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Guide to Sales Tax for Amazon FBA Sellers

Avalara

Introduction

Amazon has changed the way we do business. It has also changed the way in which we think about sales tax. For years, consumers shopped online shielded from sales tax (but not consumer’s use tax, but that is another story). However, with increased online spending, local tax jurisdictions have taken notice of the millions of dollars in lost sales tax revenue.

Amazon has taken very deliberate steps to shield sellers utilizing Fulfillment by Amazon from the long arm of state Department of Revenue offices. However, with the ongoing growth of Amazon and the need to find further efficiencies to offset investments in the company, Amazon has set down roots in a collection of states by opening warehouses. The creation of warehouse locations exposes Amazon to state nexus – a critical criteria for the legal responsibility of the state DOR to require sales tax collection, filing, and remittance.

Sales Tax 101 for Amazon Sellers

Nexus
Did you know not everyone selling products on Amazon has to bother with collecting and filing state sales tax? It’s true. Before we talk about which Amazon sellers do and do not have to manage sales tax, let’s talk about how states determine who they need to collect sales tax from. It all comes down to something known as nexus.

Nexus is defined as a “connection to or presence within a state” and it’s the first thing you want to consider when looking at how your business will manage sales tax exposure. For most businesses this starts with their home state. Wherever your business is headquartered, you have nexus and must collect and report sales tax on the taxable goods you are selling through Amazon, through a brick and mortar store, or any other e-commerce platform. However, many businesses operate beyond the borders of their home state. Whether it’s a remote office, a traveling sales person, or product stored in a state warehouse location, there are many triggers that can open a business up to nexus beyond their home state.

State Registration

Once a business has determined they have nexus in a state, the next step is register with the state Department of Registration to collect sales tax. This can be done online by visiting the appropriate state DOR website and completing the registration process. Once the application has been processed, the business will receive a sales tax permit they must display at their place of business. They may now collect sales tax from customers at a rate determined by the local taxing authority.

Collecting Sales Tax

Once you’ve successfully registered to collect sales tax, you are ready to start collecting sales tax. Sales tax is generally collected at the point of sale. Businesses are required to show the sales tax amount separately so customers can easily see the amount of the tax. For brick and mortar sellers, this typically isn’t a problem as sales receipts and checkout systems are set up to print the amounts separately. For online sellers, however, the “shopping cart” page needs to mimic this presentation showing the sales tax calculation separate from the cost of the purchased item. Amazon, of course, handles all this for you. Your only responsibility is to hold the sales tax you’ve collected until you are required to remit it to the appropriate taxing authority.

It is important to remember when a business collects sales tax it is not collecting revenue and the funds should never be treated as such. Rather, sales tax belongs to the appropriate taxing authority and, in the case of an online purchase, is taxed based on the shipping address of the purchaser. Businesses serve only as trustee or custodian of these funds until they are remitted to the state.

Origin vs. Destination States

Determining which tax rates to apply to a sale is based on a topic known as “sourcing”. States have either “origin based” or “destination based” sourcing.

Filing Sales Tax Returns

Depending on how much a business collects in sales revenue, they are assigned a sales tax filing schedule. Typically, this is annually for every business during the first year of existence. However, with more revenue comes more collected sales tax. As one might imagine, state taxing authorities are always anxious to get their hands on tax dollars. As your business grows, you’ll find your filing schedule accelerate from annually to quarterly and eventually monthly.

It’s important to point out that filing sales tax returns is not the same as remitting sales tax (also known as paying sales tax). Filing involves the process of breaking down the sales tax collected by jurisdiction and completing and submitting sales tax paperwork to the appropriate State Department of Revenue. However, for all practical purposes, we think of filing sales tax returns as a combination of filing and remitting.

Sales Tax Risks

Collecting and filing sales tax returns isn’t without risk. Any business collecting sales tax can be audited at any time by the state Department of Revenue. As such, businesses should be careful to keep their books in order and log all sales, sales tax collected, and receipts.

Filing sales tax is another area where businesses are exposed to risks. Missing filing deadlines generally results in fines and interest on the taxes due. It’s always best to file on time (or early).

How Amazon Collects Sales Tax

Amazon collects sales tax for all fifty states, Washington DC, and some local jurisdictions. It does not collect product specific excise and gross receipt taxes. States that refer to sales tax as “excise tax” or “gross receipts tax” are not excluded. It is commonly agreed that those terms are synonyms for “sales tax”.

Taxable items sold through Amazon are taxed based on the total selling price of the item. This price includes item-level shipping, handling, and freight charges, item-level discounts, and charges for gift-wrapping. At an order level, there is also an allocation of shipping and handling charges and discounts.

The total amount of sales tax applied to an order depends on a number of factors including who the item is being sold to, the type of product being purchased, and the ship-to address.

Fulfillment by Amazon

Amazon has created one of the most advanced fulfillment networks in the world. With Fulfillment by Amazon (FBA) your products are stored in Amazon fulfillment centers around the United States. Amazon picks, packs, ships, and provides customer service for these products.

How does this impact your sales tax obligation? As mentioned previously, one criteria for establishing nexus in a state is having product stored within that state. Having nexus in a state means your business needs to register with the state DOR to collect and remit sales tax within that state. Let’s consider how to best manage your exposure when participating in Fulfillment by Amazon.

Amazon’s fulfillment center network spans the following twenty-five states:

Arizona Florida Kansas Minnesota New York Pennsylvania Virginia Wisconsin
California Georgia Kentucky Nevada North Carloina Tennesee Washington
Connecticut Indiana Massachusetts New Jersey North Dakota West Virginia

Review Amazon Tax Calculation and Setup

To begin, Amazon asks sellers to complete the following four steps. It’s the fourth step where sellers define taxability rules. The first three steps are meant to get your account set up properly, review the manner in which Amazon collects sales tax, and review master product tax codes.

  • Upgrade to a Professional Seller Account – If you haven’t already, you’ll need to upgrade your Amazon Seller account from Individual to Professional.
  • Review Tax Calculation Methodology – This is recommended reading from Amazon. Whether you are new to sales tax or not, it doesn’t hurt to take a few minutes to further familiarize yourself with how Amazon collects sales tax. Within this document, Amazon offers details around the manner in which they determine sales tax and collect sales tax. Other topic covered include returns, sales tax on digital content, and exemptions.
  • Review Master Product Tax Codes and Rules – Amazon Seller Central offers predefined tax codes for a wide variety of products categories including (but not limited to) books, apparel, computers, sporting goods, and food. Take the time to locate the type of product you intend to sell and review the taxability details. As an example lets consider candy.

Candy & Confectionery (A_FOOD_CNDY)
What is this code used for? This code is intended to be used for candy, candy coated items, and confectionery.

What kinds of products are typically included? Items typically within this tax product code are most candy types, including: candy bars (without flour), lollypops, taffy, and cotton candy; candy coated items including: candied fruit, candy coated popcorn and candy coated nuts. Additionally, baskets/containers that hold Candy (as listed above) where the non-food value is de minimus (e.g. 10% or less of the total value of the basket/container).

What kinds of products are typically excluded? Items typically excluded from this tax product code are included in other product tax codes. Those food product tax codes include items such as:

  • Candy products containing flour.
  • Fruit, potato chips, cup cakes, pies, nuts.
  • All Candy baskets/containers other than that listed above.

Why should you take the time to review product tax codes and rules? You might not be aware of the fact that candy made with flour is excluded from this category as are candy baskets that have really nice baskets. Every product type has some sort of exception. Be sure you understand the taxability of the goods you are selling.

Setting Up Amazon Sales Tax Collection

Now that you’ve reviewed the manner in which Amazon collects sales tax, you are ready to set up your tax collection rules. To begin, scroll to the bottom of the page to where you can set up taxation rules for each tax jurisdiction as well as shipping & handling taxability and gift wrap taxability.

Step 1: Choose Product Tax Code: You have the following three options to consider, collecting no tax on any sales, collecting tax on every sale, and collecting tax on specific product sales. The table below shows these options along with the product tax code you’ll want to choose from the drop down menu. It should be noted that any offers you do not assign either a seller-defined default PTC or an offer level PTC, the Always Nontaxable PTC (A_GEN_NOTAX) will be used.

Tax Collection Setup Product Tax Code to Select
Do not collect sales tax on all sales A_GEN_NOTAX
Collect sales tax on all sales A_GEN_TAX
Collect sales tax on specific product types Choose from the list of product tax codes found in the drop down menu

Step 2: Define Tax Collection Obligations: If you have elected to collect sales tax, select the states for which you want the Amazon Tax Calculation Engine to calculate taxes by checking the appropriate checkboxes (State, County, City, and District).

Guidance: Should you choose to collect sales tax, it is always advisable to begin with your home state as this is the state in which you will definitely have nexus.

Step 3: Input State Registration Number: For each state you elect to collect sales tax in, you must input your state registration number.

Guidance: Registration takes place on Department of Revenue websites. We’ve created sales tax guides for every state that can help you through the registration process.

Step 4: Specify a Custom Tax Rate (OPTIONAL): Should you choose to, you can set a custom tax rate for any state. This rate will override the tax rate supplied to the Amazon Calculation Engine by Vertex.

Guidance: Generally speaking, this is not a high priority for those getting started as an Amazon Seller. However, as your business grows and your tax exposure becomes greater and possibly more complex, it is good to know you have the option of setting custom state sales tax rates.

Step 5: Choose Taxability on Shipping & Handling and Gift Wrap: Decide whether or not to collect sales tax on shipping & handling and gift wrap charges.

Guidance: Typically, we advise sellers to align their shipping & handling and gift wrap taxability with each state’s taxability. In other words, if you’re taxing goods sold into a state, you should also tax shippping & handling and gift wrap into that state (and vice versa)

Exporting Amazon Sales Tax Data

We get questions every day from users who need to export their sales data from their ecommerce, shopping cart, or accounting software in CSV form. We can help with that! Many of the platform you are currently using have published instructions, but they can be difficult to find. For Amazon users, the answers turns out to be quite straight forward.

Below you’ll find step-by-step instructions for how to export your sales tax data from your Amazon Seller Central account. Be sure to log into your Amazon account to get started.

Before we begin, however, it’s important to note that TrustFile users can connect TrustFile directly to their Amazon Seller Central account and sync data automatically. There is no need to import Amazon sales data in CSV form. With that said…

Amazon Download Instructions

  1. Log into your Amazon Seller Central account.
  2. Click the link to reports.
  3. Click “View the report” from Sales Tax Report.
  4. Click “Generate new report” button and a popup will appear.
  5. Within the popup, select the time period for which you’d like to export sales data.
  6. After report is generated, download the report.

Importing Your Amazon Data into TrustFile

Once you’ve saved your Amazon sales tax data in CSV form, you’re ready to upload it to TrustFile. Just sign into your TrustFile account, enter your company info and upload your file. Again, we want to point out that, with TrustFile, a connector is available that will connect to and sync TrustFile with your Amazon Seller Central account.

If you’re having trouble finding the file you’ve downloaded, look in the “Downloads” folder on your computer. This is often the default location downloaded files are saved. Still having issues? Let us know.

Managing Refunds and Exemptions

If you are enrolled in the Amazon FBA program, you don’t have to worry about managing refunds and tax exempt purchases. The responsibility of managing these events falls on the shoulders of Amazon. Purchasers are required to submit their tax exemption documentation for the state to which your items shipped in order to receive a sales tax refund.

If you are not enrolled in the Amazon FBA program, you may find customers contacting you directly to request a sales tax refund.

Sales Tax Holidays

Sales tax holidays are a temporary period during which state sales tax is not collected or paid on qualifying items. There are two main types of sales tax holidays. The first coincides with the beginning of the school year allowing consumers to purchase educational items such as clothing, computers, and school supplies tax free. The second is scheduled prior to the start of the expected hurricane season and allows consumers to purchase hurricane preparedness supplies tax free.

Amazon participates in sales tax holidays so be aware that during these periods, purchases of qualifying goods from customers within qualifying states will be tax exempt.

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