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Sales Tax Demystified for Amazon Sellers

Navigating sales tax with Amazon can be as difficult and painful for eCommerce sellers as navigating the Amazon rainforest with no compass. Collecting and remitting is a complex process, especially because state rules vary widely.

One of the biggest challenges you may face as an eCommerce seller is simply finding out when and where you’re on the hook for sales tax. States do not inform sellers when they are obligated to collect and remit sales tax, but they do stay on top of whether or not you successfully do. You are responsible for knowing when and where you owe sales tax, and are subject to penalties if you do not file accordingly — even if you don’t know you have an obligation.

Nexus: What is it? And where do I have it?

The key to being on top of your sales tax requirements is understanding nexus. Put simply, having nexus in a jurisdiction means you, as the seller, have a tax liability there. The current rules dictate you have nexus in any jurisdiction where you have “sufficient physical presence.”

On the surface, this seems like a pretty simple distinction to make. However, each state has its own definition what constitutes a “sufficient physical presence,” which is reflected in the varying rules and rates across states.

We’ll delve into individual states’ quirks shortly. But first, let’s lay out how jurisdictions understand physical presence, causing you to have nexus. You can have nexus in states where:

  1. You’re headquartered.
  2. You have employees (including contractors).
  3. You’ve attended trade shows with the goal of selling and/or marketing your products.
  4. You have drop shippers storing and/or shipping inventory on your behalf (assuming they are not collecting and remitting sales tax for you).
  5. You have inventory, warehouses, or other physical goods.

Another problem for sellers is determining if or where they benefit from any of the services or infrastructure listed above. Much of this depends on where third-party or drop shippers store their inventory. This has been a challenge for many Amazon Marketplace Fulfillment by Amazon (FBA) sellers, since the retail giant has warehouses all over the country and may store inventory in any number of locations.

eCommerce sellers can keep track of states where they have nexus by using a tool like Wherestock to track inventory, or by using a service like Ampersand Accounting to perform a nexus analysis.

Different state rates make sales tax even more challenging

While nexus can be somewhat murky in general, it is decidedly more complicated when you factor in each state’s unique rules and rates. For example, Colorado has a relatively low statewide sales tax (2.9 percent), but each county and city or town tacks its own determined tax rate on top of that. If you make a sale in Denver, you’ll owe an additional 3.65 percent to the city and 1.1 percent to the county, bringing the total to 7.65 percent.

Alaska, on the other hand, has no statewide sales tax rate, but a number of counties do require sales tax. Meanwhile, four states do not charge sales tax at any level: Delaware, Montana, New Hampshire, and Oregon.

But convoluted rules and rates are not the only ways states make sales tax more complicated. Some are taking it to a whole new level.

States are cracking down to maximize sales tax revenue

In April, the Massachusetts Department of Revenue (DOR) introduced regulations to expand its definition of “sufficient physical presence” for out-of-state vendors selling more than $500,000 of goods or generating more than 100 total sales into the state. These requirements extended nexus to sellers that…

  • Have licensing software installed on in-state computers.
  • Install “cookies” (tracking software) on in-state computers.
  • Use in-state services to facilitate payments, consumer support, and returns.

The directive was revoked two days prior to its would-be initiation, but this did not signal the end of the state’s efforts, as a Massachusetts judge ordered Amazon to turn in a list of all third-party sellers with sales into the state in September. Other states are likely to follow this, and are actively pursuing alternative ways to collect more sales tax from remote vendors.

What are my options?

Let’s face it: Collecting and remitting the right amount of sales tax to the right places can be a daunting challenge, especially for sellers with limited internal resources. But every challenge has a solution. Here are several ways eCommerce sellers can tackle sales tax:

  1. Hire an accountant. While it can be expensive, hiring a tax expert can be beneficial if you have a complicated legal structure, sell products with special tax implications, or have not been collecting sales tax to date and need to get caught up.
  2. Use in-house staff. This option makes sense for smaller sellers or those with an extremely small number of returns to file. When more than a few returns are in the mix, it can become a time-consuming burden and the chances of making mistakes multiply.
  3. Implement a software solution. Platforms like Taxify by Sovos can automate your filing process and cut down on errors caused by manual data entry and other processes.

There is no single perfect solution to meet everyone’s needs; each organization has unique challenges and requirements. When determining which option is the best fit for your business, be sure to consider each of the above criteria, as well as your own growth strategy for the next several years.

Taxify by Sovos helps eCommerce sellers file sales tax reports and remit sales tax payments in every jurisdiction across the United States. The SaaS portal automatically pulls Amazon transactions into Taxify, giving Amazon sellers the ability to automate filings and simplify their reporting processes. Taxify offers free live support for sellers in all states and simple, transparent pricing. For more information, please visit Taxify.co.

 

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If you enjoyed this content, consider joining us at PROSPER Show, March 13-14, 2018 at the Las Vegas Convention Center. 
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