Navigate multi-state sales tax nexus, optimize inventory accounting methods, manage marketplace facilitator complexities, and maximize tax deductions for your online retail business. Expert guidance for Shopify, Amazon FBA, and direct-to-consumer brands.
Online retail businesses face unique complexities from multi-state sales tax obligations to inventory accounting challenges. We provide specialized expertise for scaling e-commerce and DTC brands.
The Wayfair decision means e-commerce businesses create sales tax obligations in states based on economic activity, not just physical presence. Most DTC brands have nexus in 20-40 states.
Economic Nexus Thresholds:
Our Solution:
Proper inventory valuation directly impacts taxable income. Choosing the right method (FIFO, weighted average, specific identification) can save thousands annually.
Accounting Method Options:
Our Solution:
Amazon, eBay, Etsy, and other marketplaces collect sales tax on your behalf in most states. But you still have obligations for direct sales and certain states.
Complexity Points:
Our Solution:
Third-party logistics providers (ShipBob, Deliverr) and Amazon FBA create physical nexus in states where they warehouse your inventory, triggering additional obligations.
Nexus Triggers:
Our Solution:
These thresholds trigger registration and collection requirements
42 states follow this threshold:
$100,000 in sales OR 200 transactions
Measured over previous or current calendar year
States can assess tax retroactively (typically 3-4 years). If you exceeded threshold in 2021 but never registered, you owe taxes from when you first exceeded threshold plus penalties and interest.
Company Profile:
Nexus Analysis:
Our Actions:
Nexus Study (Month 1)
Analyze sales by state, identify where you exceed thresholds
State Registration (Months 2-3)
Apply for sales tax permits in nexus states (1-4 weeks each)
Automation Setup (Month 3)
Integrate Avalara/TaxJar for real-time tax calculation
Ongoing Compliance
Monthly filing, threshold monitoring, new state registration as needed
Scenario: Product cost increasing
Sold 150 units @ $30:
Pros:
Cons:
Same scenario as FIFO:
Sold 150 units @ $30:
Pros:
Cons:
| Metric | FIFO | Weighted Avg | Difference |
|---|---|---|---|
| Revenue | $4,500 | $4,500 | $0 |
| COGS | $1,600 | $1,850 | $250 higher |
| Gross Profit | $2,900 | $2,650 | $250 lower |
| Tax Savings (21% rate) | - | - | $53 with FIFO |
In inflationary environments, FIFO results in higher COGS and lower taxable income, saving $50+ per $4,500 in revenue. At scale, this adds up significantly.
All costs to acquire and prepare inventory for sale are deductible. Largest deduction for most e-commerce businesses (40-50% of revenue).
All costs to pick, pack, and ship orders to customers. Includes 3PL fees, shipping carriers, and packaging materials.
Customer acquisition costs are 100% deductible. Track CAC and ROAS to optimize spending across channels.
E-commerce platforms, payment processing, and business software are deductible operating expenses.
Costs associated with product returns reduce taxable income. Track return rate by product and channel to identify issues.
Photography, content creation, legal, and accounting services are deductible business expenses.
The Company:
A direct-to-consumer skincare brand selling through Shopify and Amazon. $3.5M annual revenue, 70% Shopify / 30% Amazon, selling to all 50 states. Bootstrapped, pre-Series A.
The Problems:
Our Solutions:
Results:
— Founder & CEO
You need to collect sales tax in states where you have "nexus" (tax obligation). Post-Wayfair, this includes states where you exceed economic nexus thresholds (typically $100K in sales or 200 transactions). Most e-commerce businesses have nexus in 15-40 states depending on sales volume and distribution.
Yes, Amazon collects and remits sales tax for FBA sales in all 47 states with marketplace facilitator laws. However, you're still responsible for: (1) income tax in states where Amazon warehouses your inventory, (2) sales tax on direct sales (Shopify, your website), and (3) proper financial reporting of all revenue streams.
Choose FIFO if product costs are rising (inflation)—it results in higher COGS and lower taxable income. Choose weighted average if costs are stable and you want simpler accounting. Once selected, you generally can't change without IRS permission (Form 3115). We analyze your cost trends and recommend the optimal method.
States can assess back taxes (typically 3-4 years) plus penalties (5-25%) and interest. We recommend voluntary disclosure agreements (VDAs) which allow you to register, pay back taxes, but often waive penalties. We've saved clients $50K-$200K in penalties through strategic VDAs.
Inbound freight (supplier to your warehouse) is part of COGS and increases your inventory cost basis. Outbound shipping (your warehouse to customer) can be treated as either COGS or operating expense depending on your accounting policy. COGS treatment better matches revenue but requires more detailed tracking.
If you develop custom software (website, apps, algorithms), create proprietary formulations (cosmetics, supplements), or engineer unique products, you likely qualify. Simple reselling doesn't qualify, but product development, website optimization, and supply chain technology often do. We've helped DTC brands claim $50K-$200K in R&D credits.
You don't collect U.S. sales tax on international orders. However, you may need to collect VAT/GST in destination countries (EU, UK, Australia) if you exceed their thresholds. Many e-commerce platforms (Shopify) can handle this automatically. International orders also have customs/duty implications for the buyer.
Switch to accrual accounting once you carry significant inventory (generally $500K+ in revenue) or before raising institutional capital. VCs require GAAP-compliant financials, which means accrual basis. Accrual also gives you better insight into true profitability by matching revenue with inventory costs.
Get expert guidance on multi-state sales tax compliance, inventory accounting optimization, and tax strategies for growing DTC brands. Free nexus assessment included.