Not sure how to handle sales tax for your Amazon business? Here's our guide.
Does Amazon collect sales tax for sellers 2021?
November 9, 2021
Entering into business on your own is exciting, but one of the biggest hassles of operating your own business is dealing with conventional sales taxes. You want to be sure that you do this well, however, to avoid extra tax rates and fulfillment fees down the road. Taxes that you’ll want to get a handle on include income tax (a subject for another time) and sales tax set by the state government not by the federal government. Today, we’ll tackle sales tax.
What Is Sales Tax?
Sales tax is money that the local (state) governments require merchants to collect for sales they make in that given area and pay back to the government to help pay for public goods and services like schools, roads, and fire departments. Almost every state collects sales tax, with the exception of Alaska, Delaware, Montana, New Hampshire, and Oregon.
You are likely accustomed to paying sales tax on almost every purchase you make. You pay it when you buy food from the grocery store, books from the bookstore, or literally any good from any store. Even if you’re lucky enough to live in a state with no sales tax, you are likely paying it on purchases you make online as well. Often, however, certain items are exempt, such as food, or exempt below a certain threshold, such as clothing purchases of less than $200. At the same time, some products carry special taxes, known as excise tax .
Up until recently, merchants only had to be concerned about sales tax if they had a physical presence within a state. Now, however, even sellers who are selling remotely can achieve what is called a “sales tax nexus” - the basis upon which your taxability is founded.
What Is The Sales Tax Nexus?
A Sales Tax Nexus simply means that you have sufficient connection with a given state that they require you to collect and pay sales tax within that state. For most of US tax history, the primary form of sales tax nexus was a “physical nexus” - meaning that a merchant or seller maintained a physical presence within a state. As sales began to move online and it became more and more feasible for sellers across the country to ship products across state borders, it became necessary for states to adopt a new form of sales tax laws that would include these sales.
Thus, the economic nexus was born. After a major Supreme Court decision in 2018 (South Dakota vs. Wayfair), states can now form an economic nexus with remote sellers who meet a minimum gross sales amount or sale count. This means that remote sellers, including Amazon FBA sellers, are now responsible for collecting and remitting sales tax.
You also must be sure that your product is a taxable product. The vast majority of products are, however some states have different definitions of how to tax groceries, clothing, and other items. Be sure to check with local authorities to discern what is deemed taxable in that area if you have one of these items.
Each state has different guidelines pertaining to what creates a nexus within that state. Here’s a complete list to help you discern where you might have a nexus. Note: if you’re unsure which states your product is housed in, you can check out the “reports” section of your Seller Central Account and download the “Inventory Event Detail” report. Within this report, you can see which warehouses your product has been in - and therefore which states you likely have nexus with - easily.
If you’ve achieved “sales tax nexus” with a given state - you are responsible for collecting and paying sales tax on your sales to that state - period.
Still confused about sales tax nexus? Check out our full breakdown of what nexus is here.
Who Collects Sales Tax?
The good news is, because Amazon functions as a marketplace, it already collects and pays sales tax for you in the majority of states. This is due to “Marketplace Facilitator Laws,” which place the weight of responsibility for collecting and paying sales tax upon a marketplace, rather than the third party sellers who utilize that marketplace. Because Amazon provides the selling space, offers payment options, provides shipping, and provides marketing - they are considered a marketplace.
As of now, Amazon is responsible for collecting and paying sales tax in every state other than Missouri - which will be falling in line with the rest of states come 2023. This means that for most states, you don’t have to worry about the hassle of setting this up manually on your account. Amazon bears the burden of charging and paying these taxes.
That being said, you will need to set up sales tax on your account for the state of Missouri, if you have nexus in that state. Additionally, if you sell on platforms other than Amazon or have an actual physical store location, you are not out of the woods.
If you do have to collect sales tax from a state that Amazon isn’t handling this process within (be sure to check their records - things change), it’s relatively easy to do - but first you need to ensure you are registered to collect sales tax in that state (and any state with which you have achieved nexus, even if Amazon is covering it for you).
How Do I Register To Collect Sales Tax?
You must obtain a sales tax permit for every state in which you intend to collect sales tax. It is illegal to collect sales tax from states without this permit. You must register for this permit in every state in which you have nexus - even if Amazon is responsible for collecting and remitting it.
Every state, unfortunately, has a different procedure for this process. You can check out a guide for the state by state sales tax process here.
Once you’ve received your permit, you should also receive information as to how frequently you need to file your taxes (usually monthly, quarterly, or annually), and your due date. You do need to file taxes even if Amazon is paying them - but you can just place 0 in the amount due.
Using a professional accountant to help with these processes and forms will take a lot of stress out of your business, so we highly recommend doing so.
Setting Up Sales Tax Collection On Amazon
Once you’ve received your permit to collect sales tax, you need to set up your Seller Central account to collect sales tax on your sales. Luckily, Amazon is very intuitive in this process so it shouldn’t take much work from you.
- Log in to Seller Central.
- Go to your Tax Settings. You can find this by going to “Settings,” then “Tax Settings,” then “View/Edit Your Tax Collection and Shipping & Handling and Giftwrap Tax Obligations Settings.”
- Select which states you need to collect sales tax in. All the states that Amazon already handles this for should be grayed out - so this should help you narrow things down.
- Keep the suggested rate. Don’t enter your own - things change frequently and you don’t want to charge the wrong amount.
- Enter in your registration ID/permit number. You will not be able to collect sales tax without this.
- Assign correct product tax codes. To do this, go back to the “Tax Settings” page and find the “View Master Product Tax Codes and Rules” page. You will either label your product as:
- A_CLTH_GEN. If you’re selling a general clothing piece, choose this.
- A_CLTH_HBAGS. If you’re selling handbags, choose this.
- A_CLTH_CSTUMS. If you’re selling costumes, choose this.
- A_FOOD_GEN. If you’re selling general goods, select this option.
- A_FOOD_CNDY. If you’re selling candy, this code is for you.
- A_FOOD_SFTDK. You’ll choose this if you’re selling soft drinks or carbonated beverages.
- A_GEN_TAX. Most products will use this code. This is the general tax code. You’ll likely fall here.
- A_GEN_NOTAX. If you don’t want to collect tax on a given item (not recommended), select this.
What To Do With Sales Tax
Now comes the hard part. Once a sales tax due date comes around, you’re responsible for sending in any taxes you’ve collected and reporting how much you have collected for every state, county, and city.
You’re going to find all this information by visiting the “Reports” page within Seller Central and finding the “Payments” tab. Then select “Generate Date Range Report.” Enter in the correct date range, and get to work. It will take a lot of time, but you will be able to determine just how much sales tax you collected per given area. Of course, you can also use an automated third party service to handle this process - which we highly recommend. Anything to save you time working in the weeds is preferred.
You’ll then file taxes for each state to which you owe them. You can do this online by visiting each state’s individual tax return sites (remember to file for every state with which you have nexus - even if Amazon is covering these taxes - you just pay nothing). You need to make note of what the marketplace (Amazon) has collected and paid for you as well as what you have collected and are paying in most states.
Honestly, the best way to file these taxes is simply to use a trustworthy e-commerce accountant, or use an automation service to handle the process. The whole thing is time consuming and confusing - you’re better off spending your time elsewhere.
Hopefully at the end of this guide you feel equipped and empowered to handle sales tax for your Amazon FBA business. There are also other costs like storage fees, consumption taxes, monthly storage fee & fulfillment fees set by amazon fulfillment center. These backend steps to establishing yourself as an Amazon seller with legitimacy are difficult at times - but necessary. As always, don’t be afraid to get help from third party automation services for aspects of your business such as these. Focus where it matters!
Julia Grant is a copywriter specializing in e-commerce and small business, helping businesses expand their reach with copy that clearly communicates their message and converts. She is a certified translator and interpreter and prides herself on providing culturally relevant content in both English and Spanish.See more posts from this author