Amazon FBA State Sales Tax Issues for E-Commerce Companies to Consider
Recently we’ve had queries from multiple clients dealing with Amazon FBA state sales tax issues for eCommerce stores. Often, sellers have dabbled on retail platforms such as eBay or Etsy, and realized how lucrative online sales can be. Once they start operating seriously, however, they run into business-related issues such as bookkeeping, self-employment tax, and of course, sales tax. This can be complex at the best of times, but it’s especially confusing if the business owner lives in one state, stores inventory in another, and sells to clients living in third-party states.
With Amazon FBA, this is a common scenario. While it makes for a challenging tax environment, it’s manageable if you have some basic understanding of the workings. This post will act as a brief introduction to Amazon FBA state sales tax issues.
Overview of Amazon FBA
The creation of the Fulfillment by Amazon (FBA) option has opened sales opportunities nation- and worldwide for many small online retailers. The option enables sellers to use Amazon’s warehousing facilities and shipping operations to store and mail products on their behalf. You get to use all the benefits offered by the retail giant, including free two-day shipping for Prime members and free shipping for all other customers on FBA products.
Amazon handles packing, delivery, customer service and returns, which helps earn the seller trust and credibility. You get access to other Amazon market places in Mexico and Canada, manage your inventory online with no minimum stockholding requirement and pay only for storage space and a fee on the orders they fulfill.
All of this frees you up to handle the management of the business, with one exception: you must do your own accounting, and that includes taxes. Amazon FBA State Sales Tax is tricky, and it is important to
What a Sales Tax Nexus Means and How it Works
Triggering a sales tax nexus means having a connection between your eCommerce business and a particular state. The connection could be due to one (or more) links, including:
- You live and are registered for business in the state, employ workers, have an office or other location in the state, which could trigger an “origin-based” tax nexus.
- Storage of eligible TPP (tangible personal property) or inventory in the state. Items such as food and certain types of clothing are sometimes exempt from sales tax, depending on the state in question. Local inventory storage can also trigger origin-based tax nexus.
- Sales and delivery to customers located in a state, which can trigger a “destination-based” tax nexus.
Online sellers can therefore, have sales tax nexus’ in more than one state. In each instance, the taxes may not only be triggered for different reasons but require different methods of processing and be based on different criteria.
Not all states have sales taxes, including Alaska, Delaware, Hawaii, Montana, New Hampshire, and Oregon, although this is subject to change at any time so you need to stay abreast of developments.
Determining Necessary Sales Tax Between States
A seller using Amazon’s FBA option might be living in Texas, using the FBA facility in California for storage, and selling mainly to customers in New York. In this instance, the business owner would be liable for collecting and paying sales tax in all three states. He (or she) would have to collect and pay origin-based taxes of 6.25% in Texas on all sales to Texas customers, 6.5% origin-based taxes in California on all sales to California customers, and destination-based taxes of 4.0% in New York on all sales to New York customers.
How to Calculate Amazon FBA State Sales Taxes
Calculating the taxes you need to collect is therefore based on where you ship from, where you ship to, and wherever you have locations. In states requiring destination-based taxes, there might also be additional taxes for individual counties and cities, which are over and above the percentages shown here. In addition, some states add taxes after shipping costs and apply them to the total amount, while in other states shipping costs are excluded from the tax calculation.
The amount of taxes you should be collecting also determines whether you have to register for sales tax, because a “negligible” amount simply isn’t worth all the paperwork. Most states rely on business owners and accountants to decide for themselves what negligible means, but it’s always better to err on the side of caution. For example, if your collectible annual sales tax is less than $50 it’s probably not worth registering, but if it’s more than $50 you should let your accountant or tax professional make that call.
Advice for Businesses
It’s simply not worth the potential penalties for tax evasion, even if you commit it unintentionally.
- Your first step as an online seller using Amazon FBA, therefore is to determine whether you need to register for sales tax, and if so, in which states. Bear in mind that it’s illegal to collect sales tax unless you’re in possession of a permit, and certain states require tax permits to be renewed regularly.
- I’d strongly recommend subscribing to one of the various software packages available that integrate with Amazon FBA, because it will greatly simplify the process.
- If you find that you should be collecting and paying sales tax in a state where you currently are not doing so, take immediate steps to rectify the situation and get legal tax help to resolve any issues. Otherwise, you could find yourself with a hefty tax bill, accompanied by fines to pay.
Samuel Brotman is a practicing attorney in San Diego and the founder of Brotman Law and a guest on our blog. His practice primarily centers on all aspects of tax litigation and criminal/civil tax controversies in front of the Internal Revenue Service, Franchise Tax Board, Employment Development Department, Board of Equalization, and various other state/local tax agencies. To learn more about Sam, visit him at http://www.sambrotman.com/ or follow him Facebook, Twitter, or LinkedIn.