Amazon is the world’s biggest online retailer, so it’s not surprising that there are millions of people who are making a living as self-employed merchants on the platform. In addition, many freelancers sell their intellectual or creative property through Amazon including books, music, crafts and the like. If you are already an Amazon seller—or you are thinking about becoming one—it’s super important that you get primed (pardon the pun) for the intricacies of sales tax implications for Amazon sellers.
It doesn’t matter how you sell goods on Amazon, whether you have your own brand or shop or use the Fulfilled by Amazon (FBA) model you are completely responsible for collecting, reporting and remitting sales tax from every sale and, of course, reporting the income you generate from your Amazon business. It also goes without saying that you need to track your sales, pay estimated taxes and manage your Amazon business just like you would any other type of company.
The brief guide below will help you better understand your sales tax obligation when you sell on Amazon:
How Amazon collects your tax information
In order to be a seller on Amazon as a U.S. taxpayer, you have to complete what Amazon refers to as a “tax interview” in your seller account. Essentially, you will be providing Amazon with the appropriate tax identity information by submitting a W-9 or a W-8BEN form plus your Taxpayer Identification Number (TIN) which is either your Employer Identification Number (EIN) or Social Security Number (SSN).
The tax implications for international sellers on Amazon
If you are not a U.S. taxpayer, but are selling your wares within the United States, the IRS requires you to provide Form W-8BEN to Amazon which exempts you from U.S. tax reporting requirements. However, Amazon also clearly states that international sellers are responsible for determining any tax obligation, reporting and paying taxes due to the appropriate taxing authorities, and abiding by any relevant VAT (value-added tax) obligations in their elected country, the countries to which they deliver products, and any other countries where their Amazon business requires them to do so.
Amazon sellers need to know the status of their sales tax nexus
As you may already be aware, forty-five U.S. states plus the District of Columbia which have a sales tax. Sellers in these areas must charge sales tax to buyers based on the individual rates of each state or district. To do this, you must have a sales tax permit or license in each state where you have a sales tax nexus.
A sales tax nexus is established when you have a significant presence in a state, usually by: 1) residing there; 2) having an employee working there; or 3) having a physical business presence there (such as an office or warehouse). When you have a sales tax nexus in a state that has sales tax, you must collect it from all buyers, no matter where you ship your products from.
An important note: A few weeks ago, the Supreme Court ruled in favor of the State of South Dakota in a suit that the state’s government had launched against online retailers Wayfair, Overstock.com and Newegg for not collecting and remitting the state’s sales tax. In the wake of this decision, South Dakota is enacting a law that requires all merchants with more than $100,000 in annual sales or more than 200 transactions in the state to collect 4.5 percent sales tax. You can expect that many other states will follow suit as Washington State and the State of Pennsylvania have this year.
This Supreme Court ruling reinforces the fact that if you are running an Amazon-based business, it is advisable to work with a tax firm that can help you manage multi-state sales tax obligations.
Collecting and paying sales tax on your Amazon sales
When you sell something on Amazon, you collect sales taxes based on the settings that you create in your Amazon selling account for each of the applicable states. Sales tax is a “pass-through” tax, meaning that you are merely collecting the taxes and passing them through to state and local taxing authorities when you file a sales tax return. This is generally done on a monthly, quarterly or annual basis.
While sales tax management for online sales may seem straightforward at first, it’s not. This is because every state (and often localities within a state) can set their own sales tax rules this often causes problems and confusion for Amazon merchants. Those who sell in multiple states and have a tax nexus in multiple states are especially prone to confusion over when to charge sales tax and at what rate.
In addition, sales tax may be applied to different products or services in different ways in different geographic locations. Shipping charges are one example—in some states sales tax is charged on them and in other states they are not taxable. There are variations in the management of sales tax permits, too. Some states require that they be renewed periodically, while others do not.
As you can see, it is critical to be crystal clear about the sales tax rules for the states and specific localities where you have a tax nexus. Otherwise you may face significant sales tax penalties or a sales tax audit.
Another important point to keep in mind if you collect sales tax in multiple states—this activity may mean that you have to file income tax returns due to the fact that you are earning income in these locales.
The difference between origin-based sales tax and destination-based sales tax
Another twist in determining sales tax rates is related to the fact that most states have either “origin-based” sales tax laws or “destination-based” sales tax laws. This means that some states require you to collect sales tax at the rate effective at the point of “origin” (i.e. your home tax nexus where your office or warehouse is located). For the majority of states, you are required to collect sales tax at the rate of the “destination” (i.e. the place here your buyer resides).
How to file sales tax returns for your Amazon business.
By this point, you are likely sensing a theme about sales tax obligations related to selling on Amazon (and online in general): the rules vary widely from state to state. The date that sales tax is due is no exception. While many states have the 20th of the month as the due date, there are other states with different due dates. This is especially important to keep on top of if you pay sales tax on a monthly or quarterly basis. States also have different requirements for filing sales tax returns, although most require you to file a return even if you have not sold anything. Be sure you know which states require you to file and pay online and which ones have different rules for filing sales tax returns.
Freelancers must stay current on sales tax compliance for their Amazon businesses
Keeping current on state and local municipality sales tax rules, especially when your business changes to include sales in different or new tax jurisdictions or offering different products can be challenging, but it is crucial to avoid penalties for non-payment of sales tax or late payments. If you are ready to start selling on Amazon or to expand your existing sales activity on the platform, it is wise to tap an experienced accounting professional for advice. They can accurately assess your sales tax obligations and keep you in compliance with reporting requirements based on your business activity so that you don’t face a sales tax audit down the line.
Jonathan Medows is a certified public accountant licensed in New York, New Jersey, Maryland, and Pennsylvania. He is also a recognized expert in taxation for freelancers and the self-employed—often tapped for his expert knowledge and perspective on self-employment taxation by national and regional publications such as The New York Post, BusinessWeek, Forbes taxation blog, WebCPA, CPA Practice Advisor, and others. You can read some of Jonathan’s press coverage here.
©2021 MEDOWS CPA, PLLC