E-Commerce Seller Deductions: Inventory, Cost of Goods Sold, Marketplace Fees, Advertising, and the Tariffs in the Landed Cost

E-commerce is an inventory business with a fee schedule, and the return follows the landed cost. Inventory and cost of goods sold — the return's center: products bought for resale (from domestic wholesalers, from overseas manufacturers, or made by the seller) are inventory — not deductible when bought, deductible as cost of goods sold when sold — with the year-end count (the units in the seller's own storage, in the marketplace's fulfillment centers, in transit, and at the third-party logistics provider) setting closing inventory, and cost of goods sold computed as opening inventory plus purchases less closing inventory; the small-business method (for sellers with average annual gross receipts of US$32 million or less — the 2026 section 448(c) threshold) permits treating inventory as non-incidental materials and supplies or following the seller's book method, which for most e-commerce sellers means the same thing — expensed as sold, with a count — and the marketplace's inventory reports are the count for units in its warehouses. The landed cost — what goes into inventory: the product's purchase price, plus the freight to get it to the seller's or the marketplace's warehouse (ocean or air freight, drayage, the freight forwarder's fees), plus customs duties and tariffs (the largest addition for imported goods in recent years — a 25 percent tariff on a US$10 unit makes it a US$12.50 unit in inventory, and the tariff is recovered through cost of goods sold as the units sell, not deducted when paid), plus the customs broker's fees, plus inbound handling — all capitalized into the units' cost under the inventory rules (the uniform capitalization rules apply to larger sellers; small-business sellers are exempt from them, and under the section 471(c) methods the freight and duties are recovered as the units are provided to customers — or as the seller's books capitalize them, which a landed-cost ledger does); a seller who expenses tariffs when paid rather than capitalizing them into the units misstates both the year's cost of goods sold and the closing inventory. The marketplace and fulfillment fees: the referral fee (a percentage of each sale — 8 to 15 percent on most categories), the fulfillment fees (per unit picked, packed, and shipped by the marketplace), the monthly storage fees (per cubic foot, with long-term storage surcharges), the removal and disposal fees, the subscription fee, the advertising (below) — all costs, on their own lines, never netted against sales; the marketplace's payout is net of all of them, and the seller books the gross sales (the marketplace's sales reports) with each fee category as a cost, reconciled to the 1099-K (which reports gross payments processed — the reporting guide) and to the marketplace's settlement statements. Advertising: sponsored product and brand ads on the marketplace, paid search and social advertising for the seller's own site, influencer and affiliate payments (1099-NECs to affiliates paid US$2,000 or more for payments made in 2026 (US$600 before); the coaching digital products guide's affiliate rule), the product photography and listing content, and the review and launch services — all deductible as paid, with the marketplace's ad spend often the largest single expense after cost of goods sold and reported separately from the referral and fulfillment fees. Returns and refunds: a refund is a reduction of sales (returns and allowances — its own line, never a netting into gross); the returned unit is either restocked (back into inventory at cost), liquidated (sold at a loss — the proceeds as sales, the cost as cost of goods sold), or disposed (a write-off of the unit's cost — a deduction when the inventory is abandoned or destroyed, documented); the marketplace's return-processing fees are costs. The seller's own site: the platform subscription (the hosted-store platform), the payment processing (a percentage per order — its own line), the apps and plug-ins, the domain and hosting, the email marketing platform, and the customer service tools — subscriptions expensed as paid. Shipping (own-site orders): postage and carrier costs for orders the seller ships itself (a cost — with shipping charged to the customer as revenue on a separate line, not netted), the packaging (supplies), the shipping software, and the third-party logistics provider's fees where the seller outsources fulfillment. Inventory storage: a rented warehouse or storage unit (rent), the seller's home (the home office rules' storage-of-inventory exception — a defined space used regularly to store inventory qualifies without the exclusive-use test when the home is the business's sole fixed location, in addition to any exclusive home office; the contractor home office guide), or the marketplace's warehouses (the storage fees above). Sourcing and travel: trade shows and sourcing trips (deductible as business travel — a trip to a manufacturer or a trade fair, with the mixed-trip allocation), samples (a cost of product development, or inventory if sold), and the sourcing agent's fees. Product development and compliance: the product design and prototyping (expensed, or capitalized where it creates a lasting asset), the safety testing and certifications (product-safety compliance for children's products, electronics, and cosmetics), the trademark registration (a trademark is a section 197 intangible whether bought or self-created — the seller's own application and registration fees are capitalized and amortized over fifteen years), the UPC codes, and the brand registry. Software and services: the inventory management and repricing tools, the accounting integration (the connector that pulls marketplace data into the books — the tool that makes the reconciliation possible), the analytics platforms, and the professional fees (the customs broker, the accountant, the trademark attorney). Labor: a virtual assistant or customer service contractor (a genuine independent business — a W-9 and a 1099; often abroad — a W-8BEN and no 1099; the international clients guide), employees in a warehouse or office (payroll), and the owner's own time (a draw, not an expense — or a salary under the S election; the e-commerce entity guide). The suppliers: an overseas manufacturer is a foreign person providing goods (no 1099 for goods; no withholding); a domestic supplier of goods needs no 1099 (payments for merchandise are exempt from 1099 reporting); the customs broker is a service provider (a 1099-NEC where not incorporated), while the forwarder's freight and storage charges are excepted from 1099 reporting. Sales tax — mostly solved, not entirely: the marketplace facilitator laws in every sales-tax state make the marketplace the collector and remitter on marketplace sales — the seller's own registration and collection obligation covers only its own-site sales, in the states where it has nexus (its home state, plus any state where its own-site sales cross the economic threshold — commonly US$100,000 or 200 transactions, varying by state — plus, in the states that assert it, any state where the marketplace stores the seller's inventory; the digital products sales tax guide's compliance system); a seller whose own-site sales are small may have nexus in only its home state; a seller whose inventory sits in a dozen fulfillment centers may have physical-presence nexus in a dozen states for its own-site sales (the states' positions differ and change — some still treat inventory stored in a fulfillment center as physical presence requiring registration for the seller's own-site sales — so the map is reviewed annually) and, in some of those states, income tax nexus as well (the consulting multistate guide's framework). Entity and self-employment: e-commerce is not a specified service trade — the QBI deduction applies at all income levels, subject to the wage-and-property limitation above the threshold (the e-commerce entity guide). The bookkeeping — the reconciliation business: gross sales by channel from the platforms' reports; each fee category as its own cost line; returns and allowances; advertising by platform; the inventory ledger (units and landed cost by SKU, with the marketplace's inventory reports and the year-end count); cost of goods sold computed, not estimated; the 1099-Ks reconciled to gross by channel; sales tax by state for own-site sales with the marketplace's collections confirmed; the suppliers' documentation (W-8BENs, the customs entries); contractors' W-9s and 1099s. The errors: booking the marketplace's net payout as sales (the 1099-K won't reconcile — the most common e-commerce error, and the one the IRS's matching program finds); expensing tariffs and freight when paid instead of capitalizing them into inventory; no year-end count (cost of goods sold as a guess); returns netted into sales; the inventory-nexus states ignored for own-site sales; and the affiliate payments without 1099s.

Key takeaways

• Inventory is deductible when sold, not when bought — cost of goods sold is opening inventory plus purchases less closing inventory, with the year-end count across the seller's storage, the marketplace's warehouses, and goods in transit.
• Landed cost goes into the units: purchase price, freight, duties and tariffs, brokerage, inbound handling — recovered through cost of goods sold as units sell, not expensed when paid.
• Book gross sales from the platforms' reports with every fee — referral, fulfillment, storage, advertising, processing — as its own cost line, reconciled to the 1099-K; the net payout is never revenue.
• Returns are a reduction of sales on their own line; returned units are restocked, liquidated, or written off when disposed.
• Marketplace facilitators collect sales tax on marketplace sales; own-site sales are the seller's obligation in nexus states — home state, economic-threshold states, and (where asserted) inventory-location states.
• Not a specified service trade; overseas manufacturers need no 1099 (goods), affiliates and customs brokers may.

The e-commerce seller's deduction file

Sales by channel (gross, from platform reports). Fees by category and channel. Returns and allowances. Advertising by platform. Inventory ledger by SKU (units, landed cost); marketplace inventory reports; year-end count; COGS computed. 1099-Ks reconciled to gross by channel. Own-site: platform, processing, shipping (revenue and cost), 3PL. Storage (warehouse rent or home storage space). Sourcing travel; samples; compliance testing; trademark (intangible). Software and integrations. Contractors (W-9 / W-8BEN); affiliates (1099-NEC). Suppliers' customs entries. Sales tax: own-site by nexus state; facilitator collections confirmed. The COGS computation and the 1099-K reconciliation are the return.

Worked example

A private-label seller grosses US$1.4 million: US$1.1 million on the marketplace (booked at gross from the sales reports, with US$142,000 of referral fees, US$118,000 of fulfillment fees, US$21,000 of storage fees, and US$96,000 of sponsored ads as separate cost lines — the marketplace's payouts, net of all of them, had been what the prior bookkeeper called "sales"), and US$300,000 on the seller's own site (with US$8,700 of processing fees, the platform subscription, and US$24,000 of postage as costs, and US$19,000 of shipping charged to customers as revenue). Inventory: 14 SKUs from two manufacturers overseas — the landed cost per unit built from the purchase price, ocean freight and drayage, the 25 percent tariff on the category, and the customs broker's fees (the tariffs, US$88,000 for the year, capitalized into the units, not expensed); the year-end count across the seller's warehouse unit, four fulfillment centers (the marketplace's inventory report), and two containers in transit — US$210,000 of closing inventory; cost of goods sold computed at US$560,000. Returns: US$47,000 of refunds as returns and allowances; US$6,000 of unsellable returns written off on disposal with the marketplace's disposal report. Advertising on the seller's own site (US$41,000), two affiliates (1099-NECs), product photography, a trade show trip to a sourcing fair (business travel), safety testing for a new SKU, and the trademark registration capitalized. A customer service contractor abroad (a W-8BEN; no 1099). Sales tax: the marketplace collects and remits on marketplace sales; own-site sales are collected in the home state and two states where own-site sales crossed the threshold; the seller reviews the inventory-nexus position in the fulfillment-center states annually. The three 1099-Ks reconcile to the gross sales by channel. Net profit lands in the low six figures — an S corporation with the owner's salary from an e-commerce operations manager's wage (the entity guide), the QBI deduction in full. The competitor who booked net payouts as sales, expensed the tariffs, and never counted the fulfillment centers: a 1099-K mismatch notice, an overstated first-year deduction, and a cost of goods sold no one could defend.

Official sources

Publication 538 states: “If you are a small business taxpayer (defined below), you can choose not to keep an inventory, but you must still use a method of accounting for inventory that clearly reflects income. A small business taxpayer can account for inventory by (a) treating the inventory as non-incidental materials and supplies, or (b) conforming to its treatment of inventory in an applicable financial statement (as defined in section 451(b)(3)).” — Internal Revenue Service, Publication 538, Accounting Periods and Methods, https://www.irs.gov/publications/p538

The IRS states: “No matter the amount of reported payments, if you receive payments for selling goods or services, you must report all income on your tax return.” — Internal Revenue Service, Understanding your Form 1099-K, https://www.irs.gov/businesses/understanding-your-form-1099-k

Practitioner note

An e-commerce seller's return is a cost-of-goods-sold computation the platforms make hard to see: the marketplace's payout arrives net of a dozen fees, the tariffs arrive as a customs bill that feels like an expense, and the inventory sits in warehouses the seller has never visited. Our e-commerce files book gross sales from the platform reports with every fee as its own line, capitalize freight and tariffs into the units' landed cost, count the fulfillment centers from the marketplace's inventory report in December, and reconcile every 1099-K to gross by channel — because the matching program finds the net-payout-as-sales error, and the buyer's accountant finds the rest.

See also: For related guidance, see e-commerce seller estimated taxes: the fourth quarter that is half the year, unsold inventory, and the payout lag; and browse every small business tax guide, by situation.

Next step

Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk handles e-commerce seller returns and bookkeeping — inventory and landed-cost accounting with tariffs capitalized, marketplace fee reconciliation at gross, returns and disposals, 1099-K matching by channel, own-site sales tax in nexus states with facilitator confirmations, supplier and affiliate documentation, and platform-to-books integration. See pricing or book a call.