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If you are an Amazon FBA seller, it is important to understand your sales tax responsibilities. However, because tax guidelines seem to be changing continuously, staying up-to-date on the latest legal requirements can be a challenge. Below is a guide to help you understand Amazon FBA sales tax so you can remain in compliance and minimize liability.
Understanding Sales Tax
As an Amazon FBA seller, you sell your products online to customers in multiple states. Although some Amazon FBA sellers may assume that selling online protects them from being responsible for these taxes, this is not necessarily the case. For this reason, it is important to understand how the law applies in your situation.
Sales Tax Laws and Online Sellers
Online sellers are subject to the same rules and regulations as traditional sellers when it comes to paying sales tax. This means that you will be required to collect sales tax and remit it to a specific state if:
- You have a sales tax nexus in that state.
- The product sold is taxable under that state’s laws.
Sales Tax Nexus Basics
You have a sales tax nexus in a state if your business has a substantial connection to the state. Every business has a sales tax nexus in its home state. However, other business activities or connections may cause you to have a sales tax nexus in other states as well. Some examples of the most common activities that create a sales tax nexus for online retailers include:
- Shipping products from another state, even with the help of a third party.
- Selling products at trade shows or other events in another state.
- Storing your inventory in another state.
- Having any physical presence in another state, such as an office or warehouse.
Some states will also consider you subject to their sales tax if you exceed a certain number of transactions or a specific dollar amount in sales within that state during the year.
Product Taxability Basics
Even when you know you have a sales tax nexus within a given state, you won’t owe tax unless the products you are selling in that state are taxable under state law. However, laws that determine product taxability in different states vary quite a bit. For example, many states don’t tax grocery items. Exceptions to this rule include Hawaii, Idaho, Alabama, Oklahoma, Kansas, Mississippi and South Dakota. Likewise, while many states tax clothing, some do not.
To understand whether a specific product you sell will be taxable in a given state, you must consult that state’s specific sales tax laws.
How Does Amazon FBA Sales Tax Work?
Step 1: Determine whether you have a sales tax nexus.
As an Amazon FBA seller, the activity most likely to give you a sales tax nexus in states outside of your home state is the storing of inventory in other locations. Although state laws may differ, you will have a sales tax nexus in the majority of states if any of your products are stored within the state’s borders. For Amazon FBA sellers, this means you have a sales tax nexus in all states where an Amazon fulfillment center stores your inventory.
States that currently have at least one Amazon fulfillment center include:
Keep in mind that it is unlikely that your products are stored in every state listed, so it is important to consider your own unique situation when thinking about sales tax requirements.
Step 2: Determine whether the product you sold was taxable.
Once you have determined that you have a sales tax nexus in the state where a product was sold, the next step involves consulting that state’s laws to figure out whether the product is taxable. If you find that the product you sold is subject to sales tax under the state’s current laws, sales tax must be collected and paid.
When Does Amazon Pay FBA Sales Tax? Amazon FBA Sellers and Marketplace Facilitator Laws
Because of the increased popularity of buying and selling online, many states have passed marketplace facilitator laws, which are laws that require retailers like Amazon to collect and pay sales tax on behalf of their sellers. This means that if you have a sales tax nexus in a state that has a marketplace facilitator law, you won’t have to worry about collecting and paying taxes on your own. Amazon will be required to handle this issue for you.
Nonetheless, it is still important to understand your responsibilities with regard to paying sales tax. Even if Amazon is collecting and pay sales taxes for you, you may still need to meet other requirements, such as registering with the state. In addition, if you have a sales tax nexus in a state that does not have a marketplace facilitator law, you will be solely responsible for making sure any applicable sales tax is collected and remitted to the government.
Ensuring Sales Tax Compliance
If you are required to collect and pay sales tax but you fail to do so, you will owe penalties. The exact penalties you will owe vary from one state to another, but they can be steep in many cases. For this reason, it is important to make sure you understand your requirements for paying sales tax and that you are remaining in compliance with these requirements at all times.
To ensure that you are compliant with all laws in every state where you sell products, follow these steps:
1. Determine whether you have tax liabilities in the state.
For every state where you sell products, figure out whether you could owe sales tax. To do this, consider whether there are any business activities (including the storage of your products at an Amazon fulfillment center) that could cause you to have a sale tax nexus. If you have a sales tax nexus in the state, figure out whether your products are subject to tax under state law.
2. Register for a sale tax permit.
If you determine that you have sales tax responsibilities in a given state, the next step involves registering for a sales tax permit. The process you must follow to register for a sales tax permit will depends on the state’s laws and established procedures. Consult the state’s official government website to learn more. Keep in mind that you will likely be required to register for a sales tax permit in any state where your business activities cause sales tax to be collected, even if Amazon is handling the collection process for you.
3. Learn about filing requirements.
Every state has its own laws with regard to sales tax filing requirements. In most cases, the frequency of your required filings will depend on your sales volume in the state. In most cases, the state will tell you when you need to file sales tax returns after your sales tax permit has been issued. Make note of all of these dates so you can be sure to file your returns on time. Otherwise, you may face penalties.
4. Find out whether Amazon collects sales tax on your behalf.
The next step in the process involves finding out whether Amazon will be collecting sales tax on your behalf in a given state. In most cases, this simply means finding out whether the state has a marketplace facilitator law in place that requires large online retailers like Amazon to collect and pay sales taxes.
At this time, the majority of states that collect sales tax have marketplace facilitator laws. However, the specifics of these laws vary, so it is important to have up-to-date information about the laws in every state where you have a sales tax nexus before you decide how to proceed.
5. If you are responsible for collecting sales tax, set up collection on Amazon.
If Amazon is responsible for collecting and paying sales tax on your behalf, you don’t need to worry about this part of the process. However, if Amazon will not be collecting and paying sales tax for you, you need to set up collection yourself. Fortunately, Amazon has made it relatively easy for its FBA sellers to collect sales taxes.
You can set up sales tax collection on Amazon by logging into Seller Central and changing your tax settings. Your tax settings allow you to designate states where you want to collect sales tax. You can also decide whether to collect local and county taxes. In addition, you are also able to designate product tax codes, which will ensure that products in special categories are taxed at the right rate. Once you have made all of these selections, Amazon’s system will be able to calculate accurate tax rates based on the most up-to-date regulations.
Keep in mind that Amazon charges a small fee for this service. In order to collect sales tax on Amazon, you will also need to input your sales tax registration number, so be sure to have this information on hand when you set up tax collection.
6. File your returns and pay your tax.
Every seller who is registered to collect state sales tax will be required to pay any collected tax to the state and file sales tax returns at regular intervals. Make sure you are filing all required documents on time. In most cases, you will be able to file sales tax returns online or by mail, but you should check with your state’s tax collection department to get specific information about filing.
To get the information you need to file your sales tax returns, simply log into Seller Central on Amazon and look at your data. Amazon allows you to generate reports of your sales for specific time periods, which can be used to calculate the amount of tax you have collected in different states. Many states will also require you to break down your sales tax collection by county, city or other special taxing districts. Although you can calculate this data with the reports generated by Amazon, it can be time consuming for some sellers. Automated software is available to help with this process if you find it too overwhelming and complicated.
Keep in mind that you most likely need to file sales tax returns even if Amazon is collecting sales tax from customers on your behalf. In some states, you may qualify to file sales tax returns less frequently if your taxes are being collected by Amazon.
As mentioned above, Amazon’s fulfillment center can create a sales tax nexus for sellers. However, because your products are probably not stored in all of these facilities, you may not be required to pay sales tax in every state where Amazon has a warehouse. To find out where your products are stored, log into Amazon Seller Central and review your Inventory Event Detail Report.
If Amazon does not process all of your sales, you may have additional sales tax requirements. For example, even if Amazon is collecting sales tax for you in a given state, you will need to collect your own tax for any transaction in that state that were not processed by Amazon. In addition, if your products are sold through other large retailers, such as Walmart, certain procedures may be different. Some smaller platforms may not collect sales tax on the behalf of any seller. Careful research is essential to make sure that you are meeting all of your sales tax requirements in all states where you sell products.