You successfully launched your online store, so now you are already preparing for the first orders?
Opening a shop on Amazon and Etsy: 3 legal tips
To run an online business on popular marketplaces efficiently, it is important to keep your financial records in order.
AppLaw found 3 aspects where you should pay special attention to protect your online business and your income.
*Reading time: ~ 6 minutes
One of the key financial issues in your online marketplace trading process is tax accounting.
If the income from your sales exceeds the costs of manufacturing the goods, the marketplace considers your activity as a business and requires you to file a number of tax returns and pay taxes. Every year, you must prepare a report on your income and expenses, which should include all costs and determine whether you are profiting from your trading.
At the same time, even if you have no sales for the year or if you break even without earning any income, you will still need to submit reports.
Meanwhile, you will have to take into consideration the requirements for the filing and preparation of financial statements in a particular jurisdiction. It is important to understand that even if the legislation of the country of registration does not require you to submit reports, the marketplace cannot force you to prepare them, but it has every right to limit the functionality of the account.
If you are registered for VAT, you may be charged VAT depending on your country of registration and the country where your goods are sold. You should consult with a tax advisor on a case-by-case basis on when to pay VAT and how to file returns.
Payment of other taxes and fees
Your country of incorporation may also require you to pay sales tax, income tax, or other fees. These obligations should be considered when choosing a jurisdiction to open a company that will be registered on marketplaces such as Amazon or Etsy. These companies are macro business players, so they set a fairly large list of conditions for onboarding.
Verification of tax information
Whether your business is registered in the US or not, to trade on Amazon you will have to pass a "tax interview". For tax residents of the United States, a special form is required to be filled out indicating the tax number. Businesses registered outside the United States must answer a series of questions in order not to be subject to US tax reporting obligations.
Customs fees and payments
When trading goods between different countries, you need to follow all the requirements both in the countries of import and export. In particular, you should check duty rates, the requirements for additional shipping documents for certain goods, and the need for licenses and permits to trade and import goods into the country.
In some countries, including the United States, you must first identify a customs broker who will act as your registered agent, collect and submit all necessary documents, and pay duties and fees.
Specifics of VAT payment
For the purposes of taxation and VAT reporting, there are several rather complex rules.
For example, until July 2021, there were limits on the annual total value of goods that you sell to one EU country, known as "Distance selling of goods". If you exceeded the limits of goods sold, you had to register for VAT in each such country and submit a lot of reports.
These limits were replaced by the One Stop Shop mechanism. It is applied in two variations, depending on whether the goods are imported:
from one EU country to another (in this case, the seller submits an additional One Stop Shop declaration in the country of his registration)
to the territory of the EU from a country that is not a member of the union (in this case, the seller has to be registered for VAT in one of the EU member states specifically for filing such a declaration).
The advantage of this regime is that in one declaration you take into account all deliveries to all EU countries and get the opportunity to submit reports through a single online account.
In the first months of your trading on online marketplaces, you may not care about taxes. However, when the time to pay and report them comes, we advise you to be ready to preserve your reputation on the platform and avoid sanctions from regulatory authorities in the country of your registration.
Popular e-commerce platforms allow you to quickly start selling products that you produce or buy.
Commissions and additional payments
However, they determine a lot of conditions for you to comply with to use their services. Before you set the cost of your goods, carefully study all the fees that the service charges you and include them in your prices.
For example, on Etsy you have to pay every time:
you add products to your store listing ($0.2 is withdrawn every 4 months if you plan to continue selling these products after this period);
you sell several items of the same product ($0.2 is charged for each additional item);
a sale is made (6.5% is charged from the entire cost of the transaction, including the price of the goods, order processing, and delivery);
payment for the completed sale is processed by the payment service (the amount depends on the country of the seller).
The platform has some other fees that vary depending on the types and quantity of items you sell.
In turn, Amazon, in addition to a fixed payment for each sale (for an individual tariff), charges a referral commission. Its size differs depending on the types of goods sold and the total amount of the purchase.
The marketplace also offers several credit options for paying for advertising, commissions for logistics and storage of goods, which will help you launch your online business faster.
We advise you to keep a record of all additional payments when drawing up financial plans and reports and remember to pay them in time.
Another important feature regarding accounting for your business is providing supporting documentation.
Both Amazon and Etsy will require you to provide proof of the authenticity of your items, especially if they are made for children or if they are food products. As with many other issues, each country determines its separate requirements for such documents.
Among the key things that marketplaces expect to see in such certificates are:
where the goods are made (not only the country but also the region)
the full composition of goods
confirmation of the quality of goods
product testing data
Important tips to comply with marketplace requirements:
You will need to request the originals of these documents from manufacturers and suppliers and provide them to marketplaces in the format they require. In most cases, a high-quality scanned copy will be sufficient, but for certain types of documents and goods, copies will need to be certified.
Also, in order to sell certain types of goods, you will need to obtain a license and keep an eye on its expiration date.
At the same time, marketplaces set requirements not only for the goods you sell but also for companies planning to create an account on the marketplace. For example, in some jurisdictions, you may be subject to having a bank account in the country of incorporation of the company.
You should take your paperwork and corporate structuring requirements seriously. If you do not provide the necessary confirmations, the platform may not only refuse to list such products but also block your account temporarily or even permanently. Given that all payments go through the marketplace, your earnings will be frozen and you will not be able to receive new payments until you submit all the documents and they are accepted.
To keep your business running on Amazon and Etsy and keep your financial records in order, contact AppLaw for the advice!