Amazon Sales Tax for Sellers & Accounting
Guide to Sales Tax for Amazon FBA Sellers
Whether you sell online, in a brick and mortar store, or all three, sales tax is a harsh reality for most retailers. Do you sell on Amazon? Amazon FBA sellers pay sales tax differently than other retailers. This is a guide for the sales tax of Amazon sellers who are looking for information on how to collect and file sales taxes.
When should Amazon FBA sellers collect sales tax?
All online retailers are subject to sales tax, regardless of whether they sell products through eCommerce. If you are an FBA seller, and your sales meet these two criteria, you must collect sales tax:
1. Nexus of sales tax
2. Taxability of products
You need to understand both to determine when and if you have to charge your Amazon FBA customer’s taxes.
1. Nexus of sales tax
“Nexus” in the context of sales tax is simply a way of saying “significant connection” with a state. The state considers you to be liable for the sales taxes people in the state pay if you have Nexus there. Your home state will always have a sales tax nexus, but other states will also have a nexus because of certain business activities.
There are several ways to have sales tax nexus in other states
- The location. The physical address of a business, like its office, warehouse, or store. For this check Amazon Utah sales tax or Amazon sales tax Alabama.
- Employees. A person who performs work on your behalf, such as an employee, a contractor, a salesperson, or an installer.
- Affiliates. In many states, Nexus is created when someone endorses your products for a percentage of profits. E.g., amazon Michigan sales tax requires a physical address.
- An arrangement in which products are dropped-shipped. Nexus can be created if third party ships to your customers.
- Eligibility: You may be considered to have Nexus even if you temporarily sell products at a trade show or other event.
- Inventories. Even if you have no other business or employees in the state, the state considers storing merchandise for sale in the state to cause a nexus. For instance, Amazon’s Illinois sales tax requires vendors to have economic Nexus if they have more than 200 transactions.
A state-based inventory storage policy is especially pertinent to Amazon FBA sellers. Most states accounting for sales tax say that this creates a sales tax nexus.
Consider it from the point of view of the state. From their perspective, any online seller that uses the state’s public resources, such as roads and public safety, for delivery and emergencies has a nexus. Because FBA sellers typically keep their stock in an Amazon fulfillment center, they may be Nexus for sales tax purposes in that state.
2. Product taxability.
Following your determination of Nexus in a particular state, you need to further determine if your items are taxable. Services are not taxed, whereas tangible personal property is. It is important to note that any exceptions to these two general rules can be made by each state depending on its specific sales tax laws.
There are some product categories that do not incur accounting sales tax in some states. Groceries, clothing, and textbooks fall into this category. Groceries and clothing, for example, are not subject to Minnesota’s tax system. A 5% reduced tax rate is applied to grocery items in Tennessee.
What are some basics of retail tax that Amazon sellers should know?
Following are the retail sales tax that Amazon sellers must know:
If a seller determines they have Nexus with a state, then they must get their sales tax collected by registering with the state Department of Registration. Online registration may be completed by visiting the website of the state’s Department of Revenue. A sales tax permit will be issued after the Department processes the application. A local taxing authority may now determine the rate at which they collect sales tax from customers.
The collection of sales tax
After you have been approved to collect sales tax, you can begin collecting sales tax. It is typically collected at the time the sale is made. The amount is typically printed separately on sales receipts and checkout systems for brick-and-mortar sellers to avoid confusion. A business must clearly display the sales tax amount separately, so customers can easily see how much tax they are paying. On the other hand, online sellers must show the sales tax calculation separately from the cost of the bought items on the “shopping cart” page. This is handled by Amazon, naturally.
The seller’s sole responsibility is to hold sales tax on behalf of the taxing authorities until the sales tax is due. In addition, businesses should remember that they are not collecting revenue when they collect sales tax. These funds should never be viewed as a source of revenue. Online purchases are taxed based on the purchaser’s shipping address instead of that of the taxing authority.
Sources of state sales taxes
Sellers on Amazon do not need to calculate their sales tax rates since Amazon will handle that for them. It is good to understand how such taxes work to know how to apply them to sales.
The correct state sales tax rate begins with knowing from which state the tax is collected from the shipper or the target state.
Using origin-based sourcing, destination-based sourcing, or mixed-sourcing, each state is classified as a kind of origin-based sourcing state. The way each state treats taxation differs, as follows:
Sourcing states are based on origin
- The sales tax will be applied for intrastate transactions based on the point of origin (i.e., shipping address).
- At present, origin-based sourcing is practiced in eight states: Arizona, Illinois, Mississippi, Missouri, New Mexico, Tennessee, Utah, and Virginia.
Destination based sourcing state
- Depending on where the products are shipped (ie. the ship-to address), Amazon applies sales tax.
- The number of origin-based sourcing states currently stands at 38.
Filing sales tax returns as an Amazon seller
Local tax authorities may require Amazon Marketplace sellers collecting sales tax to file ongoing returns with them on a periodic basis. How often tax returns are filed depends on the number of revenue sellers receive from taxable sales. Business owners who file their first tax return annually can expect to file subsequent returns annually.
Sales tax collected from a business increases as its revenues grow. Tax authorities will probably assign more frequent deadlines to remit tax revenue sooner rather than later. Once you have registered for tax, you should create the sales tax accounting entries. It would help if you did this to keep track of all tax details.
It is important to note that Amazon sellers must pay sales tax (also known as remitting tax revenue) in addition to filing sales tax returns. In order to file a sales tax return, each jurisdiction’s tax revenue must be broken down. Lastly, you must complete and submit the required state and local tax forms.
5 Sales Tax Tips For Amazon Sellers
The potential for making a location-independent income is great when selling through Amazon, eBay, or any other e-commerce site. You need to be aware of US tax implications if you sell online in the US market and earn a steady income. Below are five sales tax tips for Amazon sellers you should consider.
1. Make sure you hire an accountant who understands taxes
For sales tax, amazon sellers must invest in a good accountant. With a business comes a lot of moving parts, and if you have an LLC, they can save you big time in tax write-offs as well. Fetcher, software specifically developed for Amazon sellers by Amazon sellers, makes sorting through financial data a lot easier as well.”
2. Make sure you are up to date on state sales taxes
Amazon sellers are concerned about state sales taxes. If they ship only from one state, online sellers do not have to pay sales tax. Assume, for example, that California’s state sales tax is 7.25%, in addition to any local taxes that may apply. FBA sellers are responsible for the shipment of their products from Amazon’s warehouses located around the country. The state where their products are delivered may have a state sales tax, so they should be aware of this.
3. Decide which method of inventory accounting to use
As a result of the Tax Cuts and Jobs Act of 2017, changes were made to inventory accounting. For small retailers with sales below $25 million and inventory held, you may elect to treat it as “non-incidental” inventory. Before the change, the threshold was $1 million. If eligible, retailers and Amazon resellers can significantly reduce their taxes by simplifying their accounting.
4. Deductions should not be overlooked
There are, of course, some business expenses that you can deduct when selling online. Among them are:
- Fees charged by Amazon
- Costs associated with shipping
- Expenses associated with a home office
- Supplier visits
- Marketing/branding, such as identifying your own brand’s logo when selling your own products
- Sponsored advertisements
5. Take the right steps to integrate
Amazon seller tax is heavily influenced by the business structure. Using an LLC for tax purposes may be the best option for non-US sellers. A single-member LLC transmits all of its income to its owner, who must declare it in the country where he or she resides. The commonly portrayed income-tax-free solution often involved with selling a US LLC through a Belizean company is not the case.
Foreign companies that own US LLCs and conduct substantial business in the US, collecting sales tax, are considered US businesses. Income earned by such companies is considered effectively connected. The foreign company’s income must be reported to the IRS.
To keep track of all your tax details and costs, it is good to create accounting for sales tax expenses. Some vendors provide tools to help you with this. Quickbooks can be very useful in this regard.
Considerations for Amazon sellers regarding sales tax compliance
There are a few risks Amazon retailers need to be aware of when collecting and filing sales tax returns. In the case of an audit, sellers should keep track of all sales, any sales tax collected, receipts, returns, and tax-exempt purchases. Here are four risks in sales tax Amazon sellers need to be aware of.
Not collecting sales tax on Amazon purchases
Amazon’s retail sector is no longer possible to ignore sales taxes. According to the Supreme Court decision in South Dakota v. Wayfair, Inc, the Quill Corp v. North Dakota (1992) decision has been overturned and states can now tax online sales. If your total sales volume exceeds certain thresholds, sales tax collection from amazon sellers may be required in all remote states. Ensure that you collect tax based on your exposure.
Businesses also face risks when filing sales tax. Taxes owed are usually subject to interest and penalties for failure to file on time. Therefore, it is important to file as soon as possible.
Sales tax collected in the wrong amount
In spite of collecting sales tax from customers on Amazon, are you certain you are collecting the correct rate of tax on the product, taking state-sourced rules into account? Understanding how your Amazon store is set up and how it affects sales tax collection can be helpful.
Failure to file sales tax
State and local sales taxes have different deadlines for filing. You should know the filing deadlines for your state and local filing locations based on your assigned filing frequency. If a due date is missed, taxes are usually penalized nominally.
Errors on sales tax filing forms
Make sure not to make mistakes if you’re still filling out forms manually to file state and local sales taxes. During the last decade, technology has advanced significantly.
Amazon’s sales tax collection methods
For a better understanding of how Amazon collects sales taxes, let’s pause for a moment. A system in place on Amazon Marketplace determines the amount of tax owed by fifty states. Washington DC, and some local jurisdictions, apply it to order and collect it on behalf of the seller.
The taxes imposed by Amazon on its products do not include excise taxes or gross receipts taxes. These states may still refer to their sales taxes as “excise taxes” or “gross receipts taxes.”. The term “excise tax” is commonly used to describe sales taxes. Items sold on Amazon that are taxable are taxed on their entire selling price. Shipment, handling, and freight are included in the price, as well as fees for gift-wrapping.
How to Report and File Amazon FBA Sales Tax?
With Amazon FBA sales tax collected, you are now up and running. Soon you will be required to file your sales tax. From here, you must report how much sales tax you have collected from each state’s customers.
It is common for states to ask you how much taxes you’ve collected within their borders and from buyers within specific counties, cities, and other taxing districts.
This information can be found in two ways:
- A report from Amazon can be downloaded by logging into Seller Central, clicking Reports, and then Payments, Generate Date Range Report. Simply choose the period you want to report. You can use this information to determine how much sales tax you collected in each state, city, and county. Be aware that figuring out which taxing districts your customers live intake a lot of time.
- Automate sales tax collection. You can generate a sales tax report with a sales tax automation solution. You will have a comprehensive report of all the sales tax you collected from your buyers within a state using a sales tax automation tool that connects with all your shopping carts and marketplaces. Accounting entries for sales tax can also be done easily through tax automation.
For Sales tax, amazon sellers must have a thorough knowledge of tax rules and regulations that apply to them. Learn about the costs that a seller can deduct from their business every day. In any state, you need to pay sales tax. You should set up a sales tax license. You should check Amazon’s tax reports monthly to make sure the tax is being deducted correctly. This article covers every major point that an Amazon seller should beware of.