This article was updated June 15, 2022

Technological innovations continue to shape the future of e-commerce, especially in data infrastructure and cloud computing for businesses of all sizes. How can you enhance your operations, protect sensitive data, and develop strategic plans to stay competitive and grow?

Strategies to satisfy customers and generate business are key, but prioritizing backend operations of your platform that account for major tax, finance, and cybersecurity implications can also help drive your success.

E-commerce companies can take these steps to face common challenges:

1. Use Data to Drive Business Decisions
2. Manage Your Tax Liability
3. Focus on Big-Picture Strategies
4. Implement Tactical Guidance
5. Take Care of Your Customers

1. Use Data to Drive Business Decisions

Before you can take full advantage of your technology, you should assess how you can enhance your current system or identify and implement a new one if necessary.

Automating processes can provide a significant advantage in driving strategic decisions and establishing long-term goals based on business trends. Employing multiple enterprise resource platforms (ERPs) can help:

• Reduce your software challenges
• Eliminate manual reporting processes
• Expand the use of data for planning and decision making

ERPs can provide a comprehensive view of all areas of your business in real-time with insights to planning, budgeting, forecasting, consolidations, reporting, project management, and inventory control and management.

Transforming spreadsheet-based processes into a streamlined set of dashboards and reporting tools using applications can leverage predictive analytics to quickly identify key performance indicators.

Systems can also be customized and scaled to support your company’s needs as they change, allowing you to monitor and adapt processes, improve user experience and brand loyalty, and tailor products and experiences to meet customer demand and reporting needs.

To learn more, read Unify Your E-Commerce Business with NetSuite Cloud-Based Solutions or Determine if SuiteCommerce Is Right for Your Business.

2. Manage Your Tax Liability

Most e-commerce companies provide goods and services to customers in multiple US and international tax jurisdictions. Local tax laws constantly change, but it can prove difficult to stay ahead of evolving legislation.

Income Tax

E-commerce companies can move quickly from reporting tax losses to reporting significant taxable income. It’s important to manage your exposure from state and local income and franchise tax filings as you grow by managing your tax base complexities, apportionment planning, and structuring.

Review your filing methodologies and employ new planning and restructuring to help:

• Drive down risks of penalties and interests
• Keep filing processes seamless
• Bring down operation costs that you can reinvest into the company

State and Local Tax and Wayfair

A large tax footprint can expose your business to state and local tax issues in varying jurisdictions, including economic nexus statutes in all states that impose a sales tax except Missouri.

The 2018 South Dakota v. Wayfair, Inc., ruling introduced the concept of economic nexus. If a business sells a certain dollar value, number of items, or completes a certain number of transactions within a tax jurisdiction, the business is considered to have nexus in that jurisdiction. This means taxes will be collected on transactions made in that location.

Thirty-two countries follow this rule as of July 1, 2021. When your business expands to global markets, the countries you sell goods in will look to you to collect taxes and duties on those transactions.

Countries in the European Union as well as the United Kingdom have a zero-dollar threshold; if you sell $1 in these locations, you have nexus in that jurisdiction and are required to pay taxes there, subject to some transaction value thresholds.

Even if you’re familiar with filing requirements and collect and remit sales tax, determining exacting tax liability can be a demanding process unique to every company.

To learn more, read State & Local Tax Considerations for E-Commerce.

Business Licenses

Generally, local business taxes are a flat minimum. However, certain jurisdictions with significant consumer markets calculate their business licenses based on the company’s gross receipts, net income, or payroll. Notable examples include Cincinnati; Los Angeles; San Francisco; and Fairfax County, Virginia.

This can pose barriers for uninformed businesses. Unfortunately, a jurisdiction’s ordinance often lacks guidance on how an e-commerce company would calculate its business license tax.

For example, does the tax apply to a business that doesn’t have an office, warehouse, or fulfillment center in the locality? Also, does the local business tax apply to activities the business performed within and outside of the jurisdiction?

To address your local tax obligations:

• Determine what your local business license allows
• Assess opportunities to mitigate your business license obligations
• Prepare for your business license filing

Property Tax

Companies that hold inventory in multiple states to address shipping costs and customer needs could face personal property tax on inventory in certain states. Property tax rates can reach as high as 3%.

On the lien date, these states often provide an exemption for certain inventory sold to customers in states other than the inventory’s location. Maintaining property tax obligations and negotiating this benefit with the tax authorities can help maintain compliance.

Structuring

States vary in how they tax businesses, such as how they impose taxes for gross receipts, capital stock, and net income.

There can also be differences for computing tax based on the activities of a single entity or group of entities, such as a unitary combined group.

How you structure your business can help create efficiencies for state income and franchise tax, which vary based on state.

3. Focus on Big-Picture Strategies

Every organization wants to move forward with a clear road map that allows the business to allocate financial and human capital appropriately. Yet, e-commerce companies face barriers such as rapid growth, geographical diversity, real-time consumer expectations, and supply chain interruption.

Juggling these challenges requires current and future focus, agility, and seamless interaction throughout your operation.

Optimize Operations

It’s critical to work through the various operational dynamics of being a direct-to-consumer company, position yourself for a future liquidity event, seek nontraditional financing alternatives, and deal with tax issues.

A solid operational plan and strategy—with technology—can help prepare you for the unexpected challenges. Whether it’s exploring shifts in technology, understanding how to tap into new audiences or sales channels, or how to understand and navigate consumer expectations, these activities can help increase brand awareness and set your e-commerce company up for long-term success.

Strategic Planning

Many organizations lack a formal strategic plan, long-term vision to help guide decisions, thorough understanding of how they got to their current state, and a clear path to their chosen future.

Assessing your business functions and identifying strategies to help build and protect the assets of your organization and individuals can help forge a more tangible path forward and keep employees engaged.

Focus areas for a strategic plan can include:

• Capital Structure. Building the appropriate capital and debt structure is critical to provide for a company’s near-term cash flow needs and long-term expansion capital.
• Succession Planning. Proactive planning helps organizations remain financially healthy and culturally stable and can enhance long-term performance and value, especially through ownership transitions.
• Compensation Services. Developing comprehensive compensation philosophies, and aligning those with job descriptions, compensation benefits, and performance evaluation strategies, can help support retention goals.

Path to Liquidity

Historically, to plan and structure a company to maximize a liquidity event takes several years. In the explosive digital environment, the timeframe can shrink to 18 months or less due to market forces—such as investment fund stockpiles, low interest rates, the proliferation of special purpose acquisition companies (SPACs), and potential tax law changes.

It’s important to clearly understand and define your personal and business goals and assess your full financial picture, liquidity expectations, and desired legacy ahead of an event.

A comprehensive plan can address your short-and-long-term goals and put you in control of your finances and liquidity.

Focus areas for a plan should include:

• Business transition and succession planning
• Estate planning
• Due diligence
• Initial public offering (IPO) readiness
• Valuations
• Tax implications
• Buy-side and sell-side
• Mergers and acquisitions

Mergers & Acquisitions

Businesses engaged in a transaction from both the buy-side and sell-side should conduct due diligence. It’s important to focus on key valuation drivers such as gross margin and inventory management solutions like ERPs.

During due diligence, it’s also important to perform procedures around the appropriate classification of costs and expenses in cost of goods sold, or as part of operating expenses.

4. Implement Tactical Guidance

As your business expands in scope and scale to meet the demands of your e-commerce and omnichannel distribution channels, it’s important to take a holistic look at your organization and your e-commerce and omnichannel goals.

Supply-Chain Management

Starting sales often requires minimal infrastructure, but there are many costs associated with the process—including sourcing and shipping, taxes, duties, fees, and IT systems—businesses may not foresee, especially if expanding globally.

To prepare, e-commerce businesses with end-to-end value added tax (VAT) and customs duty support on both tangible and intangible products or services can:

• Understand when a marketplace will or won’t collect the tax on customer sales
• Adjust pricing approach based on the tax approach
• Consider logistical costs of selling, including shipping, third-party logistic (3PL) fees, and import duties

For other preparation tips, read 3 Supply Chain Considerations for E-Commerce Companies Expanding Overseas.

Sales-Return Management

Direct-to-consumer e-commerce businesses manage all kinds of returns, from apparel that doesn’t fit, expired products, recalls endangering public safety, and more.

Devoting more attention and resources to reverse logistics can help extract as much value as possible from returned goods. Implement best practices on both the front- and back-end to enhance margins and customer satisfaction.

Strategies can include:

• Collecting and analyzing patterns in return data
• Assessing location and logistics issues and where value-added processes should occur
• Determining how to address current liabilities to support sustainability and compliance

Sell with Popular Retailers

Selling products on popular retail sites can provide immediate impact for companies looking to expand their sales and increase their market presence. Without careful planning, it’s easy to be surprised by fees and potential sales tax implications often imposed by such sites.

Websites often have distinct business models for sellers that could bring differing associated fees and sales-tax requirements. It’s crucial to know how to properly account for them and select the model that makes the most sense for your business.

To learn more, please read Fees and Sales Tax Considerations for Sellers and Vendors.

5. Take Care of Your Customers

Data is arguably an e-commerce company’s greatest asset, making it critical to prioritize its security to support customer loyalty, brand image, and long-term growth strategies.

Payment Processing

Companies that accept debit and credit cards for goods and services or function as intermediaries for companies that do so must maintain compliance with the Payment Card Industry Data Security Standard (PCI DSS).

Depending on your business model and transaction volume, a PCI Report on Compliance (ROC) examination, Self-Assessment Questionnaire (SAQ) validation, or Approved Scanning Vendor (ASV) services can determine if you meet the standard’s requirements.

Additional Cybersecurity Protections

External and internal network, web application, and application programming interface (API) penetration testing can also provide additional security through tests that attempt to compromise your systems, web applications, and APIs.

This can help identify potential vulnerabilities that a cybercriminal could exploit to breach the cardholder data environment (CDE) and help you better protect valuable assets and data.

We’re Here to Help

To learn more about strategies to support your e-commerce operations, contact your Moss Adams professional.