5 Sales Tax Challenges for New Amazon Sellers
- Apr 22, 2015 | Ryan O'Donnell
If you're new to selling goods on Amazon, you might be wondering where to get started or where you'll need help. We've taken a look at the setup process and spoken with tax professionals who handle questions from Amazon Sellers daily and have pinpointed some key pain points related to sales tax setup and management.
1. Amazon Account Set Up
If you're just getting started selling on Amazon, understanding the system can be a bit challenging. Taking care of the basics is pretty straight forward. However, when it comes time to add products and set up taxability, that's where things can break down a bit. There are three key steps Professional Amazon Sellers are asked to complete:
- Review tax calculation methodology
- Review master product tax codes and rules
- Set up tax collection rules
We cover the ins and outs of these steps (and much more!) in our Amazon Guide to Sales Tax. Sellers will want to be sure they have a firm understanding of Amazon product tax codes as well as where they intend to collect sales tax. Alas, this is dependent on other factors including which Fulfillment by Amazon (FBA) warehouses sellers have products in and the seller's overall level of risk tolerance.
There are many threads in the Amazon Seller Central forums arguing about whether states can impose nexus on FBA sellers. The reality of it is, yes, states have the authority to impose nexus laws on businesses with products stored in warehouses in their state. Does that mean every FBA seller should rush out and register to collect sales tax in every FBA state? Certainly not.
It is up to the seller to assess their sales tax liability exposure and compare that to their own appetite for risk. There is no single answer to the question, "Do I really need to collect sales tax?" Every business has to evaluate this for their own unique situation. Consider involving a certified accounting professional with experience in online selling so you have an expert opinion to rely on.
3. Determining Nexus
Once you're decided your sales tax liability has moved beyond your tolerable level of risk, you'll need to know where your products are being stored. This will determine the states (beyond your home state) where you are most likely to have nexus. Unfortunately, Amazon doesn't offer a product location tool. In other words, there is no simple way an FBA seller can know where their products are being stored.
Fortunately, there's a work around and it's pretty simple. Just generate an Inventory Event Detail report. As can be seen below, Amazon has included the "FC" field as part of the report with "FC" standing for "Fulfillment Center".
Once you've downloaded your Inventory Event Detail report, you'll be able to identify each warehouse wherein you have product stored.
4. Sales Tax Registration
In order to set up an Amazon account to collect sales tax, sellers first need to have a valid sales tax registration number (Amazon requires this). However, for those who are just getting started, it hard to imagine any have completed sales tax registration. Many won't until they've begun to experience some selling success. It's a bit of a catch-22.
Once you've made the decision to get registered and collect sales tax, you'll want to review our state registration guides. State registration can be complicated—especially if you're required to register in multiple states.
5. Filing Sales Tax Returns
If you've made it to the point where you're collecting tax on Amazon sales, congratulations, you're likely experiencing some selling success. The next challenge is wrapping your head around the sales tax filing process. Generally, this begins by reviewing your sales and breaking the sales tax you collected down by jurisdiction (a chore Avalara TrustFile is uniquely equipped to handle!) From there, the manner in which you file your return depends on the state (different states offer different filing methods) and your tolerance for filing pain.
Selling on Amazon puts your products in the world's largest marketplace. Be sure to take your time and get your store set up correctly so you don't look back after years of successful selling and realize you owe back taxes and penalties because you never worked through the five sales tax challenges we're laid out in this post.