Beginner Breakdown

On the FBA Master Facebook page, I asked for people to remind me of questions that we hear all of the time, so I could try to create a one-stop-shop for that information. As it turns out, there are many questions that we hear regularly, so this is just the first installment of a series where I’ll try to tackle some of the most common and basic questions that newer sellers encounter.

[dropcap]B[/dropcap]efore we start, allow me to give some suggestions about how to ask questions so that you get the most out of the helpful community of fellow sellers:
1) Try typing your question into Google, just as an experiment. It doesn’t take any more effort to type your question into Google than Facebook and you might get an answer immediately, straight from the horse’s mouth. Granted, not all questions work well in this format, but you’d be amazed at how many questions we get that could be copied and pasted into Google and the very top response gives a very clear answer from Amazon. Not only can this save everyone time (you can get an answer faster, and the people who would respond don’t have to type answers), but it means that the more complicated questions (the ones that really need responses) do not get buried.

Sorry, I couldn't help myself! — Sorry, I couldn’t help myself!

2) Be as specific as you possibly can. It is very common to read a question like, “A product is 40k in rank and sells for $13.50 and I can buy for $5, what should I do?” It’s almost impossible to answer this. All answers will have assumptions built in that may or may not be true. Similarly, “Amazon sent me an email that my listing is being removed, what should I do?” In these cases, if we knew the exact product (or at least far more details) or had the exact email that Amazon sent you, then we could give you the best possible answer. If you can’t share some information, for whatever reason, just remember that this will impact the quality of the advice you can get.

[dropcap]A[/dropcap]mazon is splitting my shipment into three different warehouses all over the country. Is there anything I can do to fix this?

There are two primary FBA settings for your account. The default setting is Distributed Placement. What this means is that Amazon chooses multiple warehouses (often three) where your inventory is going to be sent. It doesn’t do Amazon any good to have all of a certain product in Southern California when a customer from Maine makes a purchase. It wants to evenly spread the inventory around the country for speed and convenience. This is a good thing, but it is hard to think about that when you have 50 items going to Indianapolis and 1 random SKU going to Phoenix.

If you’d like, you can change to Inventory Placement by going to Settings > Fulfillment By Amazon > Inbound Settings > Edit> and then choosing to turn on Inventory Placement. What this does, is send all of your standard inventory to one warehouse (technically, Amazon on guarantees that the same SKU will be shipped to the same warehouse, but in practice all non-oversized items and inventory that do not require a special warehouse [jewelry, for example] get shipped together). The benefit, of course, is that you will generally only need to ship to a single warehouse which can help save on shipping costs.

inventoryplacement
As you might expect, there are some drawbacks to Inventory placement:
1) You are charged for this privilege. Each item in your shipment is charged 30 cents for the first pound and 10 cents/lb for each subsequent lb. So, if you were shipping 20 1.5lb widgets via Inventory Placement it would cost $8 in fees.

2) You still do not choose which warehouse. If you live in California, there’s no guarantee that they won’t send your items to Florida, which might make the shipping savings disappear (note: You can turn on Inventory Placement, create a shipment, and look at where it wants you to send your inventory without approving it.

3) Amazon still wants to have their inventory spread around the country. Sometimes (but not always) when your items are received at the warehouse, they do not become available for sale, but rather go into ‘Reserved’ status as Amazon reroutes them to the warehouse that they wanted in the first place. The benefit is that they are paying for this shipping, not you. The drawback is it can add an extra week before your items can be sold.

So what do I suggest? Generally speaking, I prefer Distributed (the default) Placement for most scenarios. The secret is to send in enough inventory per shipment that you’re able to fill all boxes to all warehouses. I find that this usually happens in the 60+ range. However, for new sellers, who are often only sending in 20 items, it can be really frustrating (and expensive) to ship 11 to Florida, 6 to Texas, and 3 to California. In this scenario, it’s almost certainly cheaper to turn Inventory Placement on (but strongly consider turning it off or you can rack up a large bill). Finally, there are some people who get overwhelmed with the idea of shipping to multiple warehouses, making sure the right units end up in the right box, etc. Because it is overwhelming, they do not ship as often as they need to and inventory sits in their garage. No FBA seller ever made money with inventory in their garage. For these people, paying the extra 30+ cents per item might be worth it if it causes them to spring into action.

For more information, Amazon has a pretty helpful page that you can read.

[dropcap]H[/dropcap]ow should I set up my business? Do I need an LLC?

It is great that you are thinking about things like this. One of the benefits to Amazon FBA is that there are very few barriers to entry and a person can literally get started with $100 and a dream. One of the drawbacks is that people often get into it as an experiment or a hobby and never really think about some of the business decisions that need to be made. So, congratulations on taking the time to focus on an important question.
However, this is simply not a question that you’re going to be able to get a lot of useful information for on a Facebook group. The reason is that taxes are complicated and they are often very particular for your situation. For one person it might be acceptable so simply remain a sole proprietor. Somebody else might be best served by setting up an LLC and electing to be taxed as an S-corporation. For a third person there might be a completely different answer. Your unique situation will hold the determining factors.

tax At some point in your business (and I suggest earlier rather than later) you are really going to need to spend a little money and consult with a tax professional. I promise that by paying a couple hundred dollars early on for a billable hour or two will save you 10 billable hours down the road. A professional can help advise you on how to structure your business, what systems to have in place, what information needs to be recorded and in which format, deductions to consider, and other tax-reducing strategies. If there was ever a business expense that pays for itself, it is a quality tax adviser.

There are some ways to save money on this expense:

Do a little research ahead of time so you can ask HOW questions rather than WHAT questions. You aren’t getting the best use out of your money if you are spending your billable hours learning what QuickBooksPro is or what a partnership is. These are things you could have found out by searching Google for free. You want to use your time asking HOW questions: “How should I set up my bookkeeping to make sure I have all of the information you need come tax time?” “How can I best balance simplicity with tax savings?” “How can I save the most money initially, while testing the model, even if it costs me slightly more down the road?” Questions like these get to you the most bang for the buck.

Don’t pay a CPA for busywork. If your goal is to save money, you don’t need a CPA to fill out a state form for you. You probably don’t need them to do your actual bookkeeping. Et cetera. Let them advise you on how to set up your business and how to keep track of the relevant information and then find a less expensive way of completing this task.

Finally, as with all professional services, it might be best to find an expert who is knowledgeable in this particular field. I’m fairly confident that your tax adviser doesn’t need to be an e-commerce guru to give you good advice, but it might be helpful to have someone who understands some of the concerns of your business and has dealt with this sort of thing before. Many tax professionals will give you a 10-15 minute free consult. I would use this time to figure out how familiar they are with businesses like yours and whether you think that this is someone you could trust and work with. I would not use this time to try to get free tax advice.

[dropcap]I[/dropcap]’ve heard that if you’re buying products to sell, you don’t have to pay sales tax. How do I do this?
That is true. Since the end user will ultimately pay the sales tax on the item (in theory) you do not need to pay sales tax on items that are going to be resold in the same condition (you still have to pay sales tax on supplies, materials to create a final product, etc.). The difficulty is that this often varies from one state to the next. Nevertheless, the general process usually goes something like this and is usually free to do:

1) Make sure that you have an EIN from the federal government

2) Register for Sales Permit / Reseller’s License from your state.

3) Use Tax Exemption Certificate with suppliers. Amazon makes it very simple to upload this, so that you can avoid sales tax while purchasing from them. WalMart, similarly has a fairly straight forward process.

Not every retailer will accept them (Kohls, for example, some Targets, etc.), but you may as well take advantage at the places that will. Be forewarned that at many locations the employees and even managers won’t know how to do this. Initially it may take more time than it is worth, but once you learn the systems at the stores you frequent the most, the process will speed up and you’ll start saving 5-9%, depending on where you live.

If you have paid sales tax on items for resale, you can often recuperate this money. Again, this depends on your state, so I can’t give blanket answers. In California, the way it works is that the sales tax that you’ve paid (when you didn’t need to) can be used as a deduction when filing to pay the sales taxes that you owe from your own sales. If you don’t know about sales tax, I advise having a look at this page and this one.

Finally, be forewarned that when you register with your state, they now know that you have a business and will be expecting you to start remitting sales taxes. Since you should be following the law already, this shouldn’t be a problem, but you should know that you’re now on their radar.

There are still many more beginner questions that I hope to tackle in the coming weeks, but these three will have to serve as a starting point. Hope that even if you aren’t an absolute beginner that there was something useful for you in this post.

As Always, Best Wishes

Mike