What is Sales Tax in Amazon FBA?
Sales tax has a straightforward definition: customers’ tax when buying a service or a product. While selling taxable items in a state on Amazon FBA, you have to register in a section in Amazon to collect sales tax.
Registration is essential before you begin collecting sales tax because even if your intentions are pure, states consider it illegal to start collecting sales tax without having permission. After receiving your permit, sales tax due dates and a sales tax filing frequency will be assigned to you.
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Your filing frequency is determined monthly, quarterly, or annually, totally depending on your sales volume. If your sales dramatically decrease or increase, your state may assign you a new filing frequency as time goes by.
Should All Amazon Sellers Pay Sales Tax?
Sales taxes are a bit of a mystery for many sellers, especially those who use an online arbitrage souring list for their FBA business. Every Amazon seller in the U.S. must file taxes by March 15 for their businesses on Amazon. There is a “Tax Information” section under your “Seller Central” account on Amazon where you can enter your data. However, these are the cases:
- The seller, who has a minimum of 50 transactions, needs to provide his tax status to Amazon. They may risk losing their permission to sell on Amazon if they don’t do that. Besides, if an Amazon seller has 200 individual transactions and $20,000 revenue, he will get a 1099-K form from Amazon. With annual and monthly gross sales information, the IRS is provided. In addition, it includes shipping fees and sales tax.
- Depending on the state where you reside, it is possible to sell tax-exempted items on Amazon without worrying about paying sales tax. So, before starting selling, do research on your local state tax laws. Don’t forget that sales tax on almost all physical products in the U.S. is changed occasionally.
- 5 states in the U.S don’t demand sales tax, called NOMAD for short: New Hampshire, Oregon, Montana, Alaska, and Delaware.
- Generally, you can sell on Amazon without paying sales tax. For example, groceries, supplements, clothing, and books. However, a few states ask for taxes on these products too. For example, Mississippi, Oklahoma, Alabama, Kansas, and South Dakota all collect sales tax on groceries and clothes.
- You can get a sales tax exemption while sourcing products to resell on Amazon. You need to submit a resale certificate to your supplier, which is an intelligent way of saving your money.
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When Do FBA Sellers Need to Collect Sales Tax?
Like other eCommerce sellers, Amazon FBA sellers are the purpose of sales tax. There are two criteria that Amazon FBA sellers must meet to collect sales tax in the states where they are selling products:
1) Sales tax nexus
The “significant connection” to a state has a fancy legalese way as a “sales tax nexus.” The buyers in each state that you have nexus will charge sales tax. Your sales tax nexus is always in your home state, but it is also possible that the activity of the specific business creates nexus in other states.
Ways to Have Sales Tax Nexus in the Different States
- Affiliates: In many states, the one who is advertising your products in exchange for the profits creates nexus.
- Economic nexus: Your transaction numbers are over a certain state-mandated number, or your sales exceed a state-mandated dollar amount.
- A location: A store, office, warehouse, or other physical presence of a business
- Selling products at a trade exhibition or other event: If you temporarily sell the products in some states, they consider you have nexus.
- Personnel: Anyone doing work for your business as a salesperson, an employee, installer, contractor, or other.
- Inventory: Storing inventory for sale in the state causes nexus in most states, although you have no other place of business or personnel.
Inventory Nexus and Amazon FBA Sellers
The last point mentioned above, storing inventory for sale in a state, is critical for Amazon FBA sellers. You need to be aware of the state’s perspective about sales tax laws. They believe an online seller who uses their state facilities and infrastructure such as public safety, the road for delivery, etc., has nexus. Probably, Amazon will not store your inventory in every state where it has an Amazon fulfillment center.
An Important Exception to the FBA Rule
There is a Marketplace Facilitator Law almost in every state where Amazon has a fulfillment center. According to the Marketplace Facilitator Law in these states, an online marketplace like Amazon is responsible for collecting sales tax instead of sellers. So it is very beneficial for online sellers because Amazon has to collect and remit it to state on their behalf.
2) Product taxability
The next step after determining your nexus in a state is specifying the taxability of your selling products. In general, your tangible properties are taxable, unlike services that are not taxable. Besides, some states have different tax rules for some common product categories, such as textbooks, groceries, clothing in some states, and even some are not taxable. For example, grocery and clothing don’t have any taxes in Minnesota, while in Tennessee, grocery items are taxable, but it is about 5%.
How to Get Sales Tax Compliant?
As it becomes clear that you are selling taxable products and determining your nexus in the state, you must collect sales tax. You need permission from the state before collecting the sales taxes, so it is necessary to register in that state. The next step would be assigning sales tax due dates and a sales tax filing frequency that depends on your sales volume, whether monthly, quarterly or annually.
How is Amazon FBA Sales Tax Calculated?
Based on your district, city, county, and state levels, Amazon’s FBA sales tax rate will be determined. You can get a combined tax rate by adding the sales tax rates for each level. Mainly, the basis of Amazon’s sales tax calculation is this rate which is expressed as a percentage of the product’s selling price. Besides, depending on the jurisdiction, the combined tax rate varies.
As an example, in Garland in 2020, the combined sales tax TX comprises of Garland sales tax (1%), Texas state sales tax (6.25%), and Special sales tax (1%), which is in total 8.25%. In another similar example, the combined sales tax for Dayton includes Montgomery County sales tax (1.75%) and Ohio state sales tax (5.75%) sum in total 7.50%.
By using the below link, you can calculate the combined sales tax for any state or city of your choice:
In addition, different states charge sales tax rates as destination-based, while some are origin-based, and you need to have a close look at each state’s tax policies where you ship your products to. Here is the explanation for each of them:
- Origin-based sourcing:
It doesn’t matter where the product is picked up or shipped from. The location where you sell your products to your customers is considered for calculating the sales tax.
- Destination-based sourcing:
Regardless of where your business is and when you sell the item, the buyer’s local rate calculates the sales tax amount.
Arizona, Pennsylvania, Illinois, California, Missouri, Mississippi, Ohio, New Mexico, Texas, Virginia, Tennessee, and Utah.
Alabama, Florida, Colorado, Arkansas, Maryland, Connecticut, Georgia, Michigan, District of Columbia, Washington, Idaho, Massachusetts, Hawaii, Kansas, Iowa, Indiana, Maine, Nebraska, Kentucky, Louisiana, Minnesota, Oklahoma, Vermont, New York, New Jersey, Rhode Island, South Dakota, North Dakota, Nevada, South Carolina, North Carolina, Wyoming, West Virginia, and Wisconsin
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How to File and Report Amazon FBA Sales Tax?
A) Reporting collected Amazon FBA sales tax
There are three different tax reports options:
- Marketplace Tax Collection Report:
This report is not practical and is just for informational purposes. It shows the sales tax collected and remitted by Amazon for orders destined to a Marketplace Tax Collection state. Keep in mind not to use this report to remit sales tax.
- Sales Tax Calculation Report:
The sales tax calculation report reflects the taxing jurisdiction information and the sales tax rate based on your tax calculation setting. When you are remitting sales tax, this report is helpful.
- Combined Sales Tax Report:
The tax calculated based on your tax settings and sales tax Amazon collected and remitted for orders destined to a Marketplace Tax Collection state are both reflected in this informational report.
Individual sellers are not eligible for sales tax reporting or tax calculation services. Individual sellers have access to other order reporting, including any Marketplace Tax Collection amounts. For using Tax Calculation Service, it is required to switch to a Professional selling plan. By following the below instructions, all Professional sellers have access to all three sales tax reports:
- Download a report from Amazon:
1) Login to Seller Central.
2)Choose “Reports” and click “Tax Document Library.”
3) Under “Sales Tax Reports,” click “Generate a tax report.”
4) Select the “Report Type” in the “Generate sales tax report” pop-up window, and opt for the reporting range either by Month or Custom dates.
5) Click “Generate.” Your report will be available under Sales Tax Reports.
- Use sales tax automation:
Using a sales tax automation solution helps you to generate a report. All of your shopping carts and marketplaces, such as Amazon, will connect in sales tax automation. A comprehensive report will provide all the sales tax you collected from buyers within a state. So, you don’t need to waste your time with maps and tax tables because it will nail down how much sales tax you’ve collected in each county, city, and other taxing jurisdiction.
You can file your sales tax returns to remit the sales tax you collected after reporting the amount of your collected sales tax in a state.
B) Filing Amazon FBA sales tax returns
There are a couple of ways that you can file your sales tax returns:
Firstly, log in to your state’s taxing authority website. Secondly, you can submit a sales tax return. Lastly, you can make your payment through the state’s payment gateway.
2) Automatically via sales tax software
You can use a sales tax automation solution to automatically file your sales tax returns and pay what you owe to the state.
Best Amazon FBA Sales Tax Tools and Software in 2023
You will find many options while looking for Amazon FBA Sales Tax. However, you have to select the right one which is reliable and automatically does most of your tasks. Here are the top Amazon seller tax software options that are available and popular in the market:
This software helps you to calculate your taxes and file tax returns. Wherever the Avalara team submits your tax returns on your behalf, it also offers manual services. By paying some extra amount, the team will check the calculations. Their solutions include:
– Communications tax
– Excise tax
– Goods and Services tax
– Lodging tax
– Sales and use tax
– Value-added-tax (VAT)
- A2X Accounting
The next option in the list is A2X Accounting. This sales tax tool will help you track your Amazon transactions, although it does not file your taxes automatically. It provides you the all the required information such as accounting details, sales tax and fees, and others.
If you are selling in countries like the UK, France, Germany, or Spain, you need to file VAT or Value Added Tax. For companies who want to scale globally, SimplyVAT is the best choice. This Amazon tax management software manages VAT compliance solutions and saves your time. If you are a new seller with a tight budget SimplyVAT is a good investment because the tax rates may vary depending on the country and sometimes for the products within a country.
It is one of the best available options for Amazon FBA sellers to automate their tax filing. It is possible to sync your Amazon account directly with the software and file taxes for chosen states automatically. The monthly charge for the basic package starts from $19.
- Taxify (Sovos)
For online sellers and eCommerce businesses, Taxify is a good option. You will have access to ready-to-print and ready-to-sign forms to file taxes effortlessly. They support integration with point of sale systems, accounting software, shopping carts, marketplaces, and much more. This tool is available in three different packages: starter, standard, and premium plans ranging monthly from $47 to $247.
One of the complexities in the Amazon FBA businesses for most sellers is sales taxes. Managing customs duty and keeping track of taxes and other items can be daunting. Besides, human errors are high in manual calculations. Things can become simple by arming with essential tools like Amazon FBA Sales Tax Tools for tax filing.
Amazon FBA Sales Tax FAQ
When your customers buy certain items from your business, they have to pay a percentage amount called Sales Tax. While the amount you pay from your total income from the business to the state government and federal is Income Tax.
There is a “$20K rule,” which means all sellers who use marketplaces such as Amazon and make more than $20k of unadjusted gross sales or have more than 200 transactions must report Amazon sales on their taxes.
The short answer is “No.” In general, resellers must collect Sales Tax when the products are sold to the end-user.
Currently, there are five states which have no Sales-Tax: Alaska, Delaware, Montana, New Hampshire, and Oregon.