Accounting Articles > Illinois Sales and Use Tax Audit:
Sales and Use Tax audit firms
E-Commerce provides special difficulties for CPAs and Public Accountants. Let’s begin by dispelling certain falsely held beliefs. Just because you’re selling something on the internet doesn’t mean that you don’t have to play the game by the rules.
The difficulties inherent in this process can be explained as follows:
You walk into a store, and need a picture frame, let’s say. You go over to the display, look at them, pick out the correct color and size, maybe even talk to someone before making your choice. You take it up to the counter. It’s retailing for $10.00. After paying Illinois sales tax at 9%, the bill comes to $10.90. You hand them eleven dead presidents, they give you back a dime, put it in a bag, and you’re out the door. You know the story. We’ve all done it a thousand times.
Or...
You go to an internet site, and find a picture frame that looks like it might be what you want, so you send the seller an e-mail asking particular questions. You get a response. This happens a few times. You decide to make this purchase and send them a credit card number. Three days later you get the item and couldn’t be happier.
How did you as the seller loose money? You broke all of the rules of retailing.
There is a prevailing “wisdom," or lack thereof, that when you are selling something on the internet, you only have to mark things up 30%. Just because you don’t have a brick and mortar store does not mean that you can break the rules. You need a full mark up. Here’s why:
- All of that e-mailing back and forth takes time. Time is money. Time is not free. If you make the mistake of thinking that your time is not worth something, then you deserve to fail as an entrepreneur.
- People never pay with cash. If they pay with a credit card, a pay pal account, or whatever, that costs the seller a few percentage points, cutting down his already low margin.
- The seller usually doesn’t sell from his own site. He has to pay the site several percentage points, for the right to use their site, further cutting down his already low margin.
- Shipping. This doesn’t come cheap anymore. If our guy is a complete fool, he doesn’t charge extra for it.
- Sales tax. This has become a legal minefield. Individual states all handle this differently. But they love to audit internet retailers just to make sure that they are reporting this correctly.
- If this guy is a complete dope, he’s not selling from his own inventory. He’s drop shipping from the manufacturer. How is he actually going to build a customer base? As soon as the manufacturer gets the e-mail address and regular mailing address of the customer, do you think they’re not going to cut out the middle man? Of course they will. Of course they do.
Now I am hearing a resounding chorus of buts...…
But I can’t sell it if I mark it up more than 30%. But I can’t charge for shipping. But I can’t afford to maintain an inventory.
The rules of retailing haven’t changed for several centuries. Just because we have a new avenue for the selling process doesn’t mean that anything has changed from a financial standpoint.
If you don’t play the game by the rules, you will fail. Find a product to sell where you can make a profit. Let everyone else go broke trying to re-create the wheel. Don’t break the rules.
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