Until 2018, most online sellers didn’t have to collect sales tax for items they sold to customers out of their home state. After the South Dakota Supreme Court v. Wayfair case was settled, however, that all changed. Marketplace laws were enacted, making large online marketplaces like Amazon responsible for collecting and filing sales tax for the sellers using these platforms.
While there are a lot of benefits to using Fulfillment by Amazon, their seller tax service isn’t free. Amazon charges 2.9% per transaction to calculate and remit these taxes. Read on to learn about how collect sales tax on Amazon and whether this will apply to your store.
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2 scenarios when an Amazon seller needs to collect sales tax
Generally, if you are selling physical items, you’ll need to calculate, add, and collect sales tax for everything you sell. But if you’re a seller using Amazon’s Fulfilled By Amazon (FBA) service or you ship from your own location, you may be responsible for collecting sales tax in most states you’re shipping items to. Two of the most common reasons for collecting tax are if your business has a significant economic presence in a state (called an economic nexus) or you sell a taxable product.
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Sales tax nexus
A sales tax nexus occurs when an online retailer has a significant enough presence in a state that they are required to collect sales tax. This is defined in several ways, including having stores, warehouses, and employees within a state, or it can be based on meeting a threshold of sales — an “economic nexus threshold.”
If you use FBA, you may have a tax nexus in any or all of the following locations where Amazon has corporate offices or warehouses:
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- Washington D.C.
Amazon will handle the collection and payment of sales tax for these states, but it’s important to double-check that their system is set up correctly in regard to your store. If you sell items that may not be taxed in some areas, Amazon may still charge sales tax if you don’t set up product information correctly.
Every state that has sales tax has different rules regarding tax licenses or permits. If you have an economic nexus in a state, you need to make sure you’ve applied for all of the required licenses or permits before you start selling.
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Product taxability determines whether or not sales tax is collected when someone buys something. Some products aren’t taxed or are taxed at a lower rate depending on where they’re purchased. Some states have no sales tax at all, so whenever someone buys something in that state, they don’t have to pay sales tax. In other states, certain categories of goods, usually things like food, clothing, and other essentials, are taxed at a lower rate.
Amazon will collect and remit the proper amount of tax on items sold through its marketplace, but there is a way to set individual tax rates for certain categories of goods in certain states. It’s worth double-checking these settings if you sell items that are potentially taxed differently.
There are some scenarios where you don’t need to collect sales tax, including if you’re a reseller selling to other businesses. As a reseller, you don’t need to collect sales tax because the final seller will collect it when they sell the item.
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How to collect sales tax on Amazon
The benefit of being able to sell your items through a national marketplace like Amazon is that you have the opportunity to grow your customer base. But that means having to collect and pay sales tax in many different states. Luckily, Amazon does much of the work for you by collecting and remitting the proper sales tax on your behalf.
To set up internet sales tax collection in your Amazon Seller account, follow these steps:
- Apply for tax permits or licenses for each state in which you have an economic nexus. This can take a lot of time, but the alternative is you could face consequences for collecting sales tax without a license. When you receive your permits, you’ll also be assigned reporting and payment frequencies. Enter that information into your Amazon account.
- Set up your tax codes for your products. This is especially important if you sell goods that aren’t taxed or are taxed at lower rates.
- Check that all of the tax collection information in your Amazon Seller Central account is correct. You’re still responsible for following all laws and regulations, even if Amazon collects and remits taxes for you.
Don’t forget to update any information that changes over time. If your sales increase by a lot, some states might require you to remit taxes more frequently. Amazon will do this for you if you update your unique circumstances in your profile.
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How to file Amazon FBA taxes
Just because Amazon handles sales tax on your behalf doesn’t mean they take care of any income tax your business owes. You’ll need to access to several small business tax forms, including your sales tax figures, your 1099-K tax form, and a 1040 Schedule-C when you file your income taxes.
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If you sell items at a retail establishment or through your own website, you’ll need to collect and remit sales tax on those items. Most point-of-sale systems will have these tax amounts built in, but you can also use a sales tax calculator to ensure you’re charging the right amount.
Even though Amazon takes care of paying sales tax on your behalf, you’ll still need to report it on your income tax return. You can find Amazon seller tax forms in your Seller Central account.
- Navigate to the “Reports” section and find the Tax Document Library
- Look for the “Sales Tax Reports” section and click the button that says “Generate Tax Report”
- You can choose from 1 of 3 reports: the Sales Tax Calculation Report is for the sales tax that you are responsible for paying, the Marketplace Tax Collection Report covers all of the taxes that Amazon has collected and remitted for you, and the Combined Sales Tax Report covers both.
With that information, you can file and pay taxes according to the proper schedule.
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1099-K tax forms
The 1099-K is a sales reporting form that gives the IRS your monthly and annual gross sales information. This includes things like sales tax and shipping fees. Individual online sellers don’t have to fill out a 1099-K; the form will be filled out by Amazon. Amazon will provide the 1099-K to both the IRS and sellers if they meet certain criteria.
According to Amazon, all sellers who meet both of the following conditions will get their Amazon seller 1099-K form in the mail (or by email, depending on your preferences) by Jan 31:
- More than $20,000 in unadjusted gross sales, and
- More than 200 transactions.
Professional and individual sellers with more than 50 yearly transactions must also provide their tax information, even if they don’t meet the above criteria. Otherwise they may risk losing seller status. Though this isn’t a requirement from the IRS, Amazon does this to ensure they have everyone’s tax information to comply with all IRS regulations.
The number of sellers who receive a 1099-K from Amazon will increase significantly at the end of 2023, when a new tax law will require online marketplaces to send a 1099-K to anyone who sells more than $600 in a year. It will also eliminate the quantity of transactions requirement. You can provide this information in your Seller Account under “Tax Information.”
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If you’re operating as a sole proprietorship or the sole owner of an LLC in your state, and you have a business license, you’ll need to file Schedule C or Form 1040. Generally speaking, you don’t need a business license to become a seller on Amazon. However, some states will require you to get one. The criteria for getting a business license differ by state, but if you have employees, inventories, and offices in multiple states, you’ll probably need one.
If you’re just running a one-person operation out of your home, you likely won’t need one. It’s crucial to check your state’s requirements to avoid any mistakes. Remember that you’ll need to report income to the IRS whether you have a business license or not.
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Deductions for Amazon sellers
Amazon sellers can claim deductibles on things like home office expenses and education costs. Make sure to keep all receipts that can be related to your online activities. Here are some important deductions that may come in handy for sellers:
- Amount you paid for goods sold, including the wholesale price or the cost of manufacturing
- Shipping costs, including supplies and fees
- Home office expenses, including computers, office furniture, office supplies
- Amazon Seller fees
- Education related to e-commerce and online business
- Accounting, tax, POS, and inventory software
- Advertising, including digital ads, business cards, print materials
- Salary and benefit costs
- Consultant fees, including attorneys, accountants, copywriters, and web designers
It’s always a good idea to take advantage of tax breaks for small businesses so you can keep your company growing.
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Run your business with confidence
As complex as managing Amazon internet taxes sounds, there’s business and accounting software to help you do the necessary work of tracking everything from your deductibles to your Amazon seller tax information. Learning to file small business taxes is easier when you have a system consolidating all the data you need.
This article originally appeared on the Quickbooks Resource Center and was syndicated by MediaFeed.org.
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