Breaking down the profitability of a online retail sale

I saw a small business owner post on social media somewhere complaining about how hard it was and part of what they complained about was how much they had to pay in sales tax. That is one of those misconceptions that irritates me because the way you have to think about sales tax as a retailer is that it is money you are collecting for the state from your customer, not money that you as the business are paying to the state.

That money you collect for sales tax is never yours, although you may get to hold on to it between the time you collect it from the customer and you submit your monthly (or quarterly) payment to the state.

So you should never, ever, ever include sales tax collected in your sales figures. It’s not really ever your money, and it only seeks to confuse things if you think of it as such.

But that led me to thinking it might be useful to some people to break down an actual sale to an online customer from our store on March 31, 2023. The customer was in Nevada, and they paid us with PayPal. Here’s what it looked like from their perspective:

The MDF panels were sold at a 50% discount, and the extended price on that line is a demonstration of how your method and timing of rounding in calculations can lead to results that may surprise someone. You might think two items that cost $4.19 that are 50% off will cost $4.19 in total, but if your calculation actually looks like: $quantity * ROUND_TO_EVEN($price * $discount) that will give you a different result than ROUND_TO_EVEN($quantity * $price * $discount).

Okay, so our gross revenue for this sale is $21.58. (Remember, don’t count the tax!)

Now I’ll pull back the curtain and reveal our costs:

Okay, nothing too shocking there. We did get fortunate and the shipping calculation done our website matched our actual shipping cost exactly.

PayPal collected $1.31 in transaction fees ($0.49 + 3.49% of the full transaction amount - one place where the sales tax does cost us).

We didn’t really account for it on a per-sale basis like this, but I added in the expenses for the box we shipped the order in, and the promotional items (branded pencil and stickers).

So after adding up all of these costs, we ended up with a net profit of $3.39. That’s a net margin of about 16%.

That didn’t all end up in our pockets, of course. We had employees, rent, insurance, other business expenses, and debts to service.

A difference between this and an in-person sale is that the shipping stuff would be a non-issue, of course. Another is that our transaction costs for payments in person were much lower (about 2% on average for cards, or essentially zero for cash).

A larger online sale might have triggered our free shipping, but the per-sale costs (fixed part of transaction fee, the box, the promo items) wouldn’t have taken as much of a bite on a percentage basis.

In conclusion, the margins weren’t great, and without enough scale, the overhead will kill you.