Consumer protection and fair, legal eCommerce operations are often safeguarded by a comprehensive set of rules and regulations that cover everything from privacy to ecommerce sales tax compliance. In 2021, global eCommerce sales soared to an impressive $5.2 trillion, potentially increasing the regulatory burdens on online retailers. Regardless of the size, product range, or platform of a retailer, managing compliance with sales and use tax laws has always been a challenging task.
The United States alone has over 11,000 tax jurisdictions, each with their own evolving regulations. Many retail businesses also employ a complex blend of Point of Sale (POS) systems, eCommerce platforms, and retail sales tax solutions. The task of calculating sales tax from both physical store and online returns further compounds this complexity. This results in a convoluted sales and use ecommerce sales tax compliance process that can confuse customers and hinder accurate reporting.
In this post we are going to learn about US ecommerce tax laws, key ecommerce sales tax compliance rules, and what can happen if you violate any of these rules.
Regulations All Ecommerce Businesses Should Know
Given below are a few regulations that all ecommerce operators should know in order to avoid hefty fines and penalties:
US Sales Tax
According to the United States, sales tax requirements will differ from state to state. The process starts by identifying where your business has a sales tax nexus and then registering and filing tax in your respective state. The US sales tax is usually collected by the businesses while selling the product and then the amount is sent to the local or state tax authority. Not only this, but also the sale tax rates vary based on the location of the customer and the business.
For instance, an ecommerce business based in Salt Lake City would pay a different sales tax rate as compared to the one which is based in Des Moines.
If you do not properly calculate and collect the appropriate sales tax for each sale, it can negatively affect your overall eCommerce revenue. Additionally, it may expose your business to the risk of an IRS audit and potential fines when it’s time for tax filing.
Federal Trade Commission (FTC) Compliance
If you are an ecommerce business owner and you are planning to use social media influencers or affiliate marketers to boost brand awareness as well as sales, you have to be aware of the ecommerce sales tax compliance regulations set by the Federal Trade Commission (FTC).
As per the FTC, social media influencers should disclose to their audience when they have any kind of collaboration with an ecommerce brand, especially if it is a sponsored content.
It is imperative to disclose to customers that an affiliate marketer is getting paid by your company if you want to keep your eCommerce marketing campaigns transparent and honest. Not adhering to this affiliate marketing requirement by the Federal Trade Commission (FTC) is considered a deceptive trade practice under the FTC Act. This non-compliance could lead to considerable penalties for both the eCommerce firm and the affiliate.
COPPA
The Children’s Online Privacy Protection Act (COPPA) was passed in 1998 with an aim to implement new registration related to use of personal data from children below 13 years of age. The Children’s Online Privacy Protection Act (COPPA) outlines the requirements for a company’s privacy policy for websites and eCommerce platforms that collect consumer information and may be accessed by children under the age of 13. It also specifies circumstances in which parental approval is required and what can and cannot be promoted to children.
If ecommerce businesses violate any of the COPPA regulations can face penalties of up to $46,517 per affected kid. In many cases, COPPA violations may arise from marketing and advertising efforts placed on websites used by children.
For example, OpenX Technologies, Inc., an advertising platform, was fined $2 million in 2021 by the Federal Trade Commission (FTC). This penalty was imposed after it was found that OpenX had gathered location data from children under the age of 13 without obtaining the necessary consent. This data collection occurred through an OpenX ad exchange that was employed on applications directed towards children.
ADA
The American with Disabilities Act (ADA) is a federal law that orders all ecommerce businesses to develop their websites that are easily accessible to people with disabilities. Given below are some of the important things to consider when it comes to ADA compliance:
- Web Content: Websites need to be designed in such a way that it is easy for people with disabilities to use. This means that the website should have clear and easy to read language, providing alt text for images and using headings and subheadings to make the content well organized.
- Navigation: Websites should be user-friendly, with clear links and buttons that are easy to click.
- Multimedia: Websites should also provide transcripts and captions for videos and other multimedia content.
- Forms: Forms should be simple to fill in and submit, with clearly marked fields and guidelines.
Trademarks and Copyrights
According to the U.S. law, appropriately filed trademarks and copyrights like music, product designs, and literature can only be used by intellectual property owners or by those who have consent. As the proprietor of an eCommerce store, if you incorporate intellectual property into your products for which you lack legal permission or ownership rights, you could potentially face an expensive copyright infringement lawsuit.
In 2022, Shopify was ordered to pay a confidential amount to major education publications including Pearson Education and McGraw Hill, after Shopify failed to take down ecommerce sites selling pirated digital versions of their materials.
Shipping and Custom Regulations
As a lot of online retailers operate locally as well as globally, it is important for them to understand what products they can and cannot ship using the various shipping companies that are out there.
As per the U.S. Postal Service, online stores cannot ship items including but not limited to alcoholic beverages, aerosols, and hemp products both across states and abroad.
The Federal Trade Commission (FTC) has laid its own rules which require ecommerce businesses to follow fair shipping practices, including meeting the advertised shipping promises. In case they fail to do so, they are required to reimburse the clients. For instance, Fashion Nova, an online fashion retailer was required to pay $9.3 million in 2020 to settle an FTC violation because they failed to notify the customers of delayed shipments nor they gave customers the option to cancel their orders.
How to Overcome Common ECommerce Sales Tax Compliance Challenges?
Ecommerce regulatory compliance is meant to only protect your company’s brand image and assets from penalties but also to maintain strong and ongoing customer relationships through ethical business practices.
Adhering to Tax Regulations
Ecommerce businesses operate globally, which means they are required to comply with tax regulations in multiple jurisdictions. In general, ecommerce sales tax compliance can be complicated because businesses should navigate various tax rates, thresholds, and reporting requirements. If businesses fail to comply with tax regulations they should pay hefty fines. Thus, ecommerce businesses should be aware of the tax laws and follow tax collection and reporting processes.
Ensuring Fair Competition
Regulations are necessary to ensure fair competition in the e-commerce industry. Companies are forbidden from engaging in antitrust laws and other behaviors that hinder competition, such as monopolistic behavior and price manipulation. These rules level the playing field for all firms, regardless of size, by promoting a competitive environment. This gives customers more options and encourages innovation at the same time.
Understanding Intellectual Property Rights
Intellectual property rights are essential in ecommerce businesses where they rely on trademarks, branding, as well as copyrighted content. Adhering to Intellectual Property (IP) regulations is vital in ensuring businesses respect other entities’ rights and avoid infringing on copyrights or trademarks. It is incumbent on ecommerce businesses to carry out comprehensive research and due diligence to ascertain that their marketed or sold products don’t infringe on any IP rights. By honoring IP regulations, businesses can safeguard their own intellectual assets and evade legal confrontations.
Adapting to Changing Regulatory Landscape
Ecommerce sales tax compliance is an ongoing procedure. The regulatory landscape is continuously evolving with new regulations and laws that are introduced to address certain challenges. Ecommerce businesses should have knowledge about regulatory updates and adapt their practices which involves policy revisions, regular audits, and employee training to ensure compliant with recent regulations.
In a Nutshell
In a nutshell, e-commerce sales tax compliance regulations are complicated and dynamic. No matter how big or where they are located, e-commerce companies have to deal with a lot of tax jurisdictions, follow constantly evolving tax regulations, protect intellectual property rights, maintain fair competition, and offer a user-friendly platform. This procedure can be intimidating, and any mistakes could lead to expensive fines and possible legal problems.
Several ecommerce businesses have found success through tax preparation outsourcing service, primarily by staying compliant with regulations and focusing on their core business operations. For example, Etsy, a marketplace for unique and creative goods, also outsources its tax preparation. This has helped Etsy manage its complex tax obligations due to the presence of individual sellers from different tax jurisdictions. The resulting compliance has fortified Etsy’s reputation as a reliable platform, attracting more sellers and customers.
Ecommerce businesses can take guidance by opting for tax preparation outsourcing service providers like Global Accounting Corp which can help them to understand and comply with the tax laws in various jurisdictions, thereby helping their businesses avoid any potential tax pitfalls.
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