eBay is not a new entrant to the e-commerce realm, with roots tying back to 1995 when operations began as an automotive marketplace. Today, eBay is one of the top platforms that e-commerce sellers gravitate towards because of increasing customer demand and user-friendliness.
Many eBay sellers get so caught up in driving sales and maintaining profitability that they neglect to engage in the proper eBay accounting. Sales tax, revenue recognition, inventory accounting, and tax planning are the four main areas of eBay accounting.
Handling these items accurately and timely often comes with a learning curve, making it important to reach out to a qualified expert if you don’t have the time or background knowledge to fulfill the eBay accounting requirements of your business.
Sales Tax
The first area of eBay accounting that you need to know is sales tax. Following the passage of South Dakota v. Wayfair, states are tracking sales in their jurisdiction more closely. South Dakota v. Wayfair ruled that states can impose sales tax on out-of-state purchases, which directly impacts eBay sellers.
Due to the size and popularity of eBay, they are classified as a marketplace facilitator. This means that eBay is in charge of collecting and remitting sales tax to each state on your behalf. Not only can this save you a great deal of time, but it also eliminates the need to determine nexus for each state.
However, the passing of the sales tax burden does not apply to other platforms, such as Shopify. Multi-channel sellers still need to determine nexus, charge customers sales tax, and remit the proper amounts to each state.
If this isn’t something you are comfortable doing, reach out to a qualified accountant that understands the legislation affecting remittances. For example, certain states, like New Jersey, don’t impose sales tax on clothing purchases, while others do. Working with an e-commerce accountant can reduce your risk of overpaying on sales tax.
Revenue Recognition
Revenue recognition is another important piece of eBay accounting. The FASB recently passed ASC 606, which requires businesses to recognize revenue when the performance obligation is satisfied, not when money is received. This creates a new problem for e-commerce business owners at year-end when goods haven’t shipped, or warranty contracts are outstanding.
In addition, eBay recently changed the way third-party payment processing fees are deducted. Instead of invoicing your business for processing fees, the amounts are taken off the top of gross revenue, leading to the net amount of revenue being transferred to your bank account.
Without any additional adjustments, your revenue would be understated by the fees, chargebacks, and discounts that occurred. Not only does reporting the incorrect revenue impact tax return filings, but it also impacts sales tax remittances since sales tax is calculated based on revenue.
Most accountants understand how to adjust your books for these items; however, eBay sellers often hire the cheapest accountant that might not know the intricacies of ASC 606 and eBay accounting. Going with an experienced professional compared to a run-of-the-mill accountant promotes accurate financials and tax returns.
Inventory Accounting
Unlike Amazon, eBay does not offer its sellers a warehouse to store inventory. This results in the burden of proper inventory accounting falling on your plate. eBay accounting for inventory includes understanding the landed cost, which is the purchase price of the inventory. These costs will go to the balance sheet until the product is sold, when they are then moved to the income statement.
Many eBay sellers try to write the entire inventory cost off to the income statement right away, but this does not follow GAAP. In addition, unit costs of products in eBay accounting frequently change with rising inflation, meaning you need to be precisely tracking the purchase price of goods to expense the proper amounts.
Tax Planning
Another major component of eBay accounting is tax planning. Implementing tax planning strategies throughout the year can help your eBay business lower its tax burden, putting more money back into your pocket.
Tax planning is unique to each business as the number of partners, location of employees, and where the partners file returns all impact the strategies able to be used. As a result, working with an accountant that knows the tax implications of filing in different states is important.
For example, some states allow special depreciation options for asset purchases, while others do not. Understanding these implications before you purchase assets or file your returns is vital.
Summary
Implementing the right procedures in your eBay accounting function can lead to compliance with regulatory agencies, added scalability ease, and more insights into operations.
Whether you are looking for strategic advice on any of these areas or simply want to go over the eBay accounting processes your business is using, reach out to the team at BUSINESS. We specialize in helping e-commerce business owners leverage their accounting functions to achieve growth, insights, and long-term success.
