This is a guest blog post by Mark Faggiano, the founder and CEO of TaxJar.com. AMZHelp.com experts use Taxjar and recommend it to our clients. This article touches on the essentials of sales tax for Amazon FBA sellers, but we encourage you to discuss tax and accounting matters with your accountant or CPA.
Nobody every started selling on Amazon because they were looking forward to dealing with sales tax. But the fact is sales tax is a part of life for nearly every product seller.
I get it. Getting your sales tax in order can be time-consuming and sometimes even intimidating. So I’ve summarized the five essentials of sales tax to demystify the process.
Let’s dig in:
Detect where you have sales tax nexus
Forty-five states and D.C. all have a sales tax. Since sales tax is governed at the state, not federal, level, that means there are forty-six different sets of varying sales tax laws. But the one thing they all states have in common is that they require sellers who have “sales tax nexus” in their state to collect sales tax from buyers located in that state.
Nexus is just a fancy way of saying a “significant connection” to a state. Each state’s law talks about nexus a little differently, but these common factors usually create nexus:
- A location – a store, office, warehouse or other physical space
- Personnel – an employee, contractor, salesperson, installer or other person working on behalf of your business
- An affiliate – someone who sends sales to your website in exchange for a small cut of the profits from that sale
- A drop shipping relationship – in some cases, having a 3rd party distributor ship products to your clients creates sales tax nexus
- Attendance at a tradeshow or craft fair – depending on the state, selling products temporarily in a state can create sales tax nexus
- Inventory – storing inventory in a state generally creates sales tax nexus in a state
That final nexus-creating activity is what trips up many Amazon FBA sellers. Because storing inventory in a state creates sales tax nexus in a state, FBAers may find themselves with sales tax nexus in many of the states where Amazon has fulfillment centers. To determine if your inventory is stored in a state you can do one of two things:
- Pull your “Inventory Event Detail” report from Amazon Seller Central
- Check your Amazon badges on the TaxJar dashboard. If you don’t have a TaxJar account, you can try a 30-day free trial
Once you’ve determined where you have nexus, your next step is to…
Register for a sales tax permit
Before you begin collecting sales tax from customers, register your business with the state.
Don’t skip this! Most states consider it unlawful to collect sales tax from buyers without a valid permit, even unknowingly. (They’re afraid you’re going to keep the money in your pocket if you’re not registered!)
When it comes to sales tax, we recommend starting with your home state and branching out from there to your other nexus states. You can find out more in our free guide on “When to Register for a Sales Tax Permit.”
You can find step-by-step guides to registering for a sales tax permit in ever state here.
Collect sales tax from your buyers
Once you’re registered, your next step is to make sure you’re collecting sales tax from buyers in your nexus states on all of your shopping carts and platforms.
Example: You live in Iowa but have nexus in South Carolina and Tennessee because you have items stored in the Amazon fulfillment centers there. You’d need to make sure to collect sales tax from buyers in Iowa, Tennessee and South Carolina on all of the platforms on which you sell, not just Amazon.
You can find guides here on setting up sales tax on the most common eCommerce platforms.
Report how much sales tax you collected
When you registered for your sales tax permit, the state told you how often they wanted you to file a sales tax return. (This is usually either monthly, quarterly or annually.)
So when it comes time to file, you need to determine how much sales tax you collected from buyers in every state.
I wish your obligation stopped there, but the majority of the states also want you to break down how much sales tax you collected by county, city and other special taxing district. This becomes complex when you sell on multiple channels or have nexus in multiple states.
When my team and I were creating TaxJar, we observed different sellers attempting to report how much sales tax they’d collected. Some sellers used spreadsheets and complex pivot tables, others even wrote it out longhand. We had one customer tell us that they locked the whole team in the office over a weekend every month to handle sales tax!
There’s a better way now. Sales tax automation will compile all the sales tax you’ve collected and create return-ready reports for you to file.
Speaking of filing…
File sales tax
When the due date rolls around, it’s time to file your sales tax returns. You can use the reports I just mentioned to login to the state’s website and file online, or you can let TaxJar AutoFile for you.
However you choose to file, remember these two things:
- File “zero” returns – Be sure to file sales tax on your due date even if you didn’t collect a penny from buyers over the taxable period. Some states will penalize you for failing to check in even if you don’t have anything to report. This penalty can include a monetary fine (Florida’s is $50!) or even revocation of your sales tax license.
- Don’t discount discounts – About half the states will allow you to keep a very small portion of the sales tax you collected if you file on time. Here’s a list of states that offer sales tax filing discounts. Don’t leave money on the table!
And that’s it – you’ve put a lid on sales tax!
Do you have questions or comments? For a much more in-depth guide to sales tax, check out our Sales Tax for Amazon FBA Sellers guide. To discuss sales tax with us, join our Facebook group Sales Tax for eCommerce Sellers.
TaxJar is 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!