Sales Tax Compliance for the Amazon Seller
There was a time when many eCommerce sellers didn’t worry about sales tax — but those days are over. As eCommerce has grown, governments have realized how much tax revenue they could be collecting from online sales. They are expanding the definition of taxability and paying much more attention to enforcement, meaning that online retail sellers need to pay more attention as well. Sellers can no longer assume that they are flying under the radar of tax authorities.
Amazon offers its sellers many options to get help with sales tax, but these services depend on factors such as the seller’s program, fulfillment structure and location — and in most cases, sellers must opt in to these services. It’s important for sellers to know that Amazon does not automatically take care of all sales tax obligations for them.
Ultimately, sellers are responsible for their own sales tax compliance, so they need to be aware of their obligations and know what Amazon is or is not taking care of for them. Here are some basics to know in order to start getting sales tax right.
The most important part of determining your sales tax obligation is nexus, which can be defined as a “connection to or presence within a state.” Basically, if you have nexus in a state, you are required to collect sales tax on sales in that state.
It’s important to understand that you as the seller do not actually pay sales tax yourself — the customer pays the tax in addition to the price of the item sold, and your role is to charge the tax, collect it and remit it to the tax authorities.
Definitions of nexus vary from state to state, but a basic and universal rule is that you will have nexus in the state where your business is physically located. Over the past few decades, though, the definition of nexus has been expanded far beyond a physical connection. For example, nexus can be triggered by conducting business at a trade show in another state, storing goods in a warehouse and more.
For example, sellers using Fulfillment by Amazon (FBA) need to be especially aware of where Amazon is storing their goods. Amazon stores FBA goods in warehouses all over the country, and this can trigger nexus for you, as you are still considered the owner of the FBA goods. Amazon may also change the location of your goods, potentially triggering new nexus. Avalara provides a list of currently known warehouse locations.
In recent years, states have also increasingly been using “economic nexus,” meaning that nexus can be triggered by a certain amount of economic activity in a state, including sales revenue, transaction volume or a combination of both.
This trend was recently reinforced by a Supreme Court decision in South Dakota v. Wayfair, Inc., a landmark case that validated economic nexus standards and will most likely result in more sellers having nexus in more states. Several states have already adopted economic nexus, including Connecticut, Georgia, Kentucky, Hawaii, Illinois and Iowa.
What this means to you as an Amazon seller is that it will become increasingly likely that your business activities will trigger nexus in the states where you have customers.
What if I have nexus?
When you have nexus in a state, that means you have an obligation to collect sales tax there. There are a number of steps that you must take in order to fulfill this obligation and comply with sales tax requirements.
In all states, it is illegal to collect sales tax from customers unless you are registered with the state’s tax authority. You can find out how to do this by visiting that state’s sales tax website. Most states offer the option to complete your registration online, and some states only offer online registration.
Once you register, the tax authority will give you a registration number. You must have this number if you want to opt in to Amazon’s sales tax collection services.
You will also be told how often you need to file sales tax returns and your filing due dates. Your filing frequency will vary depending on the state and the amount of revenue you are bringing in from sales. Filing frequencies can range anywhere from biweekly to annually.
Sales tax calculation is included in the Amazon checkout process automatically, but you must choose which states and types of products you want included, as well as decide other options, such as whether gift wrap services are to be taxed. It’s up to you to get these settings right so that the sales tax calculations are also correct.
If you are collecting taxes yourself, remember, these are funds that belong to the tax authority. It’s best to keep them in a separate account from which you’ll pay the taxes when you file.
If you are using Amazon’s tax collection service, Amazon will collect the tax for you, but will then pass those funds on to you to remit to the tax authority when you file.
In a few states, including Oklahoma, Pennsylvania and Washington, Amazon is required to collect taxes on sales as well as remit them to the state. In these cases, the individual sellers will not need to collect or remit the taxes. However, they are still required to file sales tax returns by the correct due dates.
When you file your sales tax returns, you will report the amount of your sales for the period and pay any tax that you have collected.
Keep in mind that once you are registered with a state for sales tax purposes, you are required to file returns on your assigned due dates. This is generally true even if you have no sales for the filing period or if Amazon is collecting and remitting sales tax on your behalf.
With the evolution of the sales tax landscape, more and more Amazon sellers are being required to collect sales tax from their customers. Sellers have a responsibility to be aware of their sales tax obligations even if they are turning to Amazon to help them with compliance. Amazon sellers can also get help from services such as Avalara’s TrustFile, which automates sales tax filing and payment.
Avalara helps businesses of all sizes with sales tax solutions. Try a 30-day free trial of TrustFile today to see how automation can simplify sales tax for you.