Anytime, anywhere, get something on-demand. That’s the implied promise, and wow does it sound good. The shared economy, the gig economy, collaborative consumption, peer economy… this potential utopia has many names, but the same concept applies. Consumers access online market places through apps and “borrow” goods or get services they need for a small fee. But sharing economy participants often fail to understand the tax and accounting implications of their participation. And few CPA firms are completely prepared to deal with the increasing number of sharing economy participants or the sometimes complex circumstances that come along with counseling them or filing taxes on their behalf.
Picture the life of someone fully-immersed in the shared economy. Let’s call her Donna Digital. As the alarm clock/mobile phone rings at 6am, she silences the alarm on what will very much be the center of her world that day. She’ll hail a car she doesn’t own to take it to an office she rents along with dozens of other businesses. Once there, perhaps she uses her computer to cruise a freelance marketplace to connect with hiring managers directly and look for work. Her current employment contract is ending but that graphic design degree she recently completed (paid in part by peer-to-peer lending), has helped to turn up some other paying customers. At lunch, Donna will have her favorite sushi brought by someone on a bicycle. She’ll book a stay in a home owner’s spare room for her trip to Tahoe next week before doing some work to finish out the day and returning home.
By using Lyft, WeWork, Upwork, Lending Club, Postmates, and Airbnb in an 8-hour span, Donna still isn’t even scratching the service on the shared economy. On-demand offerings have expanded to include everything from borrowing bicycles and tools from neighbors to offering access to your home WIFI network in exchange for the ability to access someone else’s when you’re traveling.
And there’s plenty more “Donnas” out there. An eMarketer survey released earlier this year estimated 56.5 million adults would use the shared economy in 2017. That same study predicts a 53% increase by 2021 in the number of adults that will use the shared economy.
Entrepreneurs don’t need to be limited to the availability of outside marketplaces. Anyone with a smartphone and a bit of shopping savvy can create a category for selling. Whether using their own easily created webstore, or building on the backs of giants like Amazon and Walmart, individuals are swarming to e-commerce channels in massive numbers.
Retail e-commerce sales were more than $360B in 2016 and are projected to grow to $638B by 2022. In the Amazon marketplace alone, third-party sellers were responsible for half of all paid units in 2016 – or nearly $23B in revenue. And if 2017 Cyber Monday sales are any indication, the trend will continue. At $6.59B in sales, November 27 was the largest U.S. online shopping day ever.
It’s hard not to be enthusiastic about on-demand goods and services. Providing access to unused assets is more affordable than ownership, more convenient in many ways, and better for the environment. Working within the gig platforms is also a great opportunity for some people to supplement their primary income or pay the bills when they are out of work.
But individuals in the shared economy often dive into the work without realizing the tax and legal implications of what they’re doing. “Most people get into driving, or get into the shared economy looking to make some extra money,” said Harry Campbell. “They don’t realize that they’re actually running a business. From day one – you’re making revenue. That’s a business.”
Campbell left his job as an aerospace engineer in 2014 to drive for Uber and Lyft and founded his site The Rideshare Guy. Today, in addition to running his site and driving part-time, he consults with drivers to help them form strategies on everything from routes to tax strategies and insurance.
How do you track your expenses? If you use your car for business, do you attempt to deduct standard mileage or your actual vehicle expenses? How do you get the proper insurance for your business model? How do you handle and report on inventory? When accounting for sales, returns, and vendor payments, how do you form a supportive cashflow? Is your business truly profitable or just turning a profit on the items that you sell? Which products are losing you money and which are the most profitable? Those types of questions used to be for business owners to ponder. Now they’re faced by individuals who were just looking to run a few errands and collect some extra cash. E-commerce sellers find even more uncertainty and complexity. It’s not as easy as firing up your smartphone and making some quick sales.
Aside from the practical, an individual operating in the shared economy or selling online has a host of tax and finance concerns to go along with all that new opportunity. Scott Scharf should know. He’s built a business around helping e-commerce sellers navigate the complexities of the accounting for online selling. Scharf co-founded Catching Clouds with Patti Scharf, to help online businesses solve their business and accounting technology problems. Catching Clouds was founded in 2011 and only focuses on e-commerce sellers. Catching Clouds’ clients are all established in the e-commerce industry, with most averaging $1-30 million per year selling online through one to five or more channels.
In addition to their advisory services, Catching Clouds has launched The Catching Clouds Academy, which provides online accounting training for e-commerce sellers and their accountants. The Scharfs blog and speak regularly on the topic of e-commerce accounting, and host a Facebook Community related to accounting and online selling.
If there’s a component of e-commerce that’s likely to cause consternation for a CPA firm, it’s taxes. Many online sellers believe that, since they’re selling online, they only need to collect sales tax in the state where they’re based. In the United States, all merchants – physical or online – are required to collect sales tax from buyers in states where the seller has nexus. Nexus, in this case, represents when a business has a significant presence in that state. A presence might mean that the business has offices, employees, or even just stores inventory there. When an e-commerce seller uses Amazon to fulfill their own online sales within the Amazon website, their inventory can be stored in Amazon-owned warehouses, which establishes a nexus there for the seller.
And the confusion abounds from there. Sales tax laws are extremely varied. If e-commerce sellers even collect sales tax (some don’t), the process of registering and filing for sales tax payments, not to mention the tax rates, is different from state to state. Even the timelines for tax payments is wildly different from one state to the next. Sellers that do thousands of sales a month, through multiple channels and with inventory stored throughout the country, can quickly find their tax situation complex and with huge exposure in the event that they don’t make the proper payments at the right time.
Just as individuals are faced with new opportunities, CPA firms and accounting professionals can capitalize on the shared economy with some adaptions to the status quo.
Scott Scharf of Catching Clouds recommends a multi-pronged approach for accounting professionals to begin to prepare themselves for the very high likelihood that they’ll begin to encounter more and more questions, if not clients, that are immersed in the shared economy and e-commerce.
While CPAs don’t necessarily need to start driving for Uber on the weekends, it’s important to know what’s available. You can’t anticipate what kinds of accounting and tax concerns a participant might have if you’ve never even heard of the third-party platform that they’re using.
While self-driving vehicles might come along and change things drastically, ridesharing platforms aren’t going away anytime soon. How would you advise someone who has been driving for Uber but hasn’t tracked their mileage for the entire year? How should a driver even track their mileage? Can “gray area” products like trunk organizers and car washes be expensed? These are just some of the questions you’ll encounter when dealing with gig economy workers.
If you have a client that sells online and ships out of warehouses in other states, you will need to determine the tax implications and payment procedures. There are a host of resources available for this, including paid courses. Specialized companies like TaxJar and Avalara also post educational information regularly on their websites.
For the “Donna Digitals” of the world, being immersed in several selling and shared economy platforms means that income statements and source data is spread out among different apps and systems. Accounting professionals should be increasingly comfortable in navigating these apps in order to pull together the appropriate income and expense reports. When faced with an e-commerce seller that is operating several storefronts, sales data can be residing in dozens of different places. Solutions like Webgility exist to help CPA firms connect the data from multiple sources but assembling and referencing the right reports and configuring the solutions in the right way still takes some thought.
Technology issues like dealing with the shared economy or e-commerce are discussed at many conferences and industry events. Browse the attendees and sessions beforehand to target events where these topics are discussed.
The Internal Revenue Service also has resources available to help deal with some of the issues highlighted here.
You’re now on your way to helping a new cadre of people navigate the new, new way to work.
This post is the second in a series where we’ll explore emerging technology in the accounting field and hear from industry experts on potential future impacts. Read the next post here.
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