Planning to enter the US market as an Amazon seller? Find out the basics of sales tax in the USA and proper compliance to maintain your account’s active status.
A Guide on the US Sales Tax for Amazon Sellers
Tapping the US market as an expansion strategy is financially rewarding because of the size of the potential buyer base. But before you can sell on the world’s biggest online marketplace, you must fully understand its operations, and one of the most crucial is sales tax.
Since it pays for Amazon sellers to understand it, below are 10 important things you should know about the sales tax.
1. What Is FBA Sales Tax in the USA?
FBA stands for fulfilment by Amazon, a common route for many Amazon sellers. When you sell on the platform, you must charge sales tax for every item your buyers purchase.
Sales tax is a tax that customers pay when they buy a product or service. It is another type of consumption tax levied during a sale, collected by the seller, and remitted to the taxing authority. You pay for it whenever you buy coffee from a famous chain or renew your monthly subscription.
Sales tax is similar to VAT in the UK and EU—it is passed on to the end-user or consumer. If you plan to sell a product for $10 and the local sales tax rate is 10%, you must list the price at $11 to include the $1 tax. And instead of pocketing the extra dollar paid by the customer, you have to remit it to the government.
However, with Amazon FBA, handling your sales tax is slightly different compared to managing the order processing and shipping yourself. The collected tax goes into your account, and Amazon may or may not forward it to the proper tax authority.
2. The Difference Between Sales Tax and Income Tax
One of the crucial things Amazon sellers should know is that sales tax and income tax are entirely different.
Sales tax is a pass-through tax—you charge it, collect it from consumers, and remit it to the state tax authority. No complicated calculations are necessary; all you need to know is the tax rate to apply to your products. Think of yourself as the medium for collecting and forwarding the tax due.
On the other hand, income tax is paid out of your net earnings as an online merchant. And unlike sales tax, it comes straight out of your pockets. Moreover, it has different rates or tax brackets, wherein your tax due depends on the applicable rate for a specific range or threshold.
3. Do You Have to Pay Sales Tax When Selling on Amazon?
Yes, you do. Amazon sellers must pay sales tax when trading on the platform. That’s because you’re collecting sales tax from your customers on Amazon. Additionally, you must remit this collected tax to the government to keep it in line with the US tax legislation.
Bear in mind that sales tax is unavoidable, and failure to pay translates to significant penalties and fines that can impact your operations.
Besides settling sales tax dues, you must ensure proper compliance as well. Your responsibilities include registering, collecting taxes, and paying the correct amount to the government. Otherwise, you will be penalised for non-compliance, not the marketplace.
4. When Does an Amazon FBA Seller Need to Collect Sales Tax?
Tax collection isn’t something you do without a legitimate reason. When you’re an FBA seller on Amazon, you are in charge of collecting sales tax in the US states that meet at least one of the two criteria: sales tax nexus and product taxability.
5. What Is Sales Tax Nexus?
Amazon sellers need to know what sales tax nexus means. Nexus occurs when your business has some connection to a state. While every state has varying definitions of nexus, it generally means physical presence in that jurisdiction. A good example is having an office or a warehouse.
An economic connection also creates nexus and making a sale is considered one. So if your buyer lives in California, you have nexus in it. You must charge the corresponding rate and collect the sales tax for remittance to the authorities.
6. Inventory Nexus and Amazon FBA Sellers
You may wonder—what is the link between inventory nexus and Amazon sellers under the FBA program?
Under the FBA fulfilment strategy, merchants must ship their products to an Amazon warehouse. To make the most of the fees, sellers store their inventory in a fulfilment centre in the state where they have many buyers. Unfortunately, this also creates sales tax nexus.
Most state tax laws consider inventory storage grounds for nexus since online sellers use the state’s resources, such as roads for delivery, public safety services during emergencies, etc.
So if you’re an FBA seller, don’t be surprised to have sales tax nexus in a particular state—it’s simply because your inventory is stored in an Amazon fulfilment centre, meeting the physical presence criteria of nexus.
7. An Important Exception to the FBA Rule
Many critical rules are in place between Amazon sellers under FBA and the marketplace because of the latter’s relationship with the local tax authorities.
Nearly every state with an Amazon fulfilment centre has implemented some form of Marketplace Facilitator Law. Under this legislation, online marketplaces like Amazon, Walmart, eBay, and Etsy are in charge of collecting sales tax on behalf of their merchants.
It removes the burden of collecting and remitting sales tax from them. However, you still have responsibilities. For instance, you must hold a valid sales tax permit and file periodic returns in states where you have nexus or your marketplace charges and pays sales tax.
If you’re unsure whether you should file returns or what your nexus states are, it’s best to consult a tax specialist from Sterlinx Global.
8. Product Taxability
Not all products can be taxed, so determine if what you are selling is taxable. Tangible goods are generally subject to tax, while services aren’t. Moreover, some product categories like groceries, clothing, and textbooks may not be taxed or charged at a different rate in certain states.
Check with the state’s tax authority to identify which goods are taxed, subject to reduced rates, or exempt. Ensure you have the right information by consulting a sales tax expert from Sterlinx Global.
9. How to Collect Sales Tax on Amazon
While the online retail giant collects sales tax on merchants’ behalf, Amazon sellers must know that this service comes with a price.
Currently, Amazon charges 2.9% of each transaction for collecting sales tax. It’s necessary to include this rate in your pricing to ensure that it won’t reduce your margins.
Alternatively, you can forego collecting sales tax from your Amazon customers. And since tax is unavoidable, pay your dues out of your earnings. When you take this route, be prepared to do your own calculations.
But if you want to keep it simple, it’s best to let Amazon handle tax collection. To do so, you must accomplish the following:
- Set up sales tax collection in your Seller Central.
- Input the product tax codes for your products.
10. How to Report and File Amazon FBA Sales Tax
Amazon sellers must report sales tax they’ve collected in every state they’ve had buyers. Also, they need to file and submit the corresponding return to the proper taxing authority.
There are two ways to report collected sales tax:
- Download the relevant document from Amazon’s Seller Central.
- Use sales tax automation software.
Once you determine the total charged sales tax, you have to file and remit them.
Similarly, you can file your Amazon FBA sales tax return using two methods:
- Log online to the state’s taxing authority website and submit the relevant return.
- File it via a sales tax software such as TaxJar.
TaxJar automatically collects, calculates the amount due, files returns, and remits the taxes to the government on your behalf.
Frequently Asked Questions about Sales Tax
How is sales tax different from VAT?
Sales tax is imposed only once—at the point of sale. On the other hand, VAT is charged and collected at every stage of the supply chain where value is added, from production to sale. But in essence, they are both consumption taxes and raise approximately the same revenue.
Can I handle sales tax computation myself?
Yes, you can, especially when you have a solid understanding of the fundamentals. However, calculating your sales tax collection takes away the time better spent managing your business. Work with a tax specialist or accountant from Sterlinx Global so that you can focus on operations rather than compliance.
Is there a single sales tax rate?
No, there is no standard sales tax rate in the US. Instead, it varies by state and can range from 2.9 to 7.25%. Moreover, some states have zero and reduced rates applied to specific product categories. You must know the correct tax rate to ensure proper collection.
Conclusion
It’s important for Amazon sellers to understand how sales tax works and its impact on their business—after all, next to income and expenditures, taxes can make or break their profits. Because compliance can be complex, it’s best to work with a tax specialist like Sterlinx Global to cover all your bases.
