Taxes. If you’re like most other sellers, you probably shudder instinctively at the word.
When you’re selling via FBA or indeed any other platform online, you have to deal with the complexities of the tax system. You’ll be paying either annual or quarterly taxes on your income, which many people find confusing enough.
Things get more complicated when you factor in sales tax.
When and where do you need to pay it? How much should you pay and how do you collect it? Sometimes the tax side of a business can seem overwhelming.
If you understand the basics well though, you can confidently navigate the necessities of sales tax. Here’s a brief look at how sales taxes work for FBA sellers:
As a preface, we’re discussing the tax system for USA sellers here – to get into the requirements of other countries would require a large book! Here in the US, sales tax is state-based and is required by 45 states, with the exceptions being Alaska, Delaware, Montana, New Hampshire and Oregon.
To add to the complexity, states are responsible for their own tax administration and therefore all have different rules and laws when it comes to collecting and remitting taxes. Currently, California has the highest sales tax rate at a base of 7.25% while Colorado is the lowest at 2.9%.
On top of state sales taxes, many states allow sales taxes for local areas (including Alaska and Montana, who don’t have state taxes). It is possible that an online seller may be required to pay local sales taxes, so that would be something to check out locally or wherever your business has a “nexus” (which we’ll get into). When you combine state and local taxes, the states with the highest average rates become Louisiana at 9.98% and Tennessee at 9.46%.
Online sellers need to be in touch with the rules of their home state, or any state where they have a nexus. Taxjar provides a helpful map here with links to guides for each state.
Note: We always recommend talking to a qualified accountant who is knowledgeable about the sales tax world online. Don’t take our word for it, or that of any blog you might read – taxes can be complicated and should be approached with professional advice.
What is sales tax “nexus?”
You’ve heard that term “nexus” coming up a few times by now and it’s an important one for online sellers to comprehend. Why? Because when you sell online you potentially have tax liability in multiple states.
A sales tax nexus is generally defined as some kind of presence in the state concerned, however, there are different definitions of what that entails. For online sellers, this often includes things like where your inventory is stored, where you keep an office and where any employees are located. If you’re based outside of the US but have inventory in an Amazon warehouse in Washington state, then you likely have a nexus in Washington.
If it is determined that you have a sales tax nexus in a certain state, then you will be required to charge sales tax to all buyers from that state.
For example, if I live in California, but have an office for my business just across the line in Nevada, then I have inventory in warehouses in Texas and Washington, I potentially need to collect sales taxes from buyers in California, Nevada, Texas, and Washington, but not the 46 other states. Yikes, this is where sellers’ heads can start to implode…
Accounting Web produced the handy little checklist shown below. While checking a box doesn’t always mean you’ll have a nexus in the state in question, it means you should be checking with the tax authorities:
It’s important to note that it’s up to you to check which rules apply to you and with which states. If you opt to bury your head in the sand and wait, you can be picked up during an audit for failing to comply with tax laws. Each state has slightly different rules, as illustrated by the picture from Accounting Web below:
Note that tradeshow rule in Minnesota – how many FBA sellers may be affected?
Once you have determined that you do have sales tax nexus in a state, most states require you to apply for a sales tax permit in order to collect those taxes.
Dependent vs. independent nexus
Just to add another layer here, when it comes to state and local sales taxes, not all are treated equally. A dependent nexus means that if you have a nexus at any location within the state, it is considered that you have one with all locations.
Independent nexus means that a nexus in one location within the state doesn’t automatically mean a nexus with all locations.
So going back to the example of being based in California, that is an independent nexus state. When it comes to local sales taxes, a nexus in Sacramento doesn’t mean you need to collect sales taxes for Fresno. This is where it’s super-important to know the rules for each state in which you have nexus in-particular.
Origin vs. destination-based sales tax
This is another rule that varies by state. Some will require you to collect taxes at the rate of the point of origin (so this might be the rate of the state in which your goods are housed), while others want you to collect taxes at the rate of the destination of the goods, or where the customer lives.
Collecting sales taxes on Amazon
To begin with, if you want sales taxes to be collected automatically by Amazon’s collection services, you need to have a Professional Seller Account.
Secondly, you need to know where you have sales tax nexus. You’ll have to check with individual states (use the checklist further above in this article as a guide) to figure out where you might have dependent or independent nexus. Check your Amazon Inventory Event Detail report to find where your goods have been stored as you may have nexus in that state.
Thirdly, you will need a state sales tax permit for each state in which you have nexus.
With all of this information in-hand, your next step is to login to your Seller Central account and set up tax collection by going to Settings > Tax Settings. You’ll find options to choose correct product tax codes and other details such as shipping and handling taxes, which are required by some states.
You can then choose state and local areas for which you want to collect tax and select either a flat tax rate, or the rate at the buyer’s address.
The bottom line is that you can choose to become sales tax compliant or to ignore it completely and carry on without automatic tax collection, but the bad news is that it can easily catch up with you. Sales tax becomes a liability issue for your business and you don’t want to end up in a situation where you need to use your profits to not only pay missed sales taxes, but penalties imposed on top of them. We have heard that Amazon may provide lists of sellers to states where sales tax is enforced, whether this is true or not it’s important to weigh up your risks.
Remitting your sales taxes
Much to the delight of online sellers who have multiple nexuses, each state has different rules and due dates when it comes remitting those sales taxes. This means that step #1 is to know what those due dates are for each state in which you need to file. Set yourself up some deadlines in your calendar so that filing dates don’t pass you by.
Step #2 is to figure out how much you owe each state. You can either run reports from Amazon yourself or use one of the services available (like Taxjar) who can do it for you. In some cases, these services can also automatically file those taxes for you.
If you are doing it yourself, you’ll need the following report: Reports > Payments > Date range reports > Generate a date range report > Summary > Custom (enter date range of tax period). Once this report is ready, look for the “sales tax” section.
Step #3 is to actually remit the tax payment following the instructions of the individual state. As a tip here, many states offer a discount for filing on time, so take advantage where you can! Another thing to know is that you should file for every state in which you’re registered, even if it is a zero return. It’s possible to be fined or have your permit revoked if you don’t file.
Whew, that was a by-no-means exhaustive view of sales taxes for FBA sellers. As you can see, it’s a topic filled with complexities and it is best to get professional advice before making any assumptions about what applies to you.
Collecting and remitting sales taxes is something that easily slips through the cracks for busy online sellers, after all, it’s another thing to set up and monitor, but it’s important to get your business on-track even if you were previously non-compliant.
Tax penalties can follow you around for years and be a real liability, so if you haven’t already, get advice for your business asap.