Sales Tax Basics for Amazon FBA Seller Clients
With more than 10,000 taxing jurisdictions where Amazon may sell and ship products to customers, managing sales tax processes and reporting can be a daunting challenge, with missteps or missed filing deadlines resulting in painful and costly penalties.
Since many Amazon FBA sellers are small and may not have much experience with sales tax functions, it’s critical that they at least learn the basics, or find an accounting professional with experience in managing ecommerce sales tax issues.
FBA sellers, or Fulfillment by Amazon, are small businesses who use Amazon to sell their products, or act as a middleman to sell products from another manufacturer, and who have Amazon manage their inventory and shipping to customers. If the company manufactures the product itself or has a third party do so, they must arrange to have their inventory sent to an Amazon FBA warehouse.
Amazon promotes this process as a simple and almost hands-free program for small businesses, since the customer fulfillment processes are taken care of, for a fee of course. However, these small businesses are still responsible for sales tax reporting and payment.
What Are Sales Taxes?
Most consumers have at least a passing knowledge of sales taxes, which are used by states and local governments to fund a variety of programs, including infrastructure, education, social programs, police, fire, libraries and other projects. When making most retail purchases, a small percentage is added to the cost, with the rates set by each state, and often with an additional rate charged by local cities.
In some locations, there can be sales taxes levied by the state, city, county and special taxing jurisdictions such as transit districts. The retailer must periodically (usually monthly or quarterly) report their sales data and the amount of taxes they collected from those sales, and remits the taxes to the appropriate state or local tax agencies.
All U.S. states have a sales tax at the state level, except Alaska, Delaware, Montana, New Hampshire and Oregon, although Oregon has recently implemented an excise tax on the sale of bicycles that must be collected and remitted by the seller, similar to sales taxes. The non-sales taxing states also have municipal sales taxes in many cities.
For the smallest businesses with a low volume of sales, or with sales at only a single brick and mortar location, the process can be pretty simple. But when sales volumes grow, when sales are made to exempt buyers, or when sales start to expand to customers in new locations (either from opening a new store front, or via online sales), keeping up with the transactions, the different sales tax rates, and the reporting rules and deadlines to those different taxing agencies can get out of hand quickly.
Are Your Retail Clients’ Sales Taxable?
The old rule of thumb for sales taxes was set under Quill vs. North Dakota, a Supreme Court case from 1992 that determined that the catalog-based retailer did not need to collect sales taxes on transactions it made to customers located in states that the company did not have a physical presence in. This is the concept of nexus, but in the digital age, it has been greatly revised.
With ecommerce connecting sellers and buyers all over the country and around the world, many small retailers now are considered to have nexus in states where they might not think they do.
This is especially true for Amazon FBA sellers, since Amazon maintains offices, warehouses and other facilities in more than 20 U.S. states, and issues such as drop-shipping and third-party affiliate relationships can also result in nexus. In essence, this means that all FBA sellers are responsible for collecting and remitting sales taxes almost everywhere their customers are located. FBA sellers will need to apply for a sales tax permit from every state to which they will need to report sales taxes. It’s important to note that, once a seller has a sales tax permit, they may be required to continue reporting to that state even during periods in which there were no sales taxes collected for that jurisdiction.
There are some exceptions, such as purchasers who are exempt from sales taxes, such as nonprofit organizations and government entities. Additionally, some businesses, usually manufacturers who do not sell their product to general consumers, may not need to collect taxes on sales to resellers or businesses who use their product to make a new product.
Other Taxability Issues
In addition to keeping track of frequently-changing sales tax rates in each of the jurisdictions where its customers are, small businesses must also keep up with taxability provisions. For example, bubble gum may be subject to sales tax in one state, but not in another, where it may be considered food.
Likewise, a bagel in New York City may be subject to sales tax if it is sold prepared (i.e. toasted and with cream cheese), and not taxable if it is sold unprepared. There are thousands of variations of taxability rules like this across the states and depending on the nature of the sale and the classification of the item.
Many states and cities also have sales tax holidays, often around the back-to-school shopping season, but also for issues such as disaster preparedness and firearm awareness. Some states also charge sales tax on shipping costs. Manually keeping track of all of these taxability issues and sales tax holidays is impossible for most businesses, which is why it is critical that they turn to a cloud-based automated sales tax system that is constantly updated by tax professionals.
Origin Vs. Destination
For brick and mortar retailers, the location of the sales transaction is usually the location of the store. But for ecommerce businesses like FBA sellers, the location of the sale, and therefore the appropriate sales tax, depends on state laws. Some states base sales taxes on where the business is located, while others charge based on where the buyer is located.
Collecting Sales Taxes
When a purchase is rung up at a point-of-sale system at a brick and mortar business, the machine adds applicable sales taxes to the taxable items. For ecommerce transactions, the process is much the same, but with the ecommerce point-of-sale system also taking into account the above taxability factors, such as customer location and sales tax holidays.
The funds that are collected must be properly accounted for in the business’ books, with separate accounts for each state and jurisdiction. The funds should also be maintained separately from sales revenue. This isn’t the business’ money, after all: it was collected for the state and local tax departments.
Filing Sales Taxes
When submitting sales tax returns to the jurisdictions they are required to, the business will usually need to report gross sales in that jurisdiction, sales subject to tax, exempt sales, and often more detailed information such as sales by county, city or other district.
Many states have adopted the 20th of each month as the deadline for filing the previous month’s sales tax returns. However, this is not true across all states, so sellers need to be aware of all deadlines. Likewise, in most states it is possible to electronically file sales tax returns and EFT the sales tax funds, and some state actually mandate electronic filing.
Sales Tax Discounts
Filing early can pay off. Some states (currently 26) allow businesses to keep a small percentage of the sales taxes that have been collected to help cover the cost of compliance. The discount varies by state, but usually requires merchants to report and remit their sales tax collections before the filing deadline. For example, Arkansas allows the business to keep 2%, while Arizona allows 1% and Nebraska allows 2.5%. There are caps on the total amount per month or year that can be retained.
Automated Sales Tax Management
For businesses with sales across a broader range of states and jurisdictions, automated sales tax systems can greatly reduce the burdens of keeping up with potentially hundreds or thousands of sales tax rate changes and rule changes. Offered as online applications, these systems tie into a business entity’s sales or ecommerce platform and automatically applies the appropriate sales tax rate to a transaction.
These systems are comprised of massive sales tax databases (sometimes called matrices) that include rates for all jurisdictions in the nation, as well as special taxability rules, such as when is gum, clothing or food taxable and when are they not. These systems also include options for automatically preparing sales tax returns for review and electronic submission, along with digital tax remittance capabilities.
FBA Seller Sales Tax Checklist
- Determine nexus for sales taxes. This will identify in which states the business will be required to collect, report and remit sales taxes to. The seller should also obtain a sales tax permit in these states.
- Ensure tax rate and taxability data. Most ecommerce sales systems can integrate with sales tax databases, or allow the business to enter sales tax data manually. While the smallest businesses may get by with manual processes, most FBA sellers should implement an automated sales tax solution.
- Seek professional advice. Sales tax issues can quickly become cumbersome for online retailers, and the resulting late, missed or incorrectly filed returns can result in sales tax audits and painful penalties. Accounting firms that specialize in sales tax compliance can guide businesses through all of the steps, from determining nexus, reporting, integrating an automated sales tax solution, and representing the business in case of audit.
In late 2016, Kayla was brought onto the Nichols Accounting team where she continues to work as a Staff Accountant. She is planning on obtaining her CPA license and will then pursue specializing in the trust, estate, and gift tax area.