In the United States, sales tax is governed at the State level and no national general sales tax exists. As a result, it has become a complex topic for online sellers – especially Amazon sellers that use FBA to store and distribute goods. This is because of nexus, which refers to a business having a connection or tie to a State due to a significant physical presence or economic relationship. It is no wonder then, that a large proportion of FBA sellers don’t understand their responsibilities when it comes to being compliant.
In this article, we take a look at the sales tax responsibilities of Amazon merchants, recent developments in this space, and a few strategies that sellers commonly use to manage their obligations.
What is sales tax and why do I need to pay it?
Also referred to as a ‘consumption’ or ‘use’ tax, sales tax is supposed to be paid in the State where the goods and services are purchased for consumption. The money collected is used to fund local government operations – parks, roads, schools etc.
Before online shopping became prominent, it was a relatively simple task for States to collect sales tax. If you had a significant physical presence in the State, then you would need to register and file returns.
Fast forward to 2018 – online sales now represent 10% of all retail commerce in the United States, and that figure is rising fast. This has resulted in State governments collecting less sales tax from local companies, and applying pressure to outside businesses that are selling to customers within their State.
Understandably, this decrease in sales tax revenue has ruffled a few feathers in tax departments throughout the country.
Latest supreme court ruling challenges Amazon sellers
At the beginning of June 2018, the US Supreme Court concluded the South Dakota vs. Wayfair case and ruled in favour of State tax departments being able to set their own rules about who needs to register for and pay sales tax. Prior to this ruling, nexus laws were based on the 1992 Quill Corporation vs. North Dakota case, which stated that in order to be subject to sales tax, companies needed to have a significant physical presence within the State.
“By overruling the Quill case, the US Supreme Court ruling throws the traditional definition of physical nexus completely out the window for state sales tax purposes. It no longer matters whether a company has ties to the state. States can tax them anyway.”
Online marketplaces like Amazon break down the barriers for sellers to bring products to market, and create increased competition that gives consumers more choice and better prices. As an Amazon seller in the US, you don’t choose which States your customers live in, and if you are a part of the FBA program, then your stock can potentially be stored in over 30 States. This creates a tremendous amount of potential sales tax exposure.
But wait, doesn’t Amazon collect sales tax for me?
“While it is common for sellers to believe that the burden of complying with sales tax laws completely falls to Amazon, the truth is that if you have signed up as a third-party seller on their marketplace, then you signed off in your agreement (whether you actually read it or not) that you accepted the full burden of complying with sales tax laws.”
As an Amazon seller, you are required to register and file sales tax returns wherever you have nexus. You cannot collect sales tax without a license, but if you make sales and don’t collect sales tax, it’s still your responsibility to pay the sales taxes that you should have collected.
Develop a strategy towards sales tax collection before taking action
With many things in business, it is best to take action and get things moving, then work out a more formal strategy later on. However, this is not the case with sales tax compliance.
As we mentioned in the previous section, you are responsible to the States regardless of whether you actually collected sales tax in the first place.
Some people then say ‘okay great, I will register everywhere that I have nexus’. This approach is great for minimizing risk, however it can be very costly and time consuming to stay compliant in dozens of different States – especially for smaller FBA businesses.
- Let’s say that you take this approach – then what?
You can do it all yourself, which involves a great deal of paperwork and hassle on an ongoing basis.
- You can use apps such as TaxJar and Taxify to automate the process of calculation and filing returns.
- You can outsource the service to companies like The Tax Butler who will handle it all for you.
Unless you are doing it all yourself, these costs can really add up. It’s also important to note that once you’ve registered with a State department, you are “on their books”, and they are very good at keeping up with people who are in their system.
This leads some sellers to avoid registering for sales tax wherever possible, and adopting a ‘wait and see approach’. With the premise that these laws are ambiguous and constantly changing, they decide to avoid taking action for now. This is a risky strategy that can result in serious consequences. If and when tax departments begin catching on, these sellers become responsible for not only their backdated tax liabilities, but also penalties and interest.
The final option is our favorite – the ‘stair-step approach’. With this method, you begin by registering for sales tax in your home State. Then, you monitor the amount of tax exposure that you have in other States. Once the total amount of tax owing in any given State exceeds a predefined threshold (e.g: $1,000), you register in that State and file regular tax returns moving forward. This strategy helps to avoid getting caught out with sales tax debts whilst minimizing costs.
Education and understanding are the keys to getting it right
With all these new changes to the law, and increased pressure on eCommerce businesses, being an Amazon FBA seller can become quite overwhelming at times. This is why we have created free educational resources to help. Alongside our sales tax starter kit, we have also developed a bookkeeping automation series that discusses how the latest accounting technologies can help improve your business processes.
Here at MuseMinded, we help Amazon sellers by putting plans, tools, software and services in place to make Amazon accounting as easy and hands free as possible. To help our clients, and other eCommerce businesses, we have put together a free sales tax starter kit, which includes lots of valuable information to get you started.
All the best with your accounting success, and if you would like to talk more about how we can help, feel free to get in touch.