Our FBA blogger, Kat Simpson, has had quite a bit to say in favor of Amazon FBA on this blog. Basically, if you’re a bargain shopper – the kind of person who will stop at nothing scouring retail stores for a deal, then FBA could be just the income stream for you. Of course, if shopping and sourcing is your passion, chances are taxes are less of a passion for you. Plus, perhaps you’ve heard that – because Amazon FBA sellers dropship their wares via Amazon warehouses – they have to deal with sales tax from multiple states. Is it worth it? We think it is and that, with a little study, you can figure out how to charges sales tax on your FBA items.
Sales Tax and Amazon FBA 101
The big thing to understand about charging sales tax to multiple states is the concept of nexus. Nexus basically means that your business has established either a direct presence, or a presence through a representative, within a particular state or jurisdiction, such as a city or county, where you sell goods. The criteria for establishing this threshold will vary depending on the state. You would establish a presence if you have a store location in a state, hold inventory within that state, or have employees who live or work in that jurisdiction. You could also have nexus established if you have people traveling through the state to visit actual or potential customers, attend trade shows, or have consigned inventory in a warehouse in that state (this applies to FBA sellers). If you have established either a permanent or temporary presence by meeting the aforementioned thresholds, you have established nexus and need to register as a retailer.
Once you understand the concept of nexus, you will need to get in contact with Amazon, or make a list of the warehouses that you ship to, to determine where they have a physical presence so you know which states to contact about their sales tax requirements. To help you along, we’ve made a list: Locations of Amazon Fulfillment Centers.
Then, you will you need to get in contact the departments of revenue for those states and find out their nexus thresholds, determine if you need to register as a retailer, and any sales tax documentation needed to sell within that state. This information is needed if you want to enable the tax collection features Amazon provides. Never fear – we’ve made a list of Sales Tax Resources for Online Sellers in Every State which will help you get started registering your business and collecting sales tax.
The great thing about selling on Amazon is that have a sales tax collection service and an outside vendor, Vertex Indirect Tax O series, to support any tax calculations. The steps to set up your account to collect sales tax are as follows:
1. In your seller account, go to the Settings tab and click on Tax Settings. A message should appear that says “Welcome to the Tax Manger page.”
2. Select View Tax Calculation Methodology, which takes you to the “Review the Amazon tax methodology” page. Look over the methodology page and make you understand what it says. After you have viewed this and are comfortable with the methodology, select Continue.
3. At this point you will be taken to the View product tax codes page. You will need to click on the link for a product tax code to see information about that particular product tax code. This will also show you the list of conditions that apply when using this code.
4. After you have completed your review of the tax codes you will be using, select Continue at the bottom of the window.
5. You will be taken to the Set up your Tax Collection Settings page. This window will allow you to set up the following:
a. A seller-defined default product tax code.
b. The locations supported by Amazon in which you want to collect tax at the state, county, and city level.
c. An optional custom override rate for a state.
d. Your state tax registration numbers.
e. The tax settings for shipping and gift wrap.
6. At the bottom of the window is the Tax Collection Obligation table. Review this so you are familiar with what you need to do.
7. Look below this listing of states and click on the acknowledgment button, then select Continue.
8. At this point, Amazon gives you a chance for one more review of your settings. If everything looks good, click on Continue.
9. You should now be on the Confirm your tax collection settings page. After you are satisfied with your selections, check the three boxes then click Confirm.
10. At this point, your settings should be saved.
Keep in mind that sales tax is charged at the most localized areas that is specified when you entered the rate. So if the lowest level you entered was a city rate, the city rate will be charged. But if you entered a statewide rate, Amazon will use the statewide rate.
As always, if you have questions, don’t hesitate to contact your local CPA. They can help clarify any questions you have on how to charge sales tax.
Chris Peden, CPA, CMA, CFM has over 15 years in the corporate world helping companies meet their regulatory compliance requirements. He also assists small business owners with organizing and making sense of their finance information. You can reach him at firstname.lastname@example.org. In accordance with Circular 230 Treasury Department Regulations, we are required to advise you that any tax advice contained in this article may not be relied upon to avoid penalties under the Internal Revenue Code. If you are interested in a written opinion that can be relied upon to prevent the imposition of tax-related penalties, please contact the author.