How To Deal With Sales Tax For Your E-commerce Business | #234 Jared Smithson

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 Claus Lauter: Hello, and welcome to another episode of the e commerce coffee break podcast. Today, we want to talk about a topic that basically applies to every merchants out there. We want to talk about sales tax. Now, sales tax are a very complicated matter, specifically if you're selling, for instance, in the United States, which has one of the most complicated sales taxes, and it can become a headache for businesses selling online very, very quickly.

So to dive into this topic, I have an expert with me today, Jared Smithson. He's the general manager at RJMtaxexemption. com and they specialize on helping merchants. Jared has overseen and managed all work and employs at RJM. He's specializing in, as I said, e commerce sales tax filing and compliance. His greatest achievement at RJM has been increasing a total client list.

who they complete tax filing and from 50 to a thousand and two years and assisting in the creation and development of their own tax exemption app. His goal is to take away the headaches that sales tax causes to business so they can focus on what they actually do. He's also a proud father of two boys and if he gets free time, he loves to play tennis.

So let's welcome Jared to the show. Hi Jared. How are you today? Thanks, Klaus. 

Jared Smithson: Great to meet you. I'm fantastic. And thanks for using all of that. Great to hear. Thank you. 

Claus Lauter: Gerrit, sales tax, a very complicated matter, specifically if you're selling in the U. S. What got you into that topic? 

Jared Smithson: We had originally thought to start a business in the U.

2019. selling online as an international company, back in about 2019. So selling on Amazon, Shopify, and when we began, we came across the hurdles of sales tax. So we had meetings with accountants, lawyers, we went over there to try and find the answers, and we got a lot of conflicting information, and some people would tell us one thing, another person would tell us something else, and we were completely lost ourselves with how to get started, and this was originally just started with Amazon.

we then decided what the correct thing to do is, we're going to contact the states. Directly tell them what we're going to be doing, ask them one by one for their advice. So we spent a lot of time talking to them all. And they basically showed us what we should be doing, what we should be applying for, where the correct information is.

And we built our knowledge from there. our business didn't go as quickly as we like selling online. However, people came to us saying, Hey, we're starting to sell. What did you do from the sales tax? So we said to them, Oh, well, we spoke to all the states. They said, well, we don't want to do that.

So can you help us get compliance? We just did it for ourselves. We spent hundreds of hours doing it. So our first few clients came in and then from there, we realized that we had found our niche. There was nobody doing this. There was nobody offering help in these circumstances. So that's when the business grew.

So originally we had about three staff in 2019. And we grew to a team of 20 in the last four years, 

Claus Lauter: there is a certain process to become tax compliant in the U. S. or depending where you are in the world to other countries. What's basically the thought process that you need to have as a merchant, before you really start selling.

Yeah, so you need 

Jared Smithson: make sure that you are compliant before you start selling. There is a way that many people could start selling on Amazon or on Shopify in the U. S. without considering anything to do with tax. They don't stop you you can do it. But you need to make sure you do before, because if you leave it.

A few years, they will eventually come to you in the US to say the only thing for sure is death and taxes. So it will come back around. So make sure it's all done in terms of getting compliance. The first step you need to do when you're in the US is to either open up a business there. So you can either get an LLC or corporation in a state of your choosing.

So if you're international. Should be a state of your choosing. If you're already based in the US, it will be recommended to form in the state where you are based. I'm not going to go too much into that. And then you would need to get your EIN number, which is employee identification number with the IRS, and that's required to basically get any sales and use tax certificates in the U.

1. You must have that. , you can, it is possible to get an EIN for a non U. S. company, but this does cause some hurdles in terms of things like getting a U. S. bank account. For example, if you're selling on Shopify and you need to collect sales tax in certain states. Some of the states will only take payment for sales tax via a U.
2. bank account. So it will be recommended to have a U. S. LLC or corporation so you can have a U. S. business 

Claus Lauter: account. I have been through this process a few years ago, and it was very complicated. And for the listeners who do not know how the tax system works in the United States, can you give me a bit of an overview about the different levels of taxes that they need to think of?

Jared Smithson: Yeah, absolutely. So we'll start with sales tax. So it's the equivalent of Europe's BAT and it averages about seven percent However, the difference is the sales tax rate is different for every single state. It's also different for counties within the states and cities within the county. There are over 11, 000 jurisdictions, with different tax rates within the U S so it's crazy as well.

Then onto other taxes we don't handle, which you need to be aware of. You've got obviously federal income taxes through the IRS. And then you've got state income tax, state corporate tax. There are franchise taxes. There are gross receipts tax. So there are many, many different taxes to be afraid of, but you need to make sure you are all in control.

And we basically help. It makes the process as simple as possible in terms of making sure you are ticking all the right boxes. You've got the right information and you're not looking at reshuffle for years to come.

Claus Lauter: Now there's to Texas as a merchants, as a business, obviously you have to collect taxes from the sales you do, and then you have to pay taxes to the revenue service. How do I calculate my prices and how will it be shown to my customer on the product detail page? 

Jared Smithson: use using Shopify as an example.

So Shopify is great when it comes to calculating taxes There is a way where you can collect the tax in the back office if you go to taxes and duties You would click on the u. s And it'll give you all the states and you can add each state one by one. Shopify is then really, really clever.

It will automatically calculate the correct tax to charge your customer. So if your customer was purchasing from Atlanta, Georgia, from your store and you were charging a product for 100, Shopify would automatically add the tax extra on top of the 100. So they would pay, I can't remember the tax right off my head.

They would pay, let's say 107. Instead of the 100 because Shopify would charge on top of that, you would then be given that additional 7 and you'll be required to remit that back to Georgia. when it comes to sales tax, you only need to collect and remit sales tax for the states that you have nexus in.

Nexus is just a fancy way of saying you have some kind of physical presence in the states. For example, warehouse, business location, employees. Or there's something else called economic nexus, which is when you pass a total sales threshold or total transaction threshold. For example, if you were to do 200 transactions to one state, you would need to register.

So one of the common mistakes people might make is they start selling in the U S and they think I'm just going to go and register everywhere straight away. Shopify store. you've just paid upwards of thousands of dollars for somebody to do this for you when you may not have been required to.

So it's important not to panic. It's important to just register where you are required to in the beginning to keep your costs slow and then therefore you can really focus on the business. And then the next part really to go onto is how can you know when you hit a threshold? So Shopify Fantastic. So if you follow it to the letter, you've got one part in Shopify where you can add locations So let's say you have your business location added.

Let's say you're using warehouses to store your goods You would add all the locations Shopify would then tell you you have nexus here And it also tracks your economic nexus in its back office and it will notify you I believe when it is 80 percent there when you're about 80 percent to hit the threshold of sales It will tell you You may need to register here soon.

So Shopify back office takes care of all of that for 

Claus Lauter: One question I have, and it's not really about the taxes, but I think it's overlapping is, a banking situation. Can you do this whole set up with like your UK bank or like your European bank, or do you need to have bank accounts within the U S that are linked to your business?

Jared Smithson: I would recommend strongly having a U. S. bank account for the reason being when you need to pay and remit back the, tax to the states, they don't allow foreign banks. Some of them do, but there's about 10 states which are really tricky in terms of making payment back of the owed tax, and they don't allow you to.

So, it's not that difficult to open a U. S. bank. It used to be that you would have to fly over there. Put it on business expenses and have a great trip to go and open a US bank in person. After 2020, they started doing more face-to-face over zoom calls and things to open banks. And then finally you can open it up by supplying IDs such as passports.

Provided you have a company in the US you can open a US bank. That is one of the services we do offer an R G M to take away the headache of having to get a US bank open. 

Claus Lauter: Okay. that's a great service that you offer that, back in the time I actually was running around from one bank to another doing in person and it was just a pain in the neck.

It worked at the end, but it was just very uncomfortable. Tell me a bit about, RGM. what's the process if somebody approaches you? How does that work? 

Jared Smithson: the main source of our clients, we basically are partners with a lot of different automation teams. So people who are running Amazon stores or Shopify stores or this, that and the other.

So our main process would be to help the client get sales tax compliance. , by providing them with the information, based on whether they have Nexus or things like that. And then we provide them all the information and then they would give us the go ahead to proceed. We also then can take care of their sales tax filing as a separate service.

So some clients may use us to get the state registrations and then they may choose to use their accountant for their filing. Whichever way it is, if somebody chooses to do their filing themselves, we provide all the information they need along with any of the account information they need to continue it.

And then we will do things in terms of Shopify. We do like free nexus assessments and free consultations before starting. So people are aware of their potential liabilities. And we also do backlog filing. So let's say a Shopify seller had failed to be compliant and they should have collected tax for the last year or so.

We can assist in making sure that they get current and remove any of those liabilities as well. So all kinds, with e commerce, it's all very much can be clients by clients. So that's why we always like to start, with a free consultation, pre nexus assessment, just to make sure people know where they are.

Claus Lauter: Okay. How does the situation look like if you're selling not only in the US, but also like in Canada or globally? You have a complete mix in your Shopify store. How do you untangle that? Great 

Jared Smithson: question. Now, as I've mentioned at the start, we've got 11, 000 sales tax jurisdictions to manage.

So we are only limited to the US. That's all we do with. However, we have got partners who we recommend and refer people for Canada. And we've also got people we can refer to for Europe as well. So if people are selling worldwide, we have got contacts to assist people with to hand them to somebody else to handle.

I don't think I know of a company that does the taxes. the whole of the world, it's a, it's quite a large amount to take into consideration. 

Claus Lauter: Yeah. No, I can relate to that. I did my homework and it was really, really difficult, almost impossible to find someone who could point you in the right direction.

And that's why I hope this episode will help our listeners, to find someone like you to make their life easier. Tell me about the negative implications if you don't do it right. What in the worst case scenario can happen to you as a business? 

Jared Smithson: great example is I'm working with a company they started selling in the U.

1. without an EIN number. They really hit it off, really, really successful. They didn't get compliance for Shopify, and they had been storing goods all over the U. S., which meant they should have been collecting. And what this meant is we had to go back and file for the last two years. Of all of the sales tax that they should have collected.

So they have to pay that out of their own pockets. So it works out about, let's say, 50, 000, in owed sales tax, due to the liabilities. Now, they could have left it for longer, but the longer you leave it, the more penalties, the more estimates, and then when the state audit you. It's much better realize your mistake, go and fix it and wait for the state to award it to you, because the penalties can get very, very severe.

If you leave it long enough, you can... Pretty much say goodbye to all of your profits very, very quickly when you're trying to pay back the sales tax, pay somebody to do it. It adds up to an astronomical sum of money. And, we want businesses to be successful. We don't want them to be concerned with paying sales tax out of their pockets.

So my main recommendation is. Contact RGM, we give free consults, free access, no obligation to sign up for anything, but avoid reading random blogs from three years ago to base your tax knowledge and things like this, which you'll laugh, but lots of people do, speak with a professional, speak with multiple professionals and make sure you are set up before you start selling anything.

Claus Lauter: Yeah, no, I totally agree. When it comes to taxes, you should always talk to an expert because it's such a delicate field and you see obviously the fines are very high if you don't do it right and it's a complex topic as well. Tell me a little bit about the timeline and if there's any kind of homework that I need to do before I get started with you guys.

Yeah, so the timeline 

Jared Smithson: depends on what you wanted to do. So let's say as an international. You wanting to, start from scratch, get a business, get your EIN, get sales tax compliance from the beginning. So we could open up an LLC or a corporation in the state of your choosing that would take us.

Around about five working days. And then the EIN from the IRS can take anywhere from two to six weeks. Typically, it should be no more than two weeks for the IRS. If you are applying in tax season, they put the internationals to the pile. So you could be even longer in terms of the sales tax registration.

 It can take 24 hours , to get the certificates. Required for, the compliance for one state, another state, it can take up to four weeks. So very much depends on where you have Nexus and things like that. But it shouldn't ever take longer than eight weeks for everything to be completed.

And on average, I would say four to six weeks from that initial consultation Nexus assessment to opening your U. S. business. EIN number and tool sales tax compliance ready to start selling and collecting tax in the correct state. 

Claus Lauter: One question I have, obviously, if you have your own products stored in the US is one thing, what's the situation if you're either a dropshipper?

So you basically do dropshipping from, I don't know, China or wherever, or you do a print on demand. So someone else creates the products. What's the situation there? 

Jared Smithson: Yeah, so Nexus is very different in that case because, and this could change, by the way, because it's always changing. But if you're dropshipping, you technically don't have a physical location.

Taken the products and put your label on them. So you don't kind of own them as the middleman. So you don't necessarily create physical nexus. You obviously still have to be aware of economic nexus in terms of the amount of sales, but it may mean it's easier to manage the sales tax. However, if you are dropshipping, often dropshippers, let's say if you're purchasing from AliExpress, To send as a drop shipping when you purchase from these retails that you drop shipping, they will often charge you sales tax when you buy the products.

Now, there is a way that you can become exempt from paying that sales tax and that's through tax exemption. If you are selling for resale, you don't have to pay the sales tax. So we do that service as well. So we help people become sales tax exempt from retailers such as Walmart, Amazon, Sam's Club, Aliexpress, just to name a few, and that can boost your profits significantly, if you're saving 7 percent of your total gross purchases, your profit margin, you're going to make a amount of money back.

That's another service you need to do as well. So that's possible as well. That can help the dropshippers. 

Claus Lauter: Okay. Obviously you want to save as much money as possible there. Gerrit, tell me what's your pricing structure? What do you charge for your service? 

Jared Smithson: for the L L C and e i n, for a US client, we would charge $600.

 For a non-US client without a social security number, it would be a thousand dollars. And then in terms of the state registrations, if you were just after a one-off registration, we do $150 per state registration. We do offer bundle packages where if you purchase, let's say 10, it will be a thousand dollars for 10, depending on how big your business is.

In terms of the sales tax filing, we charge 30 per return with an option to pay for one year of returns up front and get a 25 percent off discount. And then we do have some surcharges. To take into account and filing. So doing the sales tax filing with the States, the more sales you make, the significant amount of more about time it will take to file the return.

So we do have a structure in place where the more sales you make, there may be a slight surcharge to account for that, but obviously the increase in your profits would take that into account. 

Claus Lauter: Okay. It makes sense. Question before we come to the end of the coffee break today, what's one final thoughts that you would want to leave our listeners with?

Jared Smithson: sales tax is a headache and you as a business owner, you do not want to be focusing all your energy on tax. Speak to a professional. You want to using your energy for selling your products, product research, growing your business, not thinking too much about tax and your business declining.

So , you can speak with RGM, get a free consult. We'd be more than happy to help, take the headache away and then you can focus your business. 

Claus Lauter: Okay, we're going to get people get in touch with you. 

Jared Smithson: Yeah, so you can reach out to my email. That's jared j a r e d at rgmtaxexemption. com or Support at rgmtaxexemption.

com that has our support team and we'll be happy to help in any way that we can 

Claus Lauter: Okay. So my recommendation to everyone listening is get in contact with Jared or any other expert in your local market. When it comes to taxes, it's not fun. You need to talk to an expert and it will save you a of money in the long run.

And you don't want to make any major mistakes when it comes to taxes. So that's my advice for this episode today. Jared, thanks so much to give us an insight on this topic and talk to you 

Jared Smithson: soon. Thanks Thanks for having me. Bye bye.