Sales Tax 101 for Amazon FBA Sellers
Mark Faggiano is the founder and CEO of TaxJar, a service built to make sales tax compliance simple for eCommerce sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!
Selling on FBA is a smart decision. Amazon takes away many of the small hassles of running an eCommerce business (like postage meters and 99% of the cardboard cuts!), so you have time to source more products.
But with that convenience comes a few drawbacks. And one of those drawbacks is sales tax.
Forty-five states and Washington D.C. all have a sales tax. They use sales tax to pay for state and local budget items like schools, roads and public safety. In fact, many states get the majority of their income from sales tax, so it’s in their interest to create the broadest tax base possible. This is where “sales tax nexus” comes in. Nexus is a fancy way of saying a “connection” to a state. Due to the Quill v. North Dakota Supreme Court ruling back in 1992, states can require merchants with nexus charge sales tax to buyers in that state. States all operate independently when it comes to sales tax, but most of them agree that storing goods in a warehouse constitutes nexus. (You can see what each state says about nexus here.)
Long story short, for Amazon sellers this means storing goods in Amazon’s fulfillment centers means nexus in more states. And nexus in more states means collecting sales tax from more buyers.
But never fear. Today I’ll give you a quick and dirty overview of sales tax for FBA sellers. And I’ll link to plenty more resources so sales tax becomes just another small part of your business and not an overwhelming chore.
Step 1: Determine Where You Have Nexus
Like I mentioned above, states where you have nexus require you to charge sales tax to buyers in that state.
You always have nexus in your home state. But Amazon FBA may give you nexus in other states, depending on whether you have inventory stored in a warehouse in that state.
So your first step is to determine where your inventory is located. You can do this in one of two ways:
- Pull your Inventory Event Detail report in Seller Central
- Use a paid service like Wherestock.com
Once you’ve determined where your inventory is stored the next step is…
Step 2: Register for your Sales Tax Permit(s)
Once you’ve determined where you have nexus, the next step is to register for a sales tax permit in each state.
Don’t skip this step and go straight to collecting, because most states consider this unlawful. When you register you’ll receive a state ID number and your sales tax filing due dates. You’ll generally file either monthly, quarterly or annually.
Here’s a list of how to register for a sales tax permit in every state.
Step 3: Collect Sales Tax from Buyers
Once you’ve secured your sales tax permits your next step is to collect sales tax from your buyers.
To assist you, we’ve created a step-by-step guide to setting up your Amazon FBA sales tax in Seller Central.
Important to Note: If you have sales tax nexus in a state that means you are required to charge sales tax on ALL sales, not just sales you make through FBA. So if you also sell on eBay, Etsy or your own shopping cart you should make sure to set up sales tax collection from buyers in every state where you have nexus on those platforms, too.
Step 4: Report How Much Sales Tax You’ve Collected
When you registered for your sales tax permit you received a set of sales tax filing due dates. When the taxable period ends and your filing due date approaches it’s time to figure out how much sales tax you collected.
In an ideal world, you could just tally up how much sales tax you collected in each state and be done with it. But, as with most things sales tax, it isn’t that simple.
Most states want to know how much you’ve collected not only in the state but my county, city and other special taxing district. If you have nexus in multiple states, this gets tricky fast.
That’s not to mention sellers who sell on multiple channels. If you sell on Amazon FBA and a couple of other platforms you’d need to pull sales tax reports from each channel and then combine them, all the while figuring out which county, city and other district each sale took place in. Ouch!
That’s why we created TaxJar. With TaxJar you connect your FBA (and any other channels you sell on) one time and we take care of the rest. We’ll divvy up your sales by the correct state, county, city and special taxing district and create a sales tax return ready report. No more poring over zip codes and tax tables to figure out how to fill out your sales tax return. TaxJar users report saving an average of 5 hours per return, and more in complicated states like New York and California. When you multiply 5 hours x 12 sales tax returns in a year, that’s a lot of time saved!
Step 5: File Your Sales Tax Return
Once you’ve figured out how much sales tax you’ve collected and divided it up into states and local districts filing is a downhill process. Use your return-ready state reports from TaxJar to login to the individual state websites, file and pay. (Here’s a map with info about each state and how to file and pay sales tax.)
You can also elect to have TaxJar AutoFile for you in some states for just $19 per state per filing.
There are a couple more things to remember about filing:
Zero Returns – Some states want a sales tax filing from you even if you didn’t collect any sales tax over the taxable period and don’t owe them any money. Be sure to file a sales tax return in “zero return” states. Penalties for failing to file can include anything from cancelling your sales tax return to monetary fines!
Sales Tax Discounts – In better news, some states “get it.” They get that collected, reporting and filing sales tax straight to the state is a burden on a merchant. For that reason, they offer a small discount to ease some of the pain. Check here for a list of states that provide discounts to merchants for paying early or on time. Here’s a list of states and the sales tax discounts they provide.
And that’s it! You’ve put a lid on sales tax!
Have more questions about FBA and sales tax? Our Sales Tax 101 Guide for FBA Sellers goes in-depth about the topic. Or feel free to ask your questions here in the comments!
From Mike: Chris did a Google Hangout looking at TaxJar and discussing the topic of sales tax. I’d strongly suggest watching it here.