Guide to sales tax for Amazon FBA sellers
A look into the basics of retail sales tax
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 number of states by opening fulfillment 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.
More recently, changes in tax compliance laws as a result of South Dakota v. Wayfair, Inc. have completely changed how Amazon marketplace sellers are exposed to sales tax compliance issues.
To be tax compliant and avoid audit risk, Amazon sellers should understand the following four components of sales tax management.
- Determining the states in which you have nexus.
- Registering for a sales tax permit in each state in which you have nexus.
- Setting up your Amazon account to collect the correct amount of sales tax.
- Filing and remitting state and local sales tax returns on time.
Nexus and its impact on sales tax compliance
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.
The effect of South Dakota v. Wayfair, Inc. on Amazon sellers
In the wake of South Dakota v. Wayfair, Inc., economic nexus is sweeping the nation. For ecommerce sellers on Amaon or any other marketplace such as Etsy, Walmart, or Craigslist, it’s important to remember states have other ways of taxing remote sales. Consider the following nexus triggering events:
- Affiliate nexus (ties to in-state affiliates)
- Click-through nexus (links on in-state websites)
- Cookie nexus (placing software or apps on in-state devices)
- Tax on marketplace sales (facilitator held liable)
- Non-collecting seller use tax reporting (non-collecting sellers must share consumer use tax information)
Registering with state tax authorities
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 on sales
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.
State sales tax sourcing
Amazon sellers are free from the hassle of calculating sales tax rates for sales as that will be determined for you by Amazon. However, it is good to have a basic understanding of how such tax is applied to sales. This begins with understanding which state sales tax rate is used - the ship-from state rate or the ship-to state rate.
Every state is classified as either an "origin based sourcing" state, a "destination based sourcing" state, or a "mixed sourcing" state. Each differs in its treating of taxation as follows:
Origin based sourcing state
- Apply sales tax to products based on their point of origin (ie. ship from address) for intrastate transactions (transactions within the same state).
- There are currently 8 origin based sourcing states: Arizona, Illinois, Mississippi, Missouri, New Mexico, Tennessee, Utah and Virginia.
Destination based sourcing state
- Apply sales tax to products based on their point of "destination" (ie. the ship-to address).
- There are currently 38 origin based sourcing states and the District of Columbia: Alabama, Alaska, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Vermont, Washington, West Virginia, Wisconsin, Wyoming, and Washington DC.
Mixed sourcing state
- Apply sales tax to products based on the product, service, or unique jurisdiction rules.
- There are currently 4 mixed sourcing states: California, Ohio, Pennsylvania, and Texas.
Filing sales tax returns as an Amazon seller
Depending on location, Amazon marketplace sellers collecting sales tax are required to file ongoing returns with state and local tax authorities. The frequency of tax return filing depends on how much revenue an sellers collect from taxable sales. Most businesses can expect to file returns annually for their first year of existence. However, as a business grows and revenues rise, so to does sales tax collected. Predictably, state and local tax authorities will assign more frequent filing deadlines (quarterly or monthly) to facilitate the remittance of tax revenue sooner rather than later.
An important point for Amazon sellers is that filing sales tax returns is not the same as remitting sales tax revenue (also known as paying sales tax). The act of filing a sales tax return involves the process of breaking down the sales tax collected by jurisdiction and completing and submitting the required sales tax paperwork to the appropriate state and local tax authorities. It is most common for businesses to file returns and remit tax at the same time so we think of filing sales tax returns as the act of filing and remitting.
Sales tax compliance risks Amazon sellers should consider
Amazon retailers collecting and filing sales tax returns should be aware of common risks. The recent South Dakota v. Wayfair, Inc decision by the Supreme Court overturned Quill Corp. v. North Dakota and radically changed sales tax compliance for Amazon sellers. As such, sellers should be careful to keep their books in order and log all sales, sales tax collected, receipts, returns, and any tax-exempt purchases in case of an audit. As an Amazon seller, consider the following four risks to avoid.
1. Not collecting sales tax on Amazon sales
Long gone are the days when Amazon retails could turn a blind eye to sales tax. The June 21, 2018 South Dakota v. Wayfair, Inc Supreme Court decision in favor of the state overturned the Quill Corp v. North Dakota (1992) decision and opened the door for states to tax remote sales. Based on your total sales volume, you may be required to collect sales tax in up to all remote states. Make sure you understand your exposure and collect tax accordingly.
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).
2. Collecting the wrong amount of sales tax
Even if you are collecting sales tax from your Amazon customers, are you certain you are collecting the appropriate tax rate based on state sourcing rules and the product in question? This is where an understanding of how you set up your Amazon store and its impact on sales tax collection is helpful.
3. Missing sales tax filing deadlines
There is no uniform tax filing deadline for state and local sales tax. Be sure to know the deadlines that apply to your assigned filing frequency for each of your state and local filing locations. Most tax authorities charge a nominal penalty for missed filing due dates.
4. Sales tax filing form errors
If you're still filling out state and local sales tax filing forms manually, be sure not make mistakes. Technology has changed tremendously in the past decade. Amazon sellers now have access to cloud-based sales tax filing services such as Avalara Returns for Small Business that help to automate the sales tax compliance process.
How Amazon collects sales tax
It's worth pausing for a moment to better understand how Amazon collects sales tax. For all fifty states, Washington DC, and some local jurisdictions, the Amazon marketplace has the necessary systems to determine the tax owed, apply it to the order, and collect it on behalf of the seller.
Amazon 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 synonymous with “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.
How to export 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 Avalara Returns for Small Business users can connect directly to their Amazon Seller Central account and sync data automatically - no CSV files, Excel files, or other complicated nonsense. With that said…
Amazon sales tax report download instructions
- Log into your Amazon Seller Central account.
- Navigate to "reports".
- Click “View the report” from Sales Tax Report.
- Click “Generate new report” button and a popup should appear.
- Within the popup, select the time period for which you’d like to export sales data.
- After sales tax report is generated, download it.
Other important tax related topics for Amazon sellers to consider
Beyond properly setting up your FBA account to collect sales tax and filing tax returns, there are other tax related situations and events sellers should be aware of.
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 ATEP program. 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. To manage tax exempt customers, consider using Avalara CertExpress, our free-to-use exemption certificate management software.
The impact of state 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.
Changing economic nexus thresholds
Following the South Dakota v. Wayfair, Inc decision, states are publishing new guidelines for taxation of remote sales.