With E-commerce sales expected to skyrocket from 2.8 trillion dollars a year in 2018 to 4.8 trillion by 2021, an entirely new set of challenges is facing business owners around the globe. While traditional businesses only had to deal with taxation issues in their local markets, the growth of global ecommerce has brought into play the opportunities and ramifications of operating simultaneously in multiple jurisdictions.
Taxation rules don’t just vary from country to country, they vary from state to state and the consequences of getting it wrong are no small matter. Just remember, Al Capone didn’t go to jail for leading one of the worlds largest criminal organizations and orchestrating multiple murders, he went to jail for not doing his taxes.
DCMT is an ecommerce solutions provider helping online merchants with a multitude of services from fulfilment to credit card processing. One of their specialties is looking at cross border shipping issues including the associated tax liabilities advertisers incur as a direct result of their shipping and fulfilment decisions.
One of the best ways DCMT has found to educated merchants about the subject is to use real world examples. The first example is an ecommerce merchant headquartered in Canada that set up a Shopify store and was selling products both in the US and Canada. They used a local fulfilment solution located in Toronto for their Canadian customers however not knowing about the tax ramifications of creating a presence in the US, they also hired a fulfilment center with locations in both California and Florida to ship their products to their US customers who ordered.
As a Canadian they falsely believed that they did not have to charge tax to their US customers. What this merchant failed to realized is that by shipping products out of both California and Florida, he had created a nexus (presence) in both states. In fact, both of these states had specifically ruled that shipping out of their state constituted creating a presence in their state meaning the merchant must charge sales tax to all customers from that state and remit it to the state government.
The merchant not knowing the specific tax obligations he had created was not charging his customers tax. The state of California becoming aware of the situation decided to sue the merchant for the taxes he was supposed to have charged to every customer who had purchased from their state. The merchant had no ability to go back and charge his customers that tax and the amount owing had grown so large that paying it would have bankrupted his business. California agreed to put him on a multi year payment plan, which virtually wiped out years of profit.
What the merchant did not realize is that for the exact same shipping cost and the exact same delivery time to their customer, they could have actually just shipped the product from Canada giving them only one fulfilment location to manage for both countries and also not creating the tax obligations by shipping out of both California and Florida.
A second example that DCMT gave was a US ecommerce merchant who was using Facebook and Instagram to sell supplements to consumers in the US. Realizing he could simply select the option online to target his ads to Canadians as well and his shipping company (Fedex) delivered to Canada, he thought why not open up a new market?
Since the merchant was located in the US, he was used to the US tax system where you only have to charge the customers tax in a state if you have a specific presence in that state. He assumed since he did not have a business presence in Canada therefore he would not have to charge his customers tax. What he failed to realize is that Canadian customers have to pay tax on every package they buy from the US exceeding $20. While there is an $800 duty free limit for customers in both Canada and the US that have products shipped across the border, it does not negate a Canadians tax liability.
To make matters worse, Fedex actually charges an additional fee often greater than the tax itself as a brokerage in order to collect payment from the customer and deliver the package. What this meant functionally was you had customers buying $100 worth of supplements and thinking they had already paid. When the products crossed the border, the Canadian border services deemed the customers owed taxes, 13% in Ontario. Fedex then charged another 13% fee to collect the tax and when the package ultimate arrived at the customers door, they had to pay $26 with their credit card on the spot in order to collect their package. As you can imagine, this led to declined packages, angry customers, credit card chargebacks and terrible online reviews.
The merchant themselves failed to realize they could have shipped the product from Canada, avoided the brokerage fee and had the product arrive to the customer in half the time.
These are two quick examples of situations where DCMT helped an online seller fix their tax and shipping issues but there are so many more situations just like it. Even for those not shipping across borders, their services are catered to helping merchants get the best possible shipping rates and delivery times available based on their specific business needs.
We highly recommend reaching out to them for a free consultation examining your business needs, structure and how they can help you both save money and more quickly get your products into your customers hands.
