Transitioning to Amazon’s FBA program can be very exciting for e-commerce business owners. FBA can expose your products to a huge variety of potential customers, as well as allow you and your customers get to take advantage of Amazon’s renowned customer service and speedy shipping. This can potentially lead to a dramatic increase in sales in a short amount of time.
All these perks come with a catch, however- sales tax is suddenly a lot more complicated when you have products stored in fulfillment centers around the country. Don’t worry though, we have you covered with this easy guide to sales tax for FBA sellers:
Quick Brush-up On Sales Tax
All but four states (Delaware, Montana, New Hampshire, and Oregon) have sales tax. Many counties, cities, and localities also charge a sales tax, which then gets added on to the state sales tax (Alaska has no state sales tax, but some of the local jurisdictions within the state do). Though sales tax can seem like a bummer, remember they fund things like schools, roads, and fire departments.
In the most straightforward sales tax scenario, you have a small brick-and-mortar store in a state- let’s say Colorado. Now, when you sell something at your store, you will add the state sales tax which in Colorado is 2.9%. If you’re in Denver, you will also add the city sales tax of 3.65%, as well as the county sales tax of 1.1%, which adds up to 7.65% total. You can simply program your cash registers to automatically add this 7.65% to every purchase so you don’t have to think about it.
Now, one key thing to remember is that sales tax is a “pass-through tax.” This means it’s only passing through your business on the way to the tax authority. In the brick-and-mortar store example, you’ll collect the sales tax and then once each sales tax filing period, you’ll file and remit your sales tax to the city, county, and state. This is a lot to keep track of, so if you decide not to use sales tax software or hire an accountant, make sure you keep deadlines and rates up-to-date and organized.
Once you open an e-commerce business utilizing Amazon’s FBA program, things get a lot more complex. This is because you now have to manage sales tax in multiple states and localities, instead of just your own.
Amazon FBA and Sales Tax Liability
When you become an Amazon FBA seller, your products are stored in fulfillment centers in various states. This is one of the main perks of using Amazon, as it makes shipping much faster for your customers. For example, if you sell something to a customer in Arizona, your product will likely be shipped from one of the fulfillment centers in Arizona itself, rather than from your home state. This can save a ton of time for shipping, and help to lower that carbon footprint!
But, if your product is stored in a state that has sales tax, you’ll be obligated to collect state tax on products that are sold to that state. The physical presence of your products in that state triggers ‘nexus,’ which means you have a sales tax liability there. Once you have nexus in a state, when a customer in that state purchases one of your items you will (most likely) be required to charge them sales tax.
Note: Once nexus is established, you have sales tax liability for all sales to that state, including sales on platforms other than Amazon.
To determine if/where you owe taxes, you’ll want to determine where your products are being stored, so you can determine if you owe taxes. When you sign up for a free trial and connect your Amazon store, Taxify will show you which states your inventory is behind stored in.
Apply for Sales Tax Licenses
Once you determine if you have sales tax obligation in a state, you need to register for a sales tax license in each of these states. This is an important step because most states consider it unlawful to collect sales tax without a license, and if you skip collecting sales tax altogether you risk huge fines and penalties.
To apply for a sales tax license, you’ll need to look up the state tax authority for each of the states you need to register in. Most states allow you to easily apply for your sales tax license online, sometimes with a small fee attached. If you have questions, don’t hesitate to give the state a call. They know their processes best!
Next Up: It’s Time to Collect Sales Tax on Amazon
As long as you have a Professional Seller account through Amazon, you can easily set things up to collect sales tax on all applicable sales. We created the following video to walk you through the process:
Be sure to use our Amazon Tax Settings guide to guide you through taxability settings for shipping and freight.
Warning: Be careful to not check the box to collect tax at the county, city, or district level unless you are planning on remitting sales tax every county, city, or district within the state. This is not intuitive and can cause you unnecessary headaches down the road!
Remitting Sales Tax
After you’ve gotten licenses and began collecting sales tax you’re ready to begin remitting to the states. Stat deadlines vary, and may be quarterly, monthly, or annually. Most states allow you to pay online, and several require it. You’ll need to file sales tax forms by the deadline and remit the sales tax you’ve collected in each state, county, and district you owe. The good news is that you can automate this entire process by starting a free 30-day trial of Taxify.
If you have sales tax obligations in multiple states, especially as your e-commerce business expands, this can all become an overwhelming amount of information to organize. Manually keeping track of sales tax percentages and filing deadlines in various states, counties, and cities is always an option, but make sure you stay organized. Failure to do so can result in costly mistakes and increase vulnerability to sales tax audits. Missing a sales tax filing deadline can lead to late fees, penalties, and even cause you to lose your sales tax license, meaning you’re no longer be able to sell products to customers in that state.