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An Accountant's Guide to Online Sales Tax – Part 2

May 21st 2018
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Just as selling through online retailers has drastically changed how your clients do business it has also changed how accountants think about, and manage, their client’s sales tax.

In Part 2 of this guide, we review how Amazon sellers manage sales tax and some of the complications that your clients may encounter.

Fulfillment by Amazon

Amazon has created one of the most advanced fulfillment networks in the world. With Fulfillment by Amazon (FBA), products are stored in Amazon fulfillment centers around the United States. The Fulfilment services offered by Amazon include these major services:

  • Inventory storage or warehousing
  • Order processing
  • Picking and packing of inventory
  • Shipping
  • Customer service and returns management

How does this impact your client’s obligation to collect sales tax? As mentioned in Part 1, one criteria for establishing nexus in a state is having product stored within that state. Having nexus in a state means your client needs to register with the state Department of Revenue to collect and remit sales tax within that state.

Let’s consider how your client can best manage their tax exposure when participating in Fulfillment by Amazon. Amazon’s fulfillment center network spans the following states, as of this writing. In some cases, the state houses fulfillment warehouses while in others, the state houses sortation centers. There are currently 27 states that have a combination of both, they include:

  1. Arizona
  2. California
  3. Colorado
  4. Connecticut
  5. Delaware
  6. Florida
  7. Georgia
  8. Illinois
  9. Indiana
  10. Kansas
  11. Kentucky
  12. Maryland
  13. Massachusetts
  14. Michigan
  15. Minnesota
  16. Nevada
  17. New Hampshire
  18. New Jersey
  19. North Carolina
  20. Ohio
  21. Pennsylvania
  22. South Carolina
  23. Tennessee
  24. Texas
  25. Virginia
  26. Washington
  27. Wisconsin

Ecommerce sellers need to be aware of the rules in each of these states. For example, some states such as Pennsylvania hold that fulfilment services are taxable. Other states are not so clear, indirectly indicating through surveys that Amazon’s FBA services are a nexus-creating activity. Many other states assert that any activity that opens or drives an existing marketplace create nexus for the seller. 

How Amazon Collects Sales Tax

Amazon collects sales tax for all 45 state that have a sales tax, also the District of Columbia and Puerto Rico, and some local jurisdictions. Taxable items sold through Amazon are taxed based on the total selling price of the item.

This price includes several components, including item-level shipping, handling, and freight charges, item-level discounts, and charges for gift-wrapping. At an order level, there is also an allocation of shipping and handling charges and discounts.

Sales Tax Holidays

Sales tax holidays are a temporary period during which state sales tax is not collected or paid on qualifying items. There are two main types of sales tax holidays; The first generally precedes the beginning of the school year, allowing consumers to purchase educational items such as clothing, computers, and school supplies tax-free. The second is generally scheduled prior to the start of an expected hurricane season and allows consumers to purchase hurricane preparedness supplies tax free.

States also provide sales tax holidays to encourage energy efficiency, celebrate the second amendment, and more. Amazon participates in sales tax holidays so be aware that during these periods, it’s against the law to charge state sales tax on sales of qualifying goods in qualifying states. However, local sales taxes sometimes apply.

Managing Refunds and Exemptions

The total amount of sales tax applied to an order depends on a number of factors including the type of product being purchased, the sales tax law at the ship-to address and also who the item is being sold to. Some purchasers are considered exempt from sales tax.

If your clients is enrolled in the Amazon FBA program, Amazon’s sales tax compliance includes managing refunds and handling tax-exempt purchasers. 

To receive a sales tax refund in a particular state, a purchaser must submit their tax exemption documentation for that state to the seller. If your client is not enrolled in the Amazon FBA program but selling online, they may find customers contacting them directly to request a sales tax refund.

Exempt Purchasers

Some purchasers are exempt from sales tax, for example non-profit organizations or other recognized charitable, religious or educational groups.  If your client is selling to sales tax exempt organizations they need to collect and maintain the exemption certificates properly.

Common complications can arise with exemption certificates, such as the purchaser changing their company name or registration number, or slight mismatches in company name. You can assist your ecommerce clients in finding a process to keep and maintain accurate exemption certificates. Poor documentation can cause serious issues if your client is ever audited.

Best Practices: Record Keeping & Audit Avoidance

Your clients who are ecommerce sellers have a special burden in keeping sales tax records because they are usually conducting transactions in more than one state. They must maintain sales tax licenses not only where they are based, but also in those states where they have nexus. If they don't carefully track the rules that apply to each transaction in each state where they do business, sellers set themselves up for serious liability issues.

It's the need to manage so many moving parts that get sellers in trouble and to make what may be the number one mistake in sales-tax bookkeeping: They simply don't pay what they owe to whom they owe it.

To avoid making this top mistake in sales tax bookkeeping, here are some basic guidelines for your clients:

  • Establish separate accounts for each state where sales tax collection is required, and make sure filing is happening on time.
  • Ensure you have sales tax permits in each state that requires you to, but don’t collect taxes in states where you are not required to do so.
  • Properly record tax liability in each state’s account, track each incoming and outgoing transaction, and remit taxes to the right states. Remitting them to the wrong states and neglecting to pay the states you actually owe can lead to penalties.
  • Carefully track and document each payment, including refunds, and reconcile your balances every time you remit a payment to the states to which taxes are owed.
  • Frequently review your sales tax records to make sure they’re being properly managed. Tax authorities are expecting compliance, not excuses.
  • If you voluntarily get a permit in a state, make sure you collect taxes and remit returns and payments in that state.
  • Make sure your account does not accumulate collected taxes. There are times it should be empty of funds because you’ve paid the taxes.
  • Don't let the business of keeping your sales tax books fall by the wayside. Avoid the biggest mistake of all -- not paying who you should when you should -- and the headaches that come with it.

If you or your client have never been through a sales tax audit before, it can be a daunting prospect. The average audit typically lasts 30 to 45 days and auditors can be on-site for two to four weeks.

Your client’s ability to prove that they’ve collected and remitted the right amount of tax is critical to the process.

Replies (1)

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By serghio
May 30th 2018 19:19 EDT

Can you recommend any consultants or services that can help with sales tax for Amazon FBA? We are an FBA seller and have noticed that the service we use often does not include sales numbers for states like New York and Washington which doesn't make sense. Thanks!

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