Running an Amazon business can sometimes feel like being on a constant roller coster ride.
That sense of accomplishment when you get a Best Sellers badge, newly gained enthusiasm when launching on the new market, or a not-so-pleasant feeling when you make a mistake that can cause a warning email from Amazon.
But we can all agree that there is a general lack of enthusiasm whenever someone mentions sales tax to an Amazon seller.
Even though many sellers understand the importance of knowing the basics of sales tax and staying up to date with its changes, this unprofitable administrative hassle gets procrastinated more often that not.
Collecting and filing tax is not the most thrilling aspect of running your business, but fortunately it can also become just another quick check on your checklist once you understand the basics.
Let’s dig into what online sellers need to know to start having an easier time with this part of their business.
Sales Tax 101
First, let's start with the basic question: ''What is sales tax and how does it work?''
Sales tax is a tax on a retail transaction. It’s usually from about 4-8% of the transaction.
What matters to you as a seller is understanding that retailers are required to collect sales tax at the point of sale, then pass that tax on to their state.
That is why sales tax is considered a “pass-through” tax, because the merchant is only holding the taxes collected before remitting it to state and local taxing authorities.
Forty-five states and Washington DC all have a sales tax, and they use the money generated form it to pay for state budget items like hospitals or transportation.
Each state gets to make their own sales tax rules and laws, so that’s why you’ll sometimes find that different states want you to handle sales tax in different ways.
This is why you always need to double check the rules of the state you are complied to pay taxes.
When should online sellers collect sales tax?
US online sellers should collect sales tax when their businesses meet two criteria:
- You have sales tax nexus in a state
- The products you sell are taxable
What is Sales Tax Nexus?
In the US, online sellers are required to collect sales tax from buyers in states where they have “sales tax nexus.”
Nexus is just a fancy way of saying that you have an obligation to collect sales tax in the state.
While every state’s sales tax nexus laws are slightly different, here’s what creates sales tax nexus in most states:1. A location– an office, warehouse, store, or other physical place of business
2. Personnel– an employee, contractor, salesperson, installer or other person doing work for your business
3. Inventory– Most states consider storing inventory for sale in the state to cause nexus even if you have no other place of business or personnel
4. Affiliates– Someone who advertises your products in exchange for a cut of the profits creates nexus in many states
5. Selling products at a tradeshow or other event– Some states consider you to have nexus even if you only sell there temporarily
6. Economic nexus - some states have passed laws that sellers making a certain dollar amount of sales or a certain number of transactions in a state creates nexus. You can read each state's economic nexus laws here.
Since each US state is allowed to make their own sales tax rules and laws, some states legislate that some product types are not taxable.
For example, groceries are either totally tax exempt or subject to a reduced tax rate in many US states and other necessities like medication, clothing, and textbooks are often non-taxable or taxed at a reduced rate.
As an online seller, it’s your job to understand if the items you are selling are subjects to take.
Fortunately, robust online marketplaces like Amazon allow you to code your products.
From there, the shopping cart will know, for example, whether to collect sales tax on clothing in the state of Pennsylvania or not.
The vast majority of tangible personal property sold in the US is subject to tax.
If you are unsure if the products you sell are taxable, we recommend checking with your state’s taxing authority or a vetted sales tax professional.
There are a couple more things to consider when deciding if the things you sell are taxable:1. Digital products
In some states, digital products – such as music, movies or digital textbooks – are taxable. This area of law is rapidly changing as states start to understand how the digital economy works, so if you sell digital items be sure to check with your state regarding taxability.
Historically in the US, services were not taxable. However, with many states strapped for cash, some have changed their laws. If you provide a service along with your eCommerce product sales, be sure to double check with your state whether that service is taxable.
How to get registered to collect sales tax
If you have nexus in a state, your next step is to register for a sales tax permit in that state.
Don’t forget to do this! Most states consider it unlawful to begin collecting sales tax without a permit.
Retailers register for a sales tax permit with the state’s taxing authority, usually called the “[State] Department of Revenue.”
If you apply online, you’ll generally receive your sales tax permit anywhere from instantly to within a couple of weeks.
From there, your state will then assign a sales tax filing frequency. This frequency is usually either monthly, quarterly or annually and generally depends on your sales volume in the state.
The higher your sales in a state, the more often that state will ask you to file a sales tax return and remit sales tax. This is because states use tax money to pay for their own initiatives, like schools, roads and public safety.
Also, be sure to note your sales tax filing due date.
Most states require that sales tax filers file and pay sales tax by the 20th of the month following the taxable period. For example, you’d pay the sales tax you collected between January 1-March 31 by April 20 of that year.
However, some states are different and require taxpayers to file and pay by the 15th of the month, the last day of the month, or some other day.
How to start collecting sales tax
Once you have a sales tax permit, your next step is to ensure that you are collecting sales tax in that state via all of your sales channels.
For example, if you have nexus in Ohio and sell on Amazon ( or Shopify and eBay), then you should set up sales tax collection on those three eCommerce sites.
Fortunately, most online shopping carts and marketplaces have a robust sales tax collection engine. You can find your guide to setting up sales tax collection on Amazon as well as on the rest of the most popular marketplaces here.
Do you charge sales tax on shipping?
Keep in mind that many US states require that online sellers also charge sales tax on any shipping or freight charges you make to your customers.
You can see a list of states where shipping is taxable here.
Pro tips for collecting sales tax:
#1 Sales tax is always charged at a sales tax rate in your buyer’s state
Let's say you have nexus in both California and Florida. When you ship an item to a customer in Florida, you’d always charge that customer a Florida sales tax rate. You’d never charge them a California sales tax rate.
#2 Nexus for one channel means nexus on all channels
Let’s say you have sales tax nexus in a state because you sell on Amazon FBA and your inventory is stored for sale in that state.
This means that you are required to collect sales tax from all buyers in that state, no matter if you make the sale on Amazon, eBay, Shopify or through another channel.
Nexus in a state means that you have a sales tax obligation for all sales.
How to report and file sales tax
Soon enough, your first sales tax filing due date will roll around.
Sales tax filing due dates are most commonly the 20th of the month following the taxable period but will vary by state.
This is also where sales tax starts to get tricky.
States require that you not only report the bulk amount of sales tax you collected from buyers in the state, but they also require that you break that amount down by city, county, and other special taxing district.
This is because, after you turn the sales tax you collected in to the state, the state then disburses those funds out to different local areas where you made a sale.
States rely on sales tax funds to pay for budget items, so they can be quite picky about how you fill out your sales tax filing.
That’s where modern technology makes your life easy.
A sales tax automation solution will connect with all the shopping carts and marketplaces on which you sell, break all of your transactions down by jurisdiction just the way the states want to see them, and even AutoFile your sales tax returns for you if you decide that filing yourself is a time-consuming hassle!
After all, sales tax isn’t profitable. And who has time to spend hours trying to figure out which county your buyer’s street address falls into?
There are a couple more important things to remember when filing sales tax returns:
Zero Returns – File a sales tax return even if you don’t have any sales tax to report or pay. States consider your sales tax filing deadline a firm one and may even assess a fine if you don’t file on time.
Discounts – About half the states with a sales tax will provide a small discount (usually 1-2%) to taxpayers who file on time. Be sure to file on time and claim this free money!
I hope you now feel more confident dealing with sales tax in you online business.
If you have any questions, leave the comment below.