We totally get it. You didn’t start your Amazon business because you’re ecstatic to start complying with sales tax in various U.S. states. In fact, Amazon FBA sales tax is one of the most bothersome administrative hassles you deal with in your business. And it isn’t even a profit-generator!
This post will explain the basics of Amazon FBA sales tax so you can finally feel confident about it and spend more time on the profit-generating side of running your business.
What is Sales Tax, Anyway?
States are responsible for governing sales tax (there is no “federal” sales tax), and 45 U.S. states and Washington D.C. all have a sales tax. The money collected from sales tax is used to fund state and local budget items like roads, schools, and parks.
Sales tax is a “pass-through tax,” meaning that while you, the merchant, are responsible for collecting sales tax from your buyer at the point of sale, you don’t actually get to keep it. You pass it on to the state by filing a sales tax return and remitting the sales tax you’ve collected.
Amazon FBA Sales Tax 101: Sales Tax Nexus
As a merchant, due to a precedent set by the Quill v. North Dakota Supreme Court case, you are only required to collect sales tax from customers in states where you have sales tax nexus. Sales tax nexus is just a fancy way of saying a “significant connection” to the state.
While every state’s laws are slightly different, these are the general factors that create nexus in every state:
- Home state – You always have nexus in your home state, even if you work from your kitchen table
- Location – An office, store, warehouse, sample room or another place of business
- Personnel – An employee, salesperson, independent contractor, installer or other personnel
- Inventory – Inventory for sale (i.e. when you use 3rd party fulfillment such as Amazon FBA)
- Drop shipping – Some drop shipping relationships will create sales tax nexus for you
- 3rd party affiliate – In states with “click-thru nexus,” an affiliate who sends sales to you in exchange for a cut of the profits creates sales tax nexus
- Making sales temporarily – Depending on the state, making sales at a trade show, craft fair or other temporary location can create sales tax nexus
If you sell on Amazon FBA, you have sales tax nexus in states where your products are stored for resale. (This is with the exception of Virginia, which issued a letter ruling last year stating that 3rd party fulfillment services where the only relationship to the state involves storing goods in a warehouse does not create sales tax nexus.)
If you have sales tax nexus in a state, your next step is to…
Register for a Sales Tax Permit
Before you collect sales tax for any state, you’re required to register for sales tax permits with those states. Don’t skip this step! States consider it unlawful to represent yourself as collecting sales tax in their name without being registered.
You’ll also need to be registered for a sales tax permit before setting up sales tax collection through Amazon Seller Central.
Once you receive your sales tax permit, you’ll also get a filing frequency and sales tax due date schedule. You’ll generally file either monthly, quarterly or annually, depending on your sales volume. The rule of thumb is the higher your sales volume in a state, the more frequently you will be asked to file. Some states, however, will want you to file monthly during your first year in order to determine your sales volume for themselves.
Possessing a sales tax permit also allows you to purchase items tax-free for resale.
Here’s a list of steps for registering for a sales tax permit in every state. And here’s our guide on when to register for a sales tax permit.
Collect Sales Tax from Buyers
Once you have your sales tax permit, set up sales tax collection from buyers through FBA. We’ve put together a handy video to walk you through this process step-by-step:
For each state, you’ll need to indicate whether you want to collect state local or all tax rates. You'll also need to indicate whether a state requires you to charge sales tax on shipping and gift-wrapping or not. We have a handy guide to filling this information out at the back of our Amazon FBA Sales Tax Guide.
Important note: Once you have sales tax nexus in a state, that means you must collect sales tax on all of your business’s sales into the state. Not just your Amazon sales. So if you sell on multiple channels, you’ll need to collect sales tax from your buyers in that state on all of your channels.
Report How Much Sales Tax You’ve Collected
Remember that filing due date your state assigned you when you registered for your sales tax permit? When that date arrives, your next step is reporting how much sales tax you’ve collected from buyers in that particular state.
States don’t make this easy. The majority of states require you, the seller, to tell them how much sales tax you collected not just from buyers in the state, but from buyers in which county, city, and special taxing district.
Here’s an example of a California sales tax form. (It keeps scrolling down, and down and down… And that’s just one page of the filing form!)
Before, sellers had to deal with the headache of figuring out where all of their customers lived, what the sales tax rate was there, and how the state wants to see this info presented. If you sold on multiple channels, you had to figure out a way to combine reports from each channel.
Today, thankfully, we have sales tax automation technology that will do all of that for you. Sales tax reporting that used to take hours now takes minutes.
File Your Sales Tax Return and Remit Your Amazon FBA Sales Tax
So, you’ve determined how much sales tax you collected in each state and local jurisdiction over the taxable period. Now your next step is to file your sales tax return and remit the sales tax collected to your state.
In most states, you can file online and then pay using ACH transfer. Or, if you want to save even more time, you can use a sales tax automation service to AutoFile and pay your sales tax returns for you.
There are a couple of important things to note when it comes to filing sales tax:
- Always file “zero returns”. States want you to file a sales tax return even if you didn’t collect any sales tax over the taxable period. Failing to file can result in a fine or losing your sales tax permit. Always file as a “check in” with the state, even if you don’t have any money to remit.
- Don’t discount discounts. About half of the states with a sales tax understand that asking you to collect tax on their behalf is a burden. These states will allow you to keep a very small percentage of the tax collected. If you choose to AutoFile with TaxJar, we’ll be sure you keep that discount. Don’t leave money on the table!
And that’s it. You’ve filed a sales tax return and can get back to running your business!
Mark Faggiano, CEO/founder of TaxJar, is the author of this guest post. TaxJar is a service that
makes sales tax reporting and filing simple for over 5,000 online sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!