Sales tax and inventory management
- Apr 19, 2017 | Laura McCamy
As your ecommerce business expands, inventory management becomes more important to your success. Having the right products in stock in the right locations will increase your ratings, get shoppers to click the "buy" button, and keep the cash flowing into your online store.
As you piece together your inventory puzzle, you’re probably thinking about cash flow, minimum reorder levels, shipping costs, and delivery times. You’re probably not thinking about sales tax, but you should be. Your decisions about inventory management could impact your sales tax obligations.
Inventory management and nexus
You are required to collect and pay sales taxes on online orders when you ship to states where you have nexus. The most common way to get nexus is for your business to have a physical presence in the state. You have nexus in the state where your business is based because you have an office there. If you ship all your orders out of your garage, your home state might be the only one where you have nexus.
As your inventory management needs grow, you are likely to have nexus in multiple states. When you outsource your fulfillment, you will need to register to collect and remit sales tax in the states where your fulfillment warehouses are located because your stock in the warehouse creates nexus.
When you ship orders to customers in the states where you have nexus, you’ll need to add sales tax to the transaction.
Nationwide inventory management
Let’s take, as an example, Marla’s Moose Hats. Marla is based in Maine. When she first started out, she kept a pallet of moose hats in her garage and shipped everything herself. As she connected with more and more moose fans around the country, her web traffic grew, but her sales were still concentrated in New England.
When Marla created her inventory management plan, she knew she needed more than help shipping orders. She needed warehouse locations closer to her potential customers. People just didn’t want to wait a whole week for their orders. When you need a moose hat, you need it right away.
Marla found a third-party fulfillment provider with warehouses in Nevada, North Carolina, and Ohio. With inventory in these three states, she could get moose hats to almost every college with a moose mascot in one to two days. Inventory management problem solved, plus fewer abandoned shopping carts.
What Marla didn’t realize at first was that she needed to change her checkout to add sales tax when she shipped orders to customers in Nevada, North Carolina and Ohio. In fact, it wasn’t until after she had shipped more than 500 hats for the championship game of the Flying Moose football team that she discovered she should have added Ohio sales tax to those orders.
Marla still owes Ohio sales tax on those moose hats. Instead of collecting it from her customers, she’ll have to pay herself, which takes a big chomp out of her bottom line.
Marla was so bummed, she started designing a sad moose hat, which wouldn’t have sold well at all (no one likes a sad moose). Fortunately, she discovered sales tax compliance software that could help her track the sales tax consequences of her inventory management plans, and now she’s a happy moose again.