Sales tax can be a confusing part of any retail business, but knowledge is power. This guide will go through the basics of sales tax for Amazon FBA sellers, and help you feel more comfortable dealing with sales tax.
The Basics of Sales Tax
Sales tax is a small percentage of a retail transaction. The retailer collects sales tax from the buyer and then remits it to the state. From there, sales tax goes to pay for schools, roads and other budget items. Some states only have one statewide sales tax, but most states also let local areas levy a sales tax. That’s why you may have experienced paying one sales tax rate in your hometown and then driving one town over and paying an entirely different sales tax rate.
Forty-five states and Washington D.C. all have a sales tax. Sales tax can be confusing because each state makes their own rules and regulations when it comes to sales tax. This means that who has to collect sales tax, how much sales tax to collect, and when and how to report and file sales tax can vary greatly from state to state.
Now I’ll go over the 5 steps to sales tax compliance for Amazon FBA sellers.
Step 1: Determine Where you have Sales Tax Nexus
In the U.S., online sellers and other retailers are only required to collect sales tax in states where you have “sales tax nexus.” Sales tax nexus is just a fancy way of saying a “significant connection” to a state.
Here are the business activities that often create sales tax nexus:
- Home state – You always have nexus in your home state, even if you work from your kitchen table
- Location – An office, store, warehouse, sample room or other place of business
- Personnel – An employee, salesperson, independent contractor, installer or other personnel
- Inventory – Inventory for sale (i.e. when you use 3rd party fulfillment such as Amazon FBA)
- Drop shipping – Some drop shipping relationships will create sales tax nexus for you
- 3rd party affiliate – In states with “click-thru nexus,” an affiliate who sends sales to you in exchange for a cut of the profits creates sales tax nexus
- Making temporary sales – Depending on the state, making sales at a tradeshow, craft fair or other temporary location can create sales tax nexus
You can see what every state’s sales tax laws say about nexus here. If you have questions regarding nexus, we advise speaking with a vetted sales tax expert for a professional opinion.
Step 2: Register for a Sales Tax Permit
Once you’ve determined you have sales tax nexus in a state, your next step is to register for a sales tax permit in that state.
When you receive your sales tax permit from the state, you will also be assigned sales tax filing due dates. These due dates are usually monthly, quarterly or annually, and will depend on how much sales tax you collect in each state.
Keep in mind that states use sales tax to pay for things like schools and roads, so if you collect a large amount of sales tax, they will want you to remit that amount more often. On the other hand, if you are a low volume or hobby seller, you may only be asked to file and remit sales tax once per year.
Also, don’t skip this step! States consider it unlawful to collect sales tax from buyers without a permit.
Brand new to business and daunted by sales tax? We recommend getting started with your home state and then branching out from there. Check out our “When to Register for a Sales Tax Permit” guide for more.
Step 3: Set up Sales Tax Collection
When you have your sales tax permit in hand, your next step is to begin collecting sales tax from your customers.
Amazon has a very robust sales tax collection that helps you collect the right amount of sales tax from your customers every time.
You should also take time to set your “product tax codes” when setting up your Amazon sales tax collection. Product tax codes allow you to specify whether your item is a grocery product, or clothing, or textbooks or other items that are not always taxed in every state. By does this, you’ll ensure you don’t inadvertently collect sales tax on nontaxable items.
Here’s our video guide to setting up sales tax collection on Amazon FBA:
Sell on other online shopping carts and marketplaces? You can see guides to setting up sales tax on most major online sales platforms here.
Step 4: Report How Much Sales Tax You Collected
Soon enough, your sales tax filing due date will roll around. At this point, you are required to figure out how much sales tax you collected in the state, and break it down by county, city and other special taxing district (like transit district, or school district, etc.)
This is where sales tax can start to become a time-consuming hassle, especially if you sell on multiple channels or sell at a high volume. Imagine taking every transaction and trying to figure out what percentage was the state tax rate, what percentage was the county tax rate, what percentage was the city tax rate, and so on. Yikes!
That’s where sales tax automation can help. A software like TaxJar will connect with Amazon and any other shopping carts and marketplaces you sell on and slice and dice your transactions into a return-ready sales tax report. If you’ve ever spent way too long on a sales tax return, try automating your sales tax.
Step 5: File your Sales Tax Returns
And finally, once you’ve broken down your sales in the way your state wants to see them, it’s time to file your sales tax returns.
In most cases, you can file your sales tax returns online through your state’s department of revenue. But if you’d rather not handle complicated sales tax filing, you can also have a service like TaxJar AutoFile your sales tax returns for you to take this cumbersome task completely off your plate.
There are a couple of important things to note about sales tax filing:
- Always file “zero returns” – File a sales tax return by the due date even if you didn’t collect any sales tax over the taxable period. States consider this a “check in” and most will charge you a penalty of around $50 if you fail to file.
- Don’t discount sales tax discounts – About half the states with a sales tax allow retailers to keep a very small portion of the sales tax they collected in exchange for paying sales tax on time. While this amount is generally only 1% or so of the sales tax you collected, it’s free money! You can see the states that offer sales tax discounts to on-time tax filers here.