When does an Amazon seller need to charge sales tax?
Sales tax laws often depend on several factors, including various state and local regulations. One issue to be aware of is whether or not you have a sales tax nexus or use tax in a particular state.
As part of the South Dakota Supreme Court v. Wayfair 2018 ruling, the classification of sales tax nexus was introduced. A sales tax nexus is a legal term for an online retailer making enough sales or having a presence in a specific region.
To qualify as a sales tax nexus, small businesses typically need to meet a specific minimum sales threshold in the region. If you have a physical presence, staff, or maintain inventory in a state, you also likely have a sales tax nexus in that jurisdiction. Once you’ve crossed these thresholds, you must apply for a sales tax permit and file sales tax return with the state.
Sales tax nexus for FBA sellers
When Amazon sellers use FBA, or Fulfillment by Amazon, they can ship their products to Amazon warehouses for customer fulfillment.
For example, suppose you’re fulfilling your own orders, and your small business is based in Massachusetts. In that case, a customer in California will have to wait longer to receive their order than a customer in Pennsylvania. When you use FBA, though, Amazon may store and ship your goods from warehouses in both California and Massachusetts, so neither customer has to wait to receive their goods.
FBA can be great for both customers and sellers—customers can get the products in their hands as fast as they would any other Amazon product, while you don’t have to worry about managing ecommerce logistics like other online sellers.
However, as in our example above, if you use FBA, your products may be stored in several different states. Therefore, the inventory Amazon stores on your behalf could mean that you have sales tax nexus in a state without even realizing it.
Amazon FBA sellers may have a tax nexus in states where Amazon fulfillment centers are located:
- Arizona
- California
- Colorado
- Connecticut
- Delaware
- Florida
- Georgia
- Illinois
- Indiana
- Kansas
- Kentucky
- Maryland
- Massachusetts
- Michigan
- Minnesota
- Nevada
- New Hampshire
- New Jersey
- North Carolina
- Ohio
- Pennsylvania
- South Carolina
- Tennessee
- Texas
- Virginia
- Washington
- Wisconsin
If you want to find out where Amazon FBA gives you sales tax nexus, our friends at TaxJar have prepared a handy step-by-step guide to finding this information in your Seller Central account.
No matter what state you sell in, though, it’s essential to understand what is and isn’t taxable in that state, city, and county. Some state sales taxes are low on life necessities like groceries and clothing, and some states don’t charge sales tax at all. With 14,000 tax jurisdictions nationwide and 3,000 unique product categories in the Amazon catalog to worry about, you must track and file your taxes accurately to avoid penalties.
How to collect sales taxas an Amazon seller
If you must collect and remit sales taxes, the first step is typically to register with the state’s tax authority and figure out how often you’ll have to file and pay. “I didn’t know I had to pay in that state” isn’t a good excuse when the tax collector comes calling.
Here are links to state tax authorities in the most populated states in the U.S.:
- California: California Department of Tax and Fee Administration
- Florida: Florida Department of Revenue
- Illinois: Illinois Department of Revenue
- New York: New York State Department of Taxation and Finance
- Ohio: Ohio Department of Taxation
- Pennsylvania: Pennsylvania Department of Revenue
- Texas: Texas Comptroller
Lucky for business owners, Amazon collects and remits sales taxes in many states for you automatically. You can see these details in your Amazon sales reports. Login into Amazon Seller Central and navigate to the Tax Settings menu to view your current sales tax collection settings and make specific selections at state and local levels.
You should also set up your product-specific tax codes for Amazon sales to ensure accurate collections. For example, you may have a higher tax rate on some products. If you under-collect on sales taxes, you may have trouble if asked to pay the difference. You also don’t want to accidentally charge sales tax where none is required, such as selling apparel or clothing in Minnesota.
How to report and file taxes as an Amazon seller
Before we get started, a note: sales taxes paid to state and local governments are not the same as business income taxes.
Sales taxes are based on revenue, while income taxes are based on profits and are paid to the federal government through the Internal Revenue Service (IRS) and possibly to a state government.
Collecting and filing sales tax
Amazon sellers choose between two plans when setting up their accounts: Individual and Professional. You must be a Professional Seller to collect sales tax on Amazon, and if you are, Amazon will automatically calculate, collect, and remit sales taxes for you.
Most states have what’s called “Marketplace Facilitator Law.” In these states, the responsibility of collecting and remitting sales tax is wholly on the marketplace (like Amazon, eBay, or Walmart), not the third-party sellers.
However, you’re still responsible for tracking and reporting your sales taxes and correcting any differences. You can find reports containing your sales and sales tax details in your Amazon Seller Central account. Once you’ve logged in:
- Under “Reports,” navigate to the Tax Document Library.
- Scroll down to the “Sales Tax Reports” section.
- You can create a tax report for any time period by clicking the “Generate tax report” button.
- Choose from the 3 report options: Sales Tax Calculation Report for remitting sales tax, Marketplace Tax Collection Report for the taxes that Amazon remit on your behalf, or Combined Sales Tax Report for both the sales tax you and Amazon are responsible for remitting.
- Your report will be listed as “In progress.” Simply refresh the page after a minute or so to be able to download the tax report.
- Downloading the tax report will give you an Excel file with all the information about each individual transaction.
In the Combined Sales Tax Report, check column X (Total_Tax) and column Y (Total_Tax_Collected_By_Amazon). These columns will show you the sales tax you’re responsible for reporting and remitting and the sales tax Amazon remits on your behalf, but you’re still responsible for reporting.
If you have a non-zero number in column X, you need to generate a Sales Tax Calculation report. This report contains a breakdown of how sales tax is calculated based on each customer’s state, city, county, and district. Since local taxes vary, you need to provide a breakdown based on these four qualities when remitting sales tax.
1099-K tax form from Amazon
If your business makes at least $600 in sales per year, Amazon will send you a 1099-K tax form. The 1099-K is used in preparing your taxes and contains tax information about payment card transactions and third-party network transactions. Even if you don’t get the form, you’re still required by law to make sure your business pays the correct amount.
State and local sales taxes for Amazon sellers
Before reporting, you may have to file for a business tax certificate or license for each jurisdiction. While this can be tedious, it’s required by law if you want to sell to customers living in those areas.
Learn more: Does Your Online Store Need a Business License?
Filing annual income tax returns as an Amazon seller
Most businesses will file income taxes using Schedule C on their personal income tax return or Form 1120 for partnerships and S corporations.
- Form 1040: Form 1040 is how individuals file a federal income tax return with the IRS. It’s used to report your gross income—the money you made over the past year—and how much of that income is taxable after tax credits and deductions.
- Schedule C: Schedule C is an addition to your 1040 annual tax return and includes a summary of your business results, with tax details that pass through to your personal tax return. This is the business tax filing method used by sole proprietorships and many LLCs.
- Form 1065: Partnerships report taxes using IRS Form 1065. In this situation, owners should also receive a personal income tax form called a K-2 or K-3, showing their portion of profits for tax reporting purposes.
- Form 1120 and 1120S: If your business is a C corporation or an LLC that files as a corporation, you’ll need to report taxes using Form 1120. S corporations use Form 1120S. As an owner, you’ll also get an additional K-1 form to report income on your personal tax return.
Tax Deductions for FBA retailers
While there’s not much you can do to influence sales tax rates and payments, you can work to minimize your year-end tax bill as an FBA retailer. You can legally lower your tax obligations by taking advantage of every possible tax deduction, especially the ones most common when selling on Amazon. Virtually every dollar you spend directly on your business counts, but exceptions exist.
Note: Tax deductions are expenses that lower your taxable income. When you lower your taxable income, you’ll owe less in taxes.
Here are some of the most common tax deductions for FBA retailers:
- Shipping: Shipping costs to get your products to your facility, Amazon’s warehouses, or customers are tax-deductible.
- Packaging: Boxes, shipping labels, padding, and tape are among the most common costs related to packaging.
- Seller fees: Whether it’s listing, transaction, or payment processing fees, any amount Amazon charges you to sell on their platform is a deductible expense, even if it’s taken from you before the money is released to you.
- Amazon Ads and other advertising: If you’re using Amazon Ads to promote your products, this counts as a marketing expense that is tax deductible. Similar online advertising like Google, Facebook, Instagram, and TikTok are also deductible expenses. Or, if you prefer other advertising like print ads, billboards, radio, or podcasts, keep a tally of that spend for your year-end tax filing.
- Banking, payment, and insurance costs: While savvy business owners work to limit banking and insurance costs, nearly all ecommerce businesses pay something for payment processing, banking, and other financial accounts and services. Any insurance expenses are also deduction-worthy.
- Work locations: Your office location—including a home office—and any other physical locations you maintain are a significant source of tax deductions. That includes rent or mortgage payments, insurance, utilities, and costs to maintain or upgrade your workspace.
- Software and utilities: Online businesses often rely on website hosting and a suite of tools to help you with various parts of your business. From photo editing software for promotional pictures to tax calculation tools, direct business expenses for software are tax-deductible.
- Education: If you take classes or courses to build your business skills or pay for employees or contractors to do so, it’s likely tax-deductible. Classes don’t have to be from a major college or university—even online courses count as business education costs.
- Business conferences and travel: In addition to conference fees, you can write off the cost of airfare, hotels, and ground transportation for the event or meeting.
- Professional services: Your accounting firm, lawyer, and other professionals required for your business may be a critical part of your team. Fortunately, these are also deductible costs for your company.
These costs should be fully tax-deductible outside of certain dining and entertainment expenses. When in doubt, check with your accountant or Bench Tax Advisor to ensure the deduction applies to your business.
Tips to improve your sales tax experience
Staying on top of your sales tax reporting and good bookkeeping practices helps reduce the stress of sales tax remittance. Whether you’re doing your own bookkeeping as an Amazon seller or working with a bookkeeper (like Bench), you get crystal clear insight into the operations of your business and your tax liabilities.
Consider taking advantage of sales tax tracking and remitting tools like TaxJar which is entirely focused on taking the guesswork out of sales tax compliance.
TaxJar plugs in to your ecommerce platform of choice, including Amazon, BigCommerce, or Stripe, to process your sales data automatically, so you don’t have to worry about missing anything or making manual mistakes.
To be confident in your sales tax process, consult with a CPA or Bench Tax Advisor to guarantee you’re taking the necessary steps to accurately report and remit sales taxes and avoid any pesky penalties and fines.
Don’t forget that sales tax and income tax are completely separate processes. Income tax filing still comes every Spring and being underprepared can result in inflated tax bills and unnecessary stress. By automating your sales tax remittance (or at least making it easier), you can stay up-to-date on your financial reporting making your tax filing stress-free and streamlined.
