It can be a little more complicated than it is for retail sellers or even businesses with their own eCommerce site, however.
Are you an Amazon seller, or interested in becoming one in the near future?
If so, this complete Amazon FBA sellers guide to sales tax will make your tax requirements, and the easiest way to comply with them, as clear as day.
We’ll cover everything you need to know about Amazon and sales tax for FBA sellers, including:
- What taxes are relevant in which countries, and when Amazon sellers need to charge them
- How and when you need to collect tax from customers
- How to ensure 100% compliance with local and international tax laws
- The easiest way to ensure you’re always ready to pay what you owe and never get caught out
- The best automated Amazon seller tax tools and services to make things even easier
Let’s start with the basics:
What is Sales Tax?
Sales tax is exactly what it sounds like – a tax on each sale made.
The retailer is responsible for adding the sales tax to the receipt and charging it to the customer, then passing it over to the government when tax day comes.
So, if you make a product for 50 cents and need to sell it at $1, but you live in a place where the sales tax rate is 10%, you’ll actually need to charge $1.10.
The extra 10 cents is marked as tax on the receipt, so the customer is aware that the money doesn’t go to you, and then you simply pass it on to the government.
45 US States and Washington DC all charge sales tax at varying rates, and the remainder don’t charge sales tax at all.
This disparity can make it extremely difficult to pay the right amount on every order, especially if you are selling large volumes online to different States and countries.
But sales tax and Amazon is something all sellers need to get their heads around – as underpaying or failing to file the correct turns can lead to major fines that could sink your business.
Do Amazon Sellers Need to Charge Sales Tax?
In a word? Yes.
The above image shows states where Amazon collects sales tax from it’s customers in green, and ones where it doesn’t in white.
Whereas Amazon does not collect sales tax on your behalf and this will be your responsibility, the map helps to illustrate just how many states will require you to collect sales tax in at least some form.
You are responsible for paying the sales tax on all sales you make in a state, online or not.
In order to figure out whether tax is owed, you need to take into account two main factors:
Sales tax nexus (or physical presence)
In other words, does your business have a connection to the state or engage in activity within it, and are the products you’re selling taxable in that state?
If the answer is yes to both, then you’ll need to pay sales tax in that state.
How Do I Get Sales Tax Nexus?
The most common things that are regarded as giving your Sales Tax Nexus within a state are:
- A physical address such as an office or store
- A warehouse or otherwise stored inventory
- Staff – if you employ remote staff in the State or even hire contractors, you may be eligible for sales tax in that State
The above applies to all states, but there are some other factors that can give you Sales Tax Nexus in other states, including:
- A dropshipping supplier in the state
- Affiliates or marketing partners there
- Other business relationships with the state such as networking events or trade shows
The absolute conditions that give you Sales Tax Nexus in different states vary quite a lot, so you need to be sure to do your research before engaging in business activity in a new state.
The best way to get a quick rundown is to use a reliable list such as this one, but beyond that, for 100% concrete details, you’ll need to contact a tax advisor or an accountant that specialises in tax.
How Do I Know if My Products Are Taxable?
In general, most physical products are taxable, but once again these rules are set on the state level and not federally, and as such there can be differences.
For example, prescription drugs are not taxable in Idaho, and neither are services. Clothing is not taxable in Illinois.
Keeping track of all of these rules is near impossible if you operate in multiple states, which is why it’s often a great idea to have an accountant or an Amazon tax software tool to manage it for you.
Amazon Sellers Guide to Sales Tax Compliance
Ok, so now that you’ve determined that you have both nexus in a state, and sell taxable products there, your next step is to get compliant.
However, if you’re a sole trader or run a smaller business, you may have to handle this manually.
Here are the basic steps to ensure you’re complying and not in any danger of legal repercussions:
1. Register for Sales Tax
The first thing you will need is a sales tax permit in the state in which you have nexus. This is required to get your business details on file and so that the government can track your tax responsibilities.
Collecting sales tax without a sales tax permit is illegal!
Drill that last sentence in your head! Getting your permit must be the first step in the process because operating without one can land you in serious trouble, even if you are collecting tax correctly.
Once you have your permit, you’ll be told how often you will need to file a tax return.
This could be monthly, annually, or quarterly depending on the state and your sales volume.
2. Collect the Appropriate Sales Tax
Now that you’re all set up, it’s time to start charging the appropriate sales tax rate on all of your products.
Amazon makes this very easy and has a full tax management system so it’s just a matter of inputting the correct details.
One thing to be aware of is that some states have “origin-based” tax laws meaning products are taxable if you operate from/send them from the state.
Other states sales tax laws are “destination based” meaning you pay sales tax on every order that is delivered to a customer there.
Keeping track of which state is which can be quite complicated and it’s a good idea to keep a resource that details each states requirements.
If you’re managing all of this manually instead of enlisting the help of accountants or other services to make it easier, we would also recommend keeping a running total of your tax bill and potentially even keeping your sales tax in a separate account.
Despite being paid to you by your customers and potentially sitting in your account for up to a year, this money is never technically yours, and accidentally spending it could land you in big trouble come tax return day.
Speaking of which:
3. File Your Tax Returns!
Once your tax returns date comes around, you’ll need to submit more than just the amount of tax you owe, and the money.
Your returns will need to include:
- Your total sales volume and revenue
- How much tax you collected in each jurisdiction
- The total amount of sales tax owed
If you don’t make any sales in a specific state and your taxable amount is zero – they will still want you to file returns and hear about it. You can be charged with tax avoidance for failing to file your returns even if you don’t owe any money, so don’t make the mistake of assuming you don’t need to do anything in this case.
If all of this sounds very complicated – in all honesty it is, and it’s a lot to ask, especially for smaller businesses or lone sellers.
Luckily we do live in an age where there are countless Amazon tax automation tools that can make this a lot easier.
You can follow that link to read our opinion on some of them, or watch this video to learn more about our favourite, Tax Jar:
What About VAT?
For those operating in European countries, VAT (Value Added Tax) is a necessity. This is very similar to sales tax in the United States, but the key difference in practice is that the tax has to be added to the RRP and displayed to the customer as part of the price, instead of being added afterwards.
For example, if you pay 50p for a product and need to sell it for £1 to make your profit margin, but VAT is at 20% – you’ll have to sell the product for £1.20 and pass the extra 20p on to the government.
If you operate in European marketplaces or are planning to in the near future, you can learn more about VAT in our following guides:
We would also highly recommend reading our SimplyVAT review in this case.
SimplyVAT are a UK-based company that can handle all of your VAT registration and tax returns for a low price, making expanding into Europe easier than ever for US FBA sellers.
Tips for Filing Tax Returns
- You can file your taxes online, which is usually much easier than doing it manually
- Most tax automation tools and services such as Tax Jar will do this for you, meaning you can essentially forget about your tax returns – a life changer for smaller, busy Amazon sellers, for whom going through all of your transactions every year, figuring out which state each order is taxable in, and calculating how much is owed can be a gargantuan task.
- Be sure to check for discounts. Over half of the US states that charge sales tax offer a discount for online sellers. It’s usually only a small amount, ranging from between 1% and 3%, but you don’t want to turn it down!
- We would highly recommend working with an automation tool or marketing agency to manage your taxes. You can certainly manage it alone, but we are all only human and errors are likely to happen on some occasions. Automated tools like Tax Jar drastically reduce your chances of a fine, and save you time to focus on growing your business. If you really do want to go it alone, take the time to thoroughly research your requirements in every state, and set up a system that will allow you to manage your taxes periodically without falling behind, especially if your sales are growing rapidly as they should be!