Sales Tax Compliance and the Amazon Seller
By Mark Faggiano
Mark Faggiano is founder and CEO of TaxJar. In today's guest column, he outlines the challenges Amazon merchants face in collecting and remitting sales tax when storing inventory in FBA warehouses.
Amazon sellers realize that successfully selling on Amazon is often a price race to the bottom. Margins are so thin that the best way for a seller to stand out from the crowd is by offering faster shipping. So, many sellers rely on fulfillment services like Fulfillment By Amazon (FBA), that allow for expedited shipping, to help differentiate outside of price wars and boost sales.
Those businesses using FBA - no matter what their annual revenue - find themselves all-of-a-sudden dealing with sales tax compliance in multiple states. Every state that has an Amazon warehouse says that inventory in a warehouse counts as nexus. That means online sellers have to collect sales tax from customers in those "warehouse states" and then remit the tax onto the state government. So, for example, if a seller is using FBA warehouses in 5 states, they are required to file 5 state sales tax returns as frequently as monthly in each state (accounting for 60 filings a year for those 5 states).
Amazon plays by their own rules
What drives online sellers on Amazon particularly mad is that Amazon is playing by a different set of rules than their third-party sellers. Amazon, while it builds more warehouses around the county, is cutting deals with states to delay their obligation to collect sales tax. So it's possible that an online seller could have nexus to a state and have to collect sales tax but Amazon.com selling the same item doesn't have to collect sales tax.
A seller's obligation
Being sales tax compliant in a state for an online seller means, first, registering the business with each state it has nexus before collecting sales tax from customers. Registration is free in most states and is required by Amazon to be eligible to collect sales tax in a state. Some states, however, require sellers to also register separately with local jurisdictions. For example, in Arizona, sellers have to pay an annual fee to register their business with non-program cities, like Phoenix.
Once registered, states tell sellers how often to file sale tax returns, which is normally based on how much money a business is generating, and is typically monthly, quarterly or annually.
Collecting sales tax with Amazon
FBA and non-FBA sellers alike have to enable sales tax collection or else no sales tax will be collected, leaving the seller liable to cover the entire amount of sales taxes owed to a state. At a high level, sellers need to tell Amazon when to collect sales tax and how much to collect. Sellers wish it were as easy as checking a couple of boxes and suddenly sales tax collection would begin instantly. The reality is the process can be very confusing for sellers not familiar with sales tax law.
When to collect
Sellers determine "when" to collect sales tax by first determining the states in which they want to collect. But collection is also tied to the taxability of each individual item in a seller's inventory. Sellers are required to tell Amazon which of their SKU's require sales tax to be collected and which do not. This is done most frequently by downloading inventory via a CSV file, editing a SKU's tax code, and then uploading the file back in to a seller's account. For sellers that sell only the same type of item, Amazon also has a way to assign a default tax code for a seller's entire inventory.
In general, food (groceries are becoming more popular on Amazon), books, and clothing are handled differently by the states (they can't agree on anything!). And then within each of those big buckets are dozens of subcategories to additionally qualify a food item, for example.
How do sellers possibly figure this out? That's the big question. It's up to them. Each of the tax codes Amazon provides does has a description of and examples of items. But ultimately the seller has to make the decision about taxibility, which may involve calling the state for advice...and that's an adventure in itself.
Sellers also have to make a decision on how to handle taxing shipping and handling as well as gift wrap per state. Some states say shipping is taxable, other say it's not. So that's another decision that the seller has to make.
How much to collect
In terms of "how much" sales tax to collect, a seller must decide whether to collect a flat sales tax rate for a state (and risk charging either too little or too much sales tax depending on the customer's location) or collect the state rate plus any applicable local rates (think county, city, and special taxes).
Unfortunately, not all states charge sales tax the same way. Origin-based states require sellers to collect a single rate based on where the business is located. In destination-based states, rates are based on where the item is being shipped. (And yet others, like California, are a hybrid of the two systems).
The ability to collect local taxes is helpful for sellers required to collect based on shipping address. Amazon uses tax rates provided by Vertex to determine the rates of collection. Amazon states that rates are updated monthly.
For providing the ability to collect sales tax, Amazon charges a fee of 2.9 percent of the amount of sales tax collected.
Filing is up to the seller
It's important to note that it's still up to the seller to compile all of their sales data and files sales tax returns to the states. Amazon doesn't offer any remittance service to sellers.
Sellers all agree filing sales tax returns is where the true burden of compliance is felt. Sales tax returns are known for requiring enormous amounts of time because many states require sales and sales tax collected to be broken down by local jurisdictions, instead of just simple lump sum figures.
About the author:
Mark Faggiano is the founder and CEO of TaxJar, a service built to make post-transaction sales tax compliance easier for multi-channel ecommerce sellers. Mark’s passion is solving complex problems for small businesses. He previously co-founded and led FileLater to become the web’s leading tax extension service for both businesses and individual taxpayers before being acquired in 2010.
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