,000 in sales or conduct 200 transactions in a year in a particular state, tax obligations kick in. However, keep in mind that each state may have different thresholds and rules. Some states like Texas and California have higher thresholds, making it crucial to research the specific requirements for each state where you do business.

Paying Your Taxes

After identifying your tax obligations, you'll need to pay them. Each state has its own tax website with varying due dates and rules. Some states require quarterly payments, while others mandate monthly or yearly filings. To ensure accurate compliance, it's advisable to utilize tax professionals or software solutions like Avalara. Automating tax compliance not only improves accuracy but also reduces costs compared to hiring a tax professional.

Choosing the Right Tools

When it comes to selecting the right tools for tax compliance, there are several options available. For smaller to medium-sized e-commerce businesses, automated platforms like Avalara, TaxValet, or TaxJar can be excellent choices. These solutions can handle the complexities of tax compliance without the need for extensive human intervention. While automated platforms may lack the personalized touch of a tax professional, they efficiently get the job done.


In summary, my journey into the realm of US sales taxes taught me a valuable lesson: international e-commerce doesn't exempt you from tax obligations, especially if you reach economic nexus in various US states. It's essential to keep a close eye on your sales, explore the thresholds and rules of each state, and utilize the right tools or experts for compliance. While taxes may not be the most exciting topic, addressing them proactively ensures your business remains legally sound and financially secure.

Thank you for joining me on this episode, and I encourage you to explore further, rate, share, and subscribe to this podcast as we continue to empower women entrepreneurs in the e-commerce industry. Together, we can navigate the challenges and seize the opportunities in this dynamic landscape. See you next time!

Episode Transcription

037 - US Tax Compliance for Cross-Border E-Commerce


Welcome to this episode of Woman Powering e-Commerce. Join me every Tuesday and Thursday as I take you behind the scenes of my journey as a female e-commerce entrepreneur. Together we'll explore the highest the lows inspired you to take action and achieve your own business goals. So let's get started.


So today I want to talk about a topic that's somewhat mysterious. This is US sales taxes, especially understanding the US economic nexus. And if you know what I'm talking about, great, I'd love for you to share your experience, especially if you're Canadian and doing business in the US. And on my part, I'd like to share how I first encountered having to deal with US taxes. And I think it's a topic that definitely needs to be spoken about maybe a little bit more, just to demystify it, basically, because I had so many unanswered questions, and even today I'm still struggling and trying to figure how this all works out. Especially for the US, the taxes, if that's what you're doing already, is much more complex than here in Canada. So you need help. You need the right tools, you need the right professionals, and I definitely want to share my story and journey around that because if you can learn off of me then, that's great.


So the first time I encountered having to deal with US sales taxes in e-commerce is, first of all, through my Shopify platform. So we use Shopify as our e-commerce platform, and one morning it just notifies us that we had reached nexus. I wasn't sure what that meant, not a word I've really heard before, and I'll definitely give you a little bit more about that in a second. But I had no clue. I didn't know I had to pay US taxes because here it is, I'm in Canada. And yes, most of our sales are in the US. So my question was, when I saw that, do e-commerce businesses based in Canada need to pay sales taxes outside of their country? Or in this case, do we have to pay US sales taxes to the US, yes or no? So the short answer is, yes and no. So yeah, I know. You'll find out why. And I think the clue to the yes or no is in the word, nexus. So I quickly realized I had a lot of confusion and misconceptions about the US sales taxes.


And at the time, I think that was back in 2018, that's really when they changed a few things and then we had to really change the way we were doing e-commerce at the time. So when I first came into contact and understanding that, "Okay, I may have to pay taxes," my questions were, "Did this apply to all of the US? How can I know in advance that it's something I have to do?" Because when I said I came to my Shopify platform and they told me the platform told me that I had reached nexus in several states, that meant that I had to pay taxes in several states because I had reached a threshold. Basically. That's a little bit what nexus means. So yeah, a lot of questions came rushing in on my legal. I definitely... We try to do things in the right way and were best to be confirm ourselves, legally-wise. So I just wanted to make sure we were okay. And how could we be proactive if it's something that we'll have to do from now on?


So after doing some research online, I quickly realized I need some help with this, definitely, because it was definitely outside of what I was used to or I did not feel qualified to answer all my questions. So, part of the answer in this is no matter where you're based in the world, that's what I learned, if you sell in the US and reach nexus in certain states, we'll go over that term again, but it means a certain threshold, then yes, you owe sales taxes to the US government. Now, a little bit about the basics of economic nexus and what I learned from it. And we call it economic nexus because there's also something called, I think, physical nexus. If you're based in the US and you sell... You actually have a physical store in the US, then if you reach a certain threshold, then that's a whole other story. To be honest, I'm not going to go into that. Today we're going to really concentrate on economic nexus. That's my point.


So economic nexus is when a business from outside a US state has to collect sales taxes in that state because they do a certain amount of business there. So each US state has its own set of rules for when this applies. So that's a little bit when it comes a little bit more challenging. I did a little bit of research just to understand the backstory because things actually changed in 2018. All of a sudden we were, as an e-commerce business, required to give out some taxes back to the US. So I did a little bit of a backstory. So it is actually pretty new. So the economic nexus idea started getting attention after a big core decision on June of 2018 in the South Dakota versus Wayfair case. And before this, the only businesses that had to remit taxes had an actual store or office in a state. But after this case happened, states could make online sellers from outside the state, or I could extend this to other countries, collect sales taxes if they sold a lot there, even if they didn't have a store in that state.


So that is what introduced the economic nexus rule. It doesn't really change anything for us, but having a little bit of a backstory kind of helps understand why all of a sudden we had to pay taxes in 2018. So my question was... Well, I believe that was true, but some part of me was asking myself, "Well, what if we don't collect? What happens? They can't really come to us." I'm just, disclaimer, I really am looking to become legal and make sure I'm compliant in all places. But I'm just saying, it's a question that popped up. So what if we don't comply? What are the consequences? So if you didn't collect sales tax when you should have, you'll end up eventually having to pay yourself. Plus of course, that is if they find out, but don't play your cards that way, please. At least I don't. Plus, they can charge you extra fees, which can be around I think 30% of the amount you owe. So that's big, especially if it accumulates over the years. You do not want to play that way.


The other question I had was, "Okay, well great, how do you know you reached nexus?" So this part can actually be a little bit complex, especially if you try to track that manually, which is not impossible, but I mean, I would not recommend that. I would not do it for myself. So you need to keep an eye on the sales and know when selling to other states means that you have to register and pay taxes there. But your e-commerce platform may track it for you automatically, like it did with Shopify. And that's how I learned about it. That can be done for you. Platforms such as Shopify can help you track it. You could also get help from a tax expert or an accountant to which they can watch over this for you. Also, some tax programs and online selling tools can keep track of these details for you, and that's exactly what we use. Like a system like Avalara, definitely that's been a huge help for us for where we're at in our business right now.


More about the softwares and other tools later, but that's what we use right now to help us. So how do you comply? That's another great question that once you're ready to actually set foot and register for taxes in the US in certain states, how do you comply? So first of all, you have to find out where you need to pay taxes. And usually if you make $100,000 in sales or have I think 200 transactions in a year, you need to pay. But it's not like this for all states. If you remember, I said, not all states are the same. They don't have all the same rules. So you have to go... It's on Google, you can Google it, find what are the different set of rules per state. I would say the majority, it's $100 in sales or 200 transactions in a year for a specific state. But in places like Texas and California, it's when you make 500k, I think, in those states.


So once you figure out which state you reach nexus and now you owe taxes, well then next step is pay your taxes. So you have to check each state's tax website to learn how and when to pay. Different states have different due dates and rules, so some you'll need to pay quarterly, other yearly, other monthly. So you have to make sure you're all set up in that area. And I would not recommend doing this on your own. Use a tax professional or software to help you with this. And like I said, we use Avalara, they just do it for you. I think they do worldwide as well, not just the US. It's a software that automates tax compliance. So that's what's really great about it. It helps improve accuracy because if you're going to do that manually and try to do it on your own, the chances you're going to be accurate are not really good, and it's a really good way of being accurate and compliant, all the while not having to pay for a tax professional.


So you're just paying the software, so it definitely reduces your costs. So there are pros and cons for using that platform. From using it and from my experience, I can see that it is an automated platform, and it's great for us because we're not at the point of hiring an accountant to do our US taxes only yet. So we are sticking with what seems to be the best option up until now. But the service will not be, of course, as personalized. They do have some customer support and I've had great service, but after several times of complaining sometimes because I was always forwarded an automated response from their customer support team. But if you stick to fighting over what you really need and having your questions answered, then it does the job. It really does the job.


And I looked at all kinds of platforms and I haven't looked everywhere, but from my research, definitely the best option for small, medium, e-commerce business. Then if you're going to get a little bit bigger, then there's... Of course, you can find an accountant, a tax professional. Or there are other services and softwares like TaxValet, TaxJar, those are also good options as well. All right, so to wrap this up, after my Shopify store, hidden nexus in the US, I definitely learned a crucial lesson. International e-commerce doesn't protect you from US sales taxes or from paying taxes in other countries, of course, if you've reached a certain point. So it's essential to track sales and get tools or expert help, like Avalara for example, to navigate this landscape. So I'm now much more aware of tax obligations when selling abroad, because they can definitely sneak up on you.


So I'm really grateful for platforms like Shopify that introduced me to the taxes. I'm very happy that they did because I don't know what I know today that I had to pay taxes. Eventually, I'd probably do my own research, but it was a really good tool to let me know about the nexus and teach me about that. They have great articles about it too, and I'm very grateful for tools like Avalara too. Even if taxes are not sexy and it's not like a topic we love talking about, but it's definitely necessary and we need to address those topics once in a while, right? So if you like this episode, take a moment, rate, share, subscribe to the podcast if you like what you heard today, and I value your support in allowing me to help more women entrepreneurs in the e-commerce business.


Thank you for being part of this journey with me. I hope you gained valuable insights and inspiration today to keep growing and taking action towards your goals. Please follow me on social media. Also follow us on your favorite podcast platform to get notifications every time a new episode is uploaded. See you next time.