The following is a guest post from our pal Jennifer Dunn over at TaxJar.
Amazon FBA is a gift to sellers. It’s a way to quickly grow and expand your business while avoiding many of the common hassles – like handling returns and customer service – that can interfere with scaling an online business.
But with that ease comes a tradeoff. Amazon stores FBA sellers’ inventory in approximately 20 states (and counting!) around the country, which often triggers sales tax nexus. This can mean that FBA sellers find themselves collecting and filing sales tax in multiple states.
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But before we get too deep into sales tax terms, let’s back up a bit.
Why is Sales Tax So Important, Anyway?
Sales tax is one of the main ways that U.S. states collect revenue. Many states see sales tax as a “fair” tax because it’s based on consumption and only charged when a buyer makes a purchase. Sales tax is also a pass-through tax, meaning it is collected at the point of sale by merchants but “passes through” a seller’s hands back to the state. Basically, forty-five states and D.C. ask sellers like you to be their sales tax collectors.
States use the revenue they make from sales tax to fund budget items like roads, schools and public safety. So they’re eager to collect as much sales tax as they can!
As an FBA seller, there are a few key things you need to know about sales tax.
Determine When You Should Charge Sales Tax
Whether or not you charge sales tax to a customer depends on two things:
- Do you have sales tax nexus in the state?
- Is what you are selling taxable?
Sales Tax Nexus
As a merchant, due to a precedent set by the Quill v. North Dakota Supreme Court case, you are only required to collect sales tax from customers in states where you have sales tax nexus. Sales tax nexus is just a fancy way of saying a “significant connection” to the state.
[Tweet “Ever heard of “sales tax nexus?” It's your key to simplifying your business tax liability.”]
While every state’s laws are slightly different, these are the general factors that create nexus in every state:
Home state – You always have nexus in your home state, even if you work from your kitchen table
Location – An office, store, warehouse, sample room or other place of business
Personnel – An employee, salesperson, independent contractor, installer or other personnel
Inventory – Inventory for sale (this is the one that applies to FBA sellers)
Drop shipping – Some drop shipping relationships will create sales tax nexus for you
3rd party affiliate – In states with “click-thru nexus,” an affiliate who sends sales to you in exchange for a cut of the profits creates sales tax nexus
Making sales temporary – Depending on the state, making sales at a tradeshow, craft fair or other temporary location can create sales tax nexus
You can see a list of what every state has to say about what creates sales tax nexus here.
As an FBA seller, storing inventory in a state gives you nexus there with two exceptions: Virginia has ruled that if a seller only sells as a 3rd party on a marketplace he or she doesn’t have nexus. New York has ruled the same thing, however doesn’t have any active FBA warehouses anyway! Further, Tennessee only requires sellers who make more than either $400/month or $4800/year in the state to register for a sales tax permit.
As with anything related to sales tax – every state is slightly different!
On the fence about collecting sales tax? Check out our When to Register for a Sales Tax Permit Guide.
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Product Taxability
You are only required to collect sales tax in a state if the products you are selling in that state are taxable. For example, if you only sell clothing, you may not have to register for a sales tax permit in Pennsylvania because that state does not consider clothing taxable.
Fortunately, Amazon has your back here. As long as you make sure each of your products is coded with the correct “product tax code,” you’ll always collect (or not collect) the right amount of sales tax on each product. Amazon will know from the product tax code to collect sales tax on a pair of jeans sold to a customer in Illinois, where clothing is taxable, but to avoid collecting sales tax on that same item to a customer in Pennsylvania, where clothing is tax free.
Here’s a video all about setting up your sales tax collection on Amazon so you collect the right amount of sales tax from customers every time:
If you have nexus in a state and are selling taxable products in that state, your next step is to…
Register for a Sales Tax Permit
States require that, before you begin collecting sales tax from a customer, you register for a sales tax permit with the state.
Don’t skip this step! States consider it unlawful to collect sales tax from customers when you are not registered.
Here is more information about how to register for a sales tax permit with every state.
When the state issues your sales tax permit, they will also assign you a filing frequency. This is generally monthly, quarterly or annually. As a general rule, the more revenue you make in a state, the more often that state will want you to file. So you may find yourself filing annually in some states, quarterly in other states, and monthly in still others.
Once you’ve registered for a sales tax permit, your next step is to…
Start Collecting Sales Tax From Your Customers
Luckily, Amazon has a very robust sales tax collection engine. Once you tell Amazon in which states you want to collect and a few more key pieces of information, they’ll collect the right amount of sales tax for you.
We’ve put together a handy chart on how to set up sales tax collection in each state. This includes whether or not you should charge local sales tax rates in each state, whether or not shipping is taxable in each state (states vary on this), and other info, like whether or not you should charge sales tax on gift-wrapping in each state.
You can find a handy guide to setting up sales tax collection on Amazon FBA here.
Report How Much Sales Tax You’ve Collected
When your sales tax filing due date in a state rolls around, your next step is to report how much sales tax you’ve collected from your buyers in that particular state.
States don’t make this easy. The majority of states require you, the seller, to tell them how much sales tax you collected not just from buyers in the state, but from buyers in which county, city and special taxing district.
Here’s just one small portion of a California sales tax form. (It keeps scrolling and scrolling…)
Before, sellers had to deal with the headache of figuring out where all of their customers lived, what the sales tax rate was there, and how the state wants to see this info prevented. If you sell on multiple channels, you had to figure out a way to combine reports from each channel. Today, we have sales tax automation technology that will do all that for you! Sales tax reporting that used to take hours now takes minutes. Whew!
[Tweet “Our pal @taxjarjenn simplifies your steps to collecting and filing sales tax…”]
Once you’ve figured out how much sales tax you collected in each state, your next step is to…
File Your Sales Tax Returns
Once you’ve determined how much sales tax you collected from customers in each state and local jurisdiction over the taxable period, your next step is to file your sales tax return and remit the sales tax collected to your state.
In most states, you can file online and then pay using ACH transfer. Or, if you want to save even more time, you have use a sales tax automation service to AutoFile and pay your sales tax returns for you.
There are a couple of important things to note when it comes to filing sales tax:
- File “zero returns” – States want you to file a sales tax return even if you didn’t collect any sales tax over the taxable period. Failing to file can result in a fine or even in having your sales tax permit revoked. Always file as a “check in” with the state, even if you don’t have any money to remit.
- Don’t count out discounts – About half of the states with a sales tax understand that asking you to collect tax on their behalf is a burden. These states will allow you to keep a very small percentage of the tax collected. If you choose to AutoFile with TaxJar, we’ll be sure you keep that discount. Don’t leave money on the table!
And that’s it. You’ve filed a sales tax return and can get back to running your business!
If you want to know more about Amazon sales tax, check out our FBA Sales Tax Guide, or start the conversation over in the Sales Tax for eCommerce Sellers Facebook group!
About the Author
TaxJar is a service that makes sales tax reporting and filing simple for more than 5,000 online sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!
