Amazon Tax Mistakes You Can Avoid Right Now
- July 29, 2015 | Jaimy Ford
Amazon has opened many doors for business owners who want to sell their products online but don’t have the time or money to create a web site or conduct the day-to-day management of online sales. And because Amazon is the largest global marketplace, it allows a business to reach customers it might never have. Furthermore, set up is easy and the service doesn’t cost you an arm and a leg.
That said, selling on Amazon doesn’t come without some risks, specifically when it comes to collecting sales tax on the products you sell through the web site. Don't fall victim to these mistakes that Amazon sellers are prone to make.
1. Not collecting sales tax
Seems like this might be one we would leave out. Everyone knows to collect sales tax, right? Wrong. We've seen sellers--both big and small--who aren't collecting any sales tax whatsoever. This can add up to a big bill coming from state and local tax jurisdictions. Worse than that, if you haven't been collecting sales tax, you'll be on the hook for the sales tax you never collected!
Solution: Get registered to collect sales tax in your home state and turn on sales tax in Amazon for that state. This is a good first step every seller should take.
2. Not being proactive with nexus
Nexus, in short, is your physical connection to a state. It gives states the legal authority to require your business to remit sales tax on taxable purchases. Nexus is complicated and can be triggered in many ways. It's up to Amazon sellers to be proactive in understanding their business activities and how they may have triggered nexus.
We've covered the most common nexus triggers ad nauseam so we thought we would dig up some more obscure examples:
- Providing marketing materials (with company logo) to customers in a state
- Providing maintenance or conducting services calls within a state
- Conduct training seminars within a state
- Inspect dealer inventories, review customer displays and shelving
- Pick up and replace damaged property
For Amazon sellers, things get even more tricky. If you're an FBA seller, you likely have inventory moving between warehouses across the US and that makes keeping track of nexus especially challenging. Moreover, some states consider affiliate marketing cause for nexus--how do you keep track of who is promoting what for you where?
While nexus is often a gray area when it comes to online sales, understand this: For every state that Amazon houses your inventory, you have nexus.
If what we just said isn't clear, let us break it down for you...
If you send Amazon 1,000 widgets, and Amazon sends 100 widgets to 10 different Amazon Fulfillment Centers in 10 different states, that creates nexus for you as a seller of goods in those 10 states. That means you must collect sales taxes from customers in those states and hand that money over to the state and local taxing authorities.
Through its Seller Central portal, Amazon does provide details about where your inventory is housed, but you will need to understand the tax rates for each of those jurisdictions--something Avalara TrustFile can assist with. Once you know where you must collect sales tax, you will need to register with that state and obtain a valid sales tax registration number, a requirement to create a seller’s account in Amazon.
Solution: Review your business practices to identify any potential nexus triggering activities. Most states offer a nexus questionnaire businesses can use as a guide to identifying nexus.
3. Assuming Amazon will remit sales tax
While it's true that Amazon will determine sales tax rates for you (for a small fee) when you sign up for the Amazon Tax Collection Services, they don't do anything sales tax related beyond that. It is the seller's responsibility to file and remit all collected sales tax in a timeline fashion. Assuming Amazon will keep your company in compliance with state and local taxing authorities is a common assumption that can result in sellers missing filing deadlines and incurring late payment penalties and interest payments.
In Amazon's words...
"The tax settings that you specify determine the amount of tax charged on each order. It is the responsibility of the merchant to report and remit these taxes to the appropriate state taxing authority. Amazon Payments simply collects the calculated tax amount from the purchaser and deposits that amount, along with the other credits for the item price and the shipping & handling fees, to the merchant account."
Solution: Put together a plan for filing and remitting sales tax in the states where you have nexus. Once you've registered with the state, you'll be assigned a filing frequency (typically monthly, quarterly, semi-annually, or annually). Determine your sales tax due dates and get reminders set up on your calendar.
4. Incorrectly setting up sales tax collection rules
Amazon sellers have several options for customizing the manner in which they collect sales tax. Amazon allows for the following fields to be manually set:
- A default product tax code
- Locations in which you want to collect tax (states, counties, cities, and districts, for example)
- Custom sales tax rates per state
- Shipping & handling and gift wrap tax settings
Customizing sales tax rules in Amazon requires a thorough understanding of sales tax rules and rates. Should you decide to set a custom rate for a state, for example, it's up to you to keep that rate up to date. If your custom rates get outdated, you may be on the hook for sales tax that was never collected.
Solution: Sign up for Amazon Sales Tax Collection Services. Sales tax rate determination is complicated stuff. Let Amazon handle it.
5. Filing sales tax returns with errors
If you sign up for Amazon Sales Tax Collection Services, which costs 2.9 percent of your collected sales and use taxes and other transaction-based charges, you gain access to a Sales Tax Report that will break down how much sales tax you have collected from each jurisdiction.
Sellers can use this report to file sales tax returns but be sure you understand what you are doing. Local and state tax authorities report filing errors as one of the top issues they see from tax payers. Filing errors, of course, can lead to late payment penalties and interest on outstanding sales tax.
Solution: Double and triple check your filing forms. Or, leverage a tool like Avalara TrustFile to automate your sales tax filing for you.