This post is from our friends at Skubana
ECommerce vendors are often forced to optimize infrastructure in any way they can to reduce total end-cost for the consumer and improve competitiveness. But, while many factors ranging from international supply chains to just in time (JIT) inventory are used to reduce costs, tax planning through optimizing overhead and infrastructure is one tactic many eCommerce sellers leave out. While this is in part because eCommerce owners and managers are often not tax professionals, tax is also often a completely separate function in most retail and e-tail. Even if you have an internal tax department, most procurement and information technology professionals prefer to leave tax to specific points in the year – forgetting that it can play a large role in profitability and therefore product cost.
While reduced taxes are seldom-looked-for innovations for eCommerce, they can contribute greatly to total cost reduction and therefore towards profitability and competitiveness. Tax planning through infrastructure management can help to reduce taxes through supply chain including operational and income tax. Tax issues affect every aspect of identifying, acquiring, importing, transporting, distributing, and selling goods, so planning your supply chain around those issues will help you to reduce what you owe.
Let’s look at some of the ways optimizing overhead and eCommerce using tools like automation will help you realize tax savings.
Taking Control of Procurement
ECommerce sellers often allow vendors and manufacturers to control procurement but defining ownership of transactions can greatly reduce total owed taxes. For example, understanding where branding and therefore added value is applied, separating warranty or insurance value from total cost of payments, and defining the appropriate jurisdictions owed tax will greatly reduce what you owe.
Intangible Assets – Separating intangible assets like warranty from the basic cost of goods will reduce total costs, simply because most states do not tax intangibles. This holds true with cost of shipping and labor, as many (some do) don’t tax this value. Create clearly defined invoices, listing when sold goods are intangible, and separating intangible costs like warranty and shipping on customer invoices to realize these savings.
Electronic Goods – Purchasing electronic goods such as electronic software may be sales tax free in many areas. Specifying which portion of goods is electronic can greatly reduce total costs to you and the customer, when you purchase them and when you sell them.
Controlling Volume Discounts – Reporting and managing goods at the value of volume discounts or contract inducement rates can dramatically reduce total owed property tax by avoiding overstating income or assets.
Owning tax-determination for transactions puts you in more control, reduces the risk of failure to comply with regulation, and reduces the risk of escheat (unclaimed property), and helps you to reduce total customs and duties paid on imports. Similarly, handling state income tax planning for negotiated vendor payments with volume discounts, exclusive carry arrangements, cooperative advertising, etc., may result in significant state income tax savings.
How does this work? Let’s say that Vendor A typically charges you a flat rate of $27,000 for goods, which you can break down into as much as $6,000 in import costs and insurance. That would reduce your total customs and eventual property tax by 22%. Or, for example, if you were to license or brand products after import, you could reduce the cost of goods considerably by reducing total value. How much? What is the value added by your brand? While this doesn’t apply to small e-tailers, those with an existing brand name should consider it.
What can you do to control your finances here? Issue your own purchase orders to directly track real-cost of goods. Fully outlining purchase terms including cost of goods per unit and in bulk with payment terms plus the expense of extras separate from cost of goods may allow you to greatly reduce total property tax based on value. Similarly, separating electronic goods such as software as a service, audiobooks, or electronic downloads can save you considerable sales tax in many states. Managing total inventory by physical warehouse location using ERP tools like Skubana also gives you an easier way to calculate tax nexus for sales and property tax based on state, avoiding the risk of paying in multiple states.
Optimizing Merchandising Activities
While many eCommerce retailers aren’t aware of the fact, having products branded can add value and therefore change total property tax, change jurisdictions where tax can apply, and affect the taxability and value of goods for income and property tax. Licensing and branding specific products with copyrights and patents or trademarks will change the jurisdiction of income tax. Review its effects on your income before branding and patenting internationally or across multiple jurisdictions.
Similarly, merchandising and marketing can have a large impact on total tax outcome depending on whether you use automation or local employees.
Your customer relationship and customer data may also affect taxes. For example, if you store valuable customer data inside the jurisdiction charging property tax on customer data, you could be accruing additional costs.
How can you reduce tax here? If your customer data is valuable enough to be considered a taxable asset, consider reviewing local state laws at each tax nexus to determine the most efficient storage area. Similarly, property tax may apply to where CRM or customer relationship data is capitalized, but you could also save on tax by reviewing amounts spent on customer communication and telecommunications and deducting total costs. In this case, the only way to truly reduce total costs is to review your best strategies and make long-term changes with the support of your financial or tax adviser.
Distribution and Fulfilment
Distribution and fulfillment are critical elements of eCommerce, but they greatly affect your tax structure. For example, warehousing in multiple tax jurisdictions could result in double taxation on the same merchandise or over-taxation on over-valued merchandise. Efficient management of distribution center functions as well as transportation and inventory management will reduce total costs.
- Review assets employed in managing property in each jurisdiction
- Reduce total inventory values by using third-party logistics to ship more quickly with JIT inventory while avoiding tax nexus in some states. Keep in mind this will establish tax nexus in most states your 3PL stores your inventory.
- Properly value merchandise, using your own purchase order forms to display actual value of merchandise minus transportation, storage, and warranty or insurance. Track depreciation over time on stored inventory and report only real-value.
- Consider separating distribution activities into separate legal entities when operating in multiple states to avoid double taxation or multi-state income taxation.
- Carefully examine inventory handling operations to deduct costs for state and federal income tax. If you own or invest in any warehousing properties or vehicles, many states allow you to deduct their purchase and maintenance
- Review international sales and distribution for potential savings in state income tax. However, Amazon now reports sales in multiple countries including the UK and most of Western Europe. International sales may accrue VAT or foreign earned income tax which you can deduct or withhold from local state and federal taxes.
One of the key points of optimizing distribution and property tax is optimizing warehousing to reduce inefficiencies. For example, if you currently maintain 5 warehouses in different states, you are accruing significant additional costs and may be paying sales tax and multi-state income tax due to infrastructure inefficiencies. You could reduce these by reviewing total earnings and profit by location using Skubana to determine if and why specific distribution centers are profitable. If so, you could reduce multi-state income tax by creating separate legal entities. If not, you could move to streamline your operations by shifting inventory to distribution services and leaving your own warehouse and therefore tax nexus behind. However, you should significantly review these steps with a legal consultant based on your own unique business data before taking it.
Tax Inefficiencies to Avoid
ECommerce businesses run into several tax inefficiencies, largely surrounding sales tax noncompliance and payroll tax and noncompliance.
Reducing Payroll Tax – While companies should by no means fire employees, avoiding taking on new ones by creating efficiencies through automation software like Skubana can greatly reduce payroll tax and the risk of payroll noncompliance. For example, Skubana can automate nearly all repetitive tasks between shopping cart and pick and pack, reducing the total man-hours dedicated to each sale, and therefore reducing the total number of employees needed to operate, even as sales increase.
Sales Tax Systems – Using automated tax systems enables you to charge sales tax in nexus states to avoid non-compliance or increased personal costs. TaxJar automates sales tax and tax on shipping and international sales to reduce non-compliance and time spent on tax management.
Optimizing ECommerce Infrastructure to Reduce Tax
Taking steps to plan for taxation will allow you to simplify operations, make choices that better benefit tax, and reduce operating costs, all of which benefit you and the customer. Property (inventory), sales and use (warehousing, transport, online sales), branding, excise tax, and state and federal income tax each represent massive costs and you can reduce them by planning, improving efficiencies, and taking charge of your supply chain wherever possible.
No supply chain is completely static, so you must be prepared to change and update your strategy as your business, supply sources, and distribution change. Investing in the tools and technology to effectively manage your costs and inventory at every step will reduce costs, enabling you to stay efficient and competitive.
About the Author
Skubana is an all in one inventory management solution for omnichannel online merchants that unifies everything after the checkout.