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4 Ways to Limit Your Amazon Sales Tax Exposure

  • Jun 8, 2015 | Laura McCamy

If you are one of the more than two million independent sellers on Amazon’s Marketplace, you may be opening yourself up to sales tax liabilities in multiple states without even realizing it. Worse yet, for some states the rate of tax you need to collect isn’t the same across the whole state but varies based on where your customer lives (we’re looking at you, Texas!).


You need to collect and remit sales taxes for online sales you ship to any state where you have a physical location, or nexus. You have nexus in your home state, so you owe state sales taxes on Internet orders you ship to customers in your state. Some examples of things that can create nexus in other states include a drop shipping location, remote employees, and visiting the state for an event such as a business conference.

If this seems overwhelming to you, don’t worry. There are several things you can do to reduce your sales tax exposure when selling on Amazon. Here are four ways to reduce your sales tax filing headaches. Some of these apply to other ecommerce sites, such as eBay, PayPal, or Etsy as well.

1. Sell Tax Exempt Goods

If the products you sell are exempt from sales taxes, you don’t have to worry about nexus. Regulations vary from state to state, so you will still need to do some homework.

Many states exempt items they consider to be basic needs from sales tax. In Minnesota, New Jersey, Pennsylvania, and Vermont, for example, clothing is exempt from sales tax. In Rhode Island, New York, and Massachusetts, sales of clothing items valued at less than a certain dollar amount are exempt ($110 and $175, respectively). Other items that may be tax-exempt are foods or medical devices.

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2. Only Hire Employees Within Your Home State

It can be cost-effective and convenient to hire a remote employee to manage your website or handle your data entry, but if that employee lives in another state, you may have just created a nexus. By adding an employee, you may have also added a responsibility to collect sales taxes on the sales you ship to the state where the employee lives and works and to file state sales tax returns.

This doesn’t mean you can’t use remote workers; just make sure they live and work in a state where you already have a physical location. Otherwise, adding an employee may bring a whole additional level of sales tax paperwork.

3. Locate in States With No Sales Taxes

If you have to create a nexus outside your home state, consider a location in one of the NOMAD states--the five states that don’t have state sales tax:New Hampshire, Oregon, Montana, Alaska, and Delaware. A warehouse or an employee located in one of those states won’t add to your sales tax burden.

4. Don't Sign Up for FBA

This is a decision point for your business. Fulfillment by Amazon (FBA) gives small sellers access to Amazon’s network of warehouses, the ability to offer free shipping to Amazon Prime members, and help with returns, among other benefits. Signing on with FBA could leave you more time to focus on marketing and help you grow your business. According to Amazon’s website, “71% of FBA respondents reported that their unit sales increased on Amazon.com more than 20% since joining FBA.”

But FBA could also give you nexus in 26 states. Three of those states have no state sales tax, so that’s 23 states where you need to research the tax codes to find out whether a drop ship location constitutes nexus and then, potentially, collect and pay sales taxes when you ship orders to those states.

If FBA is simply a good tool for growing your business, fear of sales taxes shouldn't stop you from joining. You can find relief from your sales tax headaches with a service such as Avalara Returns for Small Business, which can track which state and local tax regulations apply to you and leave you more time to build your online sales.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Laura McCamy
Avalara Author Laura McCamy