Do I Need to Collect Sales Tax in Amazon FBA States?
- April 5, 2016 | Laura McCamy
If you are an Amazon seller and you use Amazon FBA, you may need to collect sales tax in the states where Amazon has fulfillment centers. As more and more commerce moves online, states are becoming more aggressive in defining nexus-creating activities to include fulfillment and warehousing, both of which FBA provides. So here are the basics to help you decide if you need to collect sales tax in Amazon FBA states.
Nexus in Amazon FBA States
Amazon has fulfillment centers in 28 US states, according to the company’s website. Three of those states do not have state sales tax: Oregon, Delaware, and New Hampshire. That leaves 25 states where you might now have sales tax nexus.
Nexus means having a large enough physical presence to trigger the responsibility to collect and pay sales taxes in a state. You have nexus in at least one state: the state where your business is located. There are a variety of ways to get nexus in states where you may have never set foot, including click-through nexus and remote employees. Using a warehouse (even if you are subcontracting that warehouse space through Amazon and not directly paying rent to anyone in the state) and utilizing shipping services, like those provided by FBA, are activities that can create nexus.
When your products are stored in and shipped from an Amazon warehouse in Texas, for example, you arguably have nexus in Texas, even if your business is headquartered in Maine. This means that the State of Texas can legally expect you to register to collect sales taxes and to charge Texas sales tax when you ship an order to Texas -- no matter which warehouse ships the order.
In Which Amazon FBA States Do I Have Nexus?
If your business is large and you have lots of orders nationwide through Amazon FBA, it may make sense to go ahead and register to collect and remit sales taxes in the 25 states where Amazon fulfillment centers might potentially give you nexus. You don’t lose anything by doing this (other than time), and you could save yourself headaches and penalties down the road.
If you are like most Amazon sellers, however, your business is probably small to mid-sized and you don’t have the resources or the sales volume to justify registering in all those states. You will want to track which fulfillment centers ship your orders and look at your sales volumes in those states.
For example, you have a business selling rare books based in Arizona. You use Amazon FBA and you notice that quite a few of your orders have been shipped from an Amazon fulfillment center in Michigan. Then you look at your sales for the last six months and find that, other than one order for $100 that went to Kalamazoo, you haven’t sold any books to customers in Michigan. Your total Michigan tax liability is $6. In the unlikely event that the State of Michigan comes after you for this money, the penalty and interest you owe on such a small amount will be minimal. It would probably cost you more to register and file tax returns in Michigan than the $6 you owe, so your risks of not registering are low.
On the other hand, if you realize that members of a book group in Ann Arbor are some of your best customers, ordering hundreds of dollars' worth of books from you every month, it’s probably time to register and collect sales taxes in Michigan.
If all the Kindles in the world explode and sales in your online bookshop go through the roof, your sales tax obligations could get ahead of you. If you should be so lucky, you might want to consult a tax professional and do a voluntary disclosure agreement. This way, rather than registering and being hit with scads of penalties, you can limit what you owe while you get current with your tax obligations.
The best practice is to stay on top of your nexus in Amazon FBA states. Any sales taxes you owe that you haven’t collected from your customers will come out of your pocket and bite your bottom line.
Exceptions to the Rules
If the goods you sell are nontaxable, you don’t need to worry about nexus in Amazon FBA states. However, most of the goods sold on Amazon are taxable in most of the states that have sales taxes. Food items are often nontaxable and clothing is tax-exempt in some states and in certain circumstances. Check the tax codes in the states where you have nexus to be sure you are on the right side of the tax law.
Amazon FBA can be a boon to sellers and a headache at the same time. You may now have nexus in one or more of the Amazon FBA states. The time it takes you to set yourself up to collect and pay sales taxes in a new state is much less hassle than getting caught short during an audit.