I just attended Teachable’s Black Friday Summit over the past couple of weeks, and the content was amazing. It was a free series of 12 different webinars talking about everything from how to select an online course to teach, how to successfully launch a campaign, how to make your videos beautiful, and everything in between.
Well… almost everything.
I found one glaring omission which is the same exact omission I see at virtually every online seller’s conference. Accounting. And specifically, sales tax. These are really huge topics for all online sellers, and yet the topics are typically completely glossed over.
I attended the entire Summit, and although there was plenty of information about building up your sales and marketing efforts, they basically ignored what to do as a business once you’ve made all that money.
So let’s talk about it.
If you’re just starting out, this doesn’t need to be a big deal. Here are the biggest things you need to pay attention to:
KNOW WHAT KIND OF BUSINESS YOU ARE
Sole Proprietor - this is the simplest business formation possible. Basically, you tip your head to one side and say out loud, “I am now a business.” Then you report all of your business income and expenses under your name on Schedule C of your personal income tax return. Done.
This business entity type does not afford you any legal protection or special tax savings (in fact, you have to pay self-employment taxes on the net income from your business). But it’s super-easy to start and stop and is perfect for someone just dipping a toe into entrepreneurial waters.
Setting up a Limited Liability Company is just barely more complicated than that but may offer you more legal protection, so may want to look into it.
There are tons of other entity types as well (Partnership, LP, LLP, LLLP, S Corporation, or C Corporation), but regardless of the type you choose, I implore you to find a reputable CPA and attorney to help you cross your T’s and dot your I’s.
These are costs of doing business that are worth their weight in gold.
KEEP YOUR BUSINESS AND PERSONAL FINANCES SEPARATE
Regardless of the entity type of your business, you will ALWAYS want to keep your business and personal finances separate.
Just open a separate checking account and credit card for the business, and you’re off to the races. Do your best not to use personal funds for your business or your business funds personally as treating your business as a piggy bank that you can access any time you want a new pair of shoes may jeopardize any legal liability protection you have. (Please talk to your attorney for more info.)
The other advantage is that when you (or your bookkeeper) are trying to update your accounting, there’s a lot less superfluous data to weed through, and you’ll be less prone to errors.
USE AN ACCOUNTING SYSTEM AND RECONCILE OFTEN
Xero and QuickBooks Online are the current fan favorites in the U.S. accounting industry (I prefer Xero).
Accounting systems, particularly cloud accounting systems, were designed to take away all the heavy lifting in managing the data. Take advantage of it. Once you learn some basics, it can provide you with good reports for keeping an eye on your profitability and other important financial metrics.
BE AWARE OF SALES TAX… YES, YOU MIGHT NEED TO COLLECT THIS!
Here are the high level basics you need to know.
DO YOU HAVE “NEXUS?”
Nexus is basically a fancy way of talking about where you have a business presence. If you don’t have a business presence (nexus) in a state, you aren’t responsible for collecting sales tax. Period. That’s typically really good news.
Some of the most common ways that you can determine whether you have nexus is through:
People - where are you, your employees, and your salespeople?
Property - where is your desk, your inventory?
If you have people or property in a particular jurisdiction, that city, county and/or state can claim that you are doing business there, and as such, require that you collect sales tax from your customers.
SUPER IMPORTANT! You know this Affiliate Marketing stuff that everyone is super-excited about? Umm, it’s a sales tax nightmare. Affiliates are salespeople. Salespeople create nexus. Just imagine the companies who use hundreds or thousands of affiliates. Yikes. They are legally responsible for collecting sales tax in pretty much all the states that have a sales tax. Did I mention it was a nightmare? Yeah.
So now you’ve determined where you have nexus, but if your products aren’t taxable, it all becomes moot.
IS WHAT YOU’RE SELLING EVEN TAXABLE?
Again, you’ll be jazzed to hear that the taxability of products varies widely from state to state. To find out whether your product is taxable, you’ll need to check with the state(s) where you have nexus. Just doing a quick Google search like "is my product taxable in Ohio" should point you in the right direction.
Here’s a fun example… I’m in Colorado, and in Colorado, services are not taxable. So your first inclination would be to assume that online courses are not taxable, but SURPRISE - they are. Here’s why….
Live courses or educational courses where the students interact with the teachers is considered a service. However, if what’s being sold is a recorded video, it’s considered a product, and it’s irrelevant that the content is educational in nature. It is nonetheless considered a “tangible product” that is subject to sales tax.
Oh, and did I mention that Colorado has over 300 sales tax jurisdictions? Yeah, there’s that.
HOW DO YOU COLLECT SALES TAX?
I'm so glad you asked. Here is where the insult to injury comes into play. Let’s say you are a highly legal and ethical person who accepts the responsibility to collect and remit sales tax on behalf of your customers. Awesome.
The only problem is that few shopping carts are properly equipped to determine from whom to collect sales tax and at what rate. It’s really, really hard. As a result, a lot of shopping carts simply ignore this functionality.
I haven’t seen any online learning platforms who have the ability to do this, but please give me a shout if you do!
Until shopping carts catch up to the needs of the online course creators, it's probably best to consider making your course price inclusive of sales tax (if it's required) so you can err on the side of caution and remain in compliance with the law.