On May 22nd, 2018, we organized a meetup in collaboration with Intuit Quickbooks (referred to as QBO throughout this article), where a range of topics related to Amazon accounting were discussed. We were privileged to have three Amazon accounting and app experts present at our meetup:
- Jeri Wambeek from Which AddOn.
- Michael Fleming from Sales Tax and More (via video link).
- Arnold Shields from Dolman Bateman Accountants.
Our meetup was hosted at the QBO Sydney offices. A big thanks goes out to Intuit Quickbooks for generously providing catering and a venue.
The main topics discussed during the meetup were:
- Using apps and integrations to set up an automated system that accurately accounts for inventory, sales and expenses in real-time, and feeds the relevant information to where it is needed.
- How individual US states are chasing sellers directly for payment of sales tax, and a discourse on how some states such as South Carolina are taking Amazon to supreme court in an attempt to shift the responsibility of collecting sales tax on to Amazon.
- How the approach of states towards collecting sales tax is changing, and the measures that they can take to collect overdue sales tax, including issuing large fines.
- What you need to know when selling to consumers in Rhode Island if you aren’t registered for sales tax.
- Considerations that should be made when deciding which legal structure to operate your Amazon business through as an Australian citizen.
- Useful apps to help with overseas sales tax collection and payment, and their limitations.
- How A2X helps with gathering the correct information from Amazon and entering it into your financials correctly.
Paul Grey from A2X introduces the guest speakers and discusses a little bit about what A2X does:
“A2X is a cloud software service that connects Amazon’s marketplace systems to accounting systems to automate the accounting and reconciliation of Amazon marketplace sales and expenses.”
Jeri Wambeek – Strategies for building an ecosystem of apps around your business to increase your efficiencies and reduce your overheads
Jeri co-founded Which AddOn, an Australian consultancy business that specializes in implementing add-ons, apps and integrations into businesses in order to make them more accurate, efficient and scalable. They take a customer-centric approach, which is tailored to suit the individual needs of each client.
There are three types of businesses that Jeri tends to work with:
- People just getting started on Amazon.
- People selling in Australia on multiple sales channels.
- People in America that already sell lots on Amazon and multiple sales channels as well.
Most businesses that sell physical products have a disconnected system. This means that the various apps and parts of the business don’t communicate and share information properly. A simple eCommerce operation might use Shopify, freight providers, Amazon, and a host of other apps. If these disconnected systems don’t communicate, it can create serious information bottlenecks.
If you’re just starting out on Amazon, or are about to begin, you need to know how much you are spending on products, fees, marketing etc. – it is vital that you are able to understand the income and expenses so that you can calculate profit margins and ensure that the business is viable.
A relatively simple system needs to be able to handle the following:
- Manage outgoings and expenses, both in Australian Dollars, and foreign currency.
- The accounting system needs to be able to manage foreign currency.
- Needs to be able to track customers and suppliers – so that you can keep an eye on spending and upcoming bills. This helps to stay on top of payments and cashflows.
- Managing the revenue, fees and other expenses, and inputting them into the accounting system – A2X helps to automate this data feed by covering transactional activity in the Amazon sales channel.
- Needs to be able to track and register the cost of goods sold.
- Managing basic inventory – most basic businesses with a few products can do this with an accounting system such as QBO. However, as the business and product ranges grows, a dedicated inventory management system will be necessary.
- QBO can handle basic inventory, foreign currency, and money coming in and going out of your bank account and other accounts.
As an example, one of Jeri’s clients in a multi-channel seller in Australia. They are just getting started on Amazon, but already have existing customers in other areas. They are currently incurring costs for production, marketing etc., and need a system that can track both transactions and physical production/movement of stock to ensure that everything is taken care of and accounted for.
In this example, the business needs to manage inventory across multiple sales channels and warehouses. They also need to manage production schedules and detailed landed costs. For this client, Jeri recommended that they keep using QBO for accounting, but add on the DEAR inventory management software.
QBO can handle inventory up to a point. However, the functionality is quite basic and requires a third party plugin to be added once the system requirements get a bit more complex.
DEAR Inventory Management is the next step up, and adds onto the QBO platform. Alongside handling the detailed inventory functionality that QBO can’t provide on its own, DEAR can also do the following:
- Manage inventory across multiple warehouses and production schedules.
- Provide a B2B portal for wholesale customers.
- Handle multiple currencies and manage foreign currency/exchange rates.
- Integrate with other sales channels (such as POS, Shopify, eBay etc.) and communicate with each sales channel about inventory levels in real time.
- Feed the relevant financial information to QBO, where it is filed in the accounts.
Here’s an example of one of Jeri’s clients who is multi-channel seller in the US:
- The business sells lights.
- Over 100 orders per day on Amazon.
- Over 150 orders per day through 2 websites (Houzz and Wayfair) which is fulfilled using dropshipping.
- Around 20 wholesale orders per day through Shopify.
- Before speaking with Jeri, they had no central inventory management system, and all information from Shopify and Amazon was just feeding directly into QBO.
- To solve these issues, Jeri implemented the Cin7 inventory management system.
- Cin7 can do all that DEAR can do, but it can also manage EDIs (electronic data interchange).
- Houzz and Wayfair are recognized as lifestyle brands in the US, and thus attract a significant consumer following. If you want to deal with large retailers such as supermarkets and department stores, you need to have an EDI connection so that they can send you orders electronically with all the relevant information included.
- For this reason, Cin7 was a must, as it allowed them to efficiently connect with some of their largest clients.
- In this business, Cin7 acts as the central inventory and information management system that communicates with all the moving parts:
- Sales orders from each individual sales channel are fed into Cin7.
- Purchases from suppliers are fed into Cin7.
- Cin7 calculates stock across all locations and communicates this to each individual sales channel in real-time.
- When an inventory item runs out of stock, Cin7 communicates this to all the other sales channels so that the business doesn’t oversell stock lines that are unavailable.
- All sales go to Cin7, then the financial information is pushed into QBO from there. With this structure, Cin7 manages all the sales reporting, and QBO manages taxes and compliance. This allows businesses to gain an accurate, detailed picture of their sales across the various channels whilst being able to rest easy knowing that their compliance is being handled properly.
- For wholesale transactions, Cin7 raises the invoice, then QBO tracks the payment through integration with bank feeds. When the customer pays the invoice, QBO then informs Cin7 that the bill has been paid.
By setting up an integrated, connected automated system, businesses are able to reduce workload, increase the accuracy of financial and sales information and free up time to focus on activities that grow the business.
Michael Fleming – How to deal with e-commerce US state and local level taxes
Michael J. Fleming was present at this meetup via videolink from just outside Dallas, Texas. His firm, Sales Tax and More specializes in US state tax compliance for Amazon sellers with a key focus towards sales tax issues. Michael has been involved in eCommerce sales tax for 8 years – during these years, he has helped thousands of Amazon sellers with their state tax obligations. Michael is one of the leading experts in US sales tax as it applies to Amazon sellers.
There is one thing in common with both domestic and international FBA sellers: very few believe that they should be collecting sales tax. Unfortunately, it’s what the states believe that is important.
Michael discussed a particular client – an international seller who had troubles with Washington state chasing him for overdue sales taxes. This merchant had been operating for about 10 years, with a presence in Washington for 7 years.
The first thing that the state asked for was an inventory event detail report. Unfortunately, there is no way to hide on this report, as it tells you when the inventory first showed up in the state, and the last 7 years of sales reports. In an attempt to make the investigation go away, the client said to Michael “make sure Washington knows that we are located in China. Good luck for them trying to get our money”. Michael didn’t think this argument would work, but acted as his client requested and put the argument forward anyway.
The response from Washington state was swift. They said that they will do the following if payment is not received within 30 days:
- Do an estimated assessment of sales (estimated numbers are always worse than real numbers).
- If payment is not made within 30 days, the debt will be turned over to collections.
- They would then levy the accounts receivable on Amazon.
- Put a lien on the inventory in Washington.
- Levy any bank account in the US that the state can find, and levy any merchant accounts.
- Due to the fact that this was a pretty large seller, they were finally going to pressure Amazon to not let them sell any more goods and close down their account.
In this case, the US market was so big, and offered so much potential future business that the client decided to bite the bullet and pay the overdue tax bill. Michael doesn’t know whether states have successfully gone for accounts receivable at Amazon yet. However, states have gone after customer accounts receivable where they are owed money by US people and organizations.
States do cross lines to go after bank accounts in other states, and are becoming much more aggressive towards Amazon sellers than they have been in the past. They are getting much better at finding sellers that aren’t paying their taxes. Four years ago, people would say “Mike, you point me to one person the state found on purpose, that they didn’t find by accident and I’ll pay attention to you” – and he couldn’t give them any examples.
The states knew that there were lots of unpaid taxes out there to be collected, but they were a bit slow to react, and didn’t know how to find the sellers who owed them money. Then California and Washington started acting like customers and would go into the sellers shopping cart and place an order. If sales tax was being collected, they would abandon the shopping cart and move onto the next one. If taxes weren’t being collected, they would put on their detectives hat and start chasing the seller.
That year (2015), 10 sellers contacted Michael. The following year, 60 sellers got in touch. Last year, 3-5 sellers were calling Michael with sales tax issues every week! States are definitely getting better at chasing FBA sellers down. Once a state finds you, your options are very limited. If you are proactive with regards to paying sales taxes, you have many more options to choose from.
Penalties and interest for unpaid taxes can be crippling to businesses who haven’t met their liabilities in a timely manner – these fines often exceed 50% of the initial tax owed. In Washington alone, the penalty is 39%, then you have to add interest and back-taxes on top of that!
The tragedy in all this is that sales tax should be paid by the consumer. However, if sales tax is not collected at the time of sale, it becomes the sellers liability. The state will go after the seller rather than the individual because it is much easier to chase sellers.
Amazon is now turning seller information over to individual states. Earlier this year, Massachusetts successfully filed a lawsuit against Amazon, forcing the behemoth to turn over third party seller information. Massachusetts was the first state to successfully gain access to this information in a court of law. Since then, Amazon has turned information over to the state of Rhode Island, and has just announced that they are turning information over to New York – however they are only turning over information to NY about sellers that reside in the state.
Previously, it was easy to fly under the radar with respect to paying sales taxes on Amazon commerce. However, now that Amazon is providing information to states, it is changing the playing field as far as compliance goes. This year, it is going to get real for lots of sellers out there – both on the domestic and international fronts.
Compliance is in many ways like insurance:
- You don’t need it until something bad happens.
- It doesn’t add value to your business.
- It’s always expensive.
Compliance does cost real money. However, they are pennies compared to the back-taxes, penalties and interest that you’ll have to pay if/when you get caught. This is not a problem that goes away. It grows with time. Most states backdate taxes up to 7 years. However, some states go back even further (8-10 years). In theory, states can backdate sales taxes to the day you started doing business.
Before a state can require you to collect and pay their taxes, you need to have nexus. Nexus is just a fancy term for a link or connection to the state – such as stock being held in Amazon warehouses, or the owner/entity having a physical presence in the state. In America, the FBA programme creates nexus in every state that Amazon has fulfilment facilities. This is because when inventory is shipped to an Amazon warehouse, Amazon can then move it to any one (or a combination) of their warehouses without your prior notice or consent.
Unfortunately, every state except for New York says that inventory creates physical presence nexus. Lots of people argue that inventory doesn’t create nexus, however Michael believes that the states are on a firm legal footing here.
A 1967 US supreme court case ruled that activities of third parties, even when they don’t associate with you exclusively can create nexus for you if they are helping you to establish or maintain a market. It’s hard to argue that Amazon is not helping sellers to establish/maintain a market. For many sellers, it’s the main reason why they use Amazon in the first place.
Most states believe that it’s the sellers responsibility to collect sales tax. Those that don’t believe this are currently ‘having their cake and eating it too’. South Carolina for example, says that Amazon should be collecting sales tax, but in the meantime, sellers need to collect their own taxes.
Amazon is now collecting sales tax for 2 states: Massachusetts and Rhode Island. This has not made it any easier though – if anything, it’s made it more dangerous for sellers, as Amazon passes all this information onto the states, and they only collect sales taxes going forward. If there are any previously unpaid sales tax obligations, the seller is still responsible for all of that tax exposure, and the states can easily access information on who owes unpaid taxes.
The worst thing states have gotten away with is removing ‘Seller Use Tax Notice and Reporting Requirements’. This is why Amazon capitulated and agreed to handing information over to Rhode Island. Basically, if you don’t have nexus for a state like Rhode Island, but you sell to customers in Rhode Island, you are required to post 5 notices to the customer to inform them of their sales tax responsibilities:
- To begin with, you must have a notice on your website that says you are not responsible for collecting sales tax for sellers in Rhode Island, so the customer must pay the tax directly to the state.
- At the point of sale, you need to display a similar notice.
- Then, within 48 hours of the transaction, you need to provide the customer with a third notice.
- By January 31st of every year, you have to send a 4th notice which totals up all of the customer’s purchases throughout the year.
- Finally, you are required to turn in an attestation to the state saying that you have complied with every notice on every transaction.
There are significant fines for missed notices. In Rhode Island, it is $10 for each missed notice, and a minimum fine of $10,000. With such a large fine, and extremely low threshold, the risks of not complying with local sales taxes are just too significant to ignore. Once you’ve registered for sales tax, these requirements go away.
The state’s purpose here is to make it so difficult for sellers to operate without registering for sales tax that they ‘voluntarily’ register. Oklahoma for example, just implemented new laws that impose even heftier burdens on non-compliant sellers. If you have $10,000 in sales and don’t register, you can get mid-6 figure fines and penalties. It is unlikely however, that Oklahoma will follow through with imposing and collecting these fines.
This issue has spent the past 7 years in various courts throughout the US, and has been to the supreme court twice. Now, other states are jumping on the bandwagon to collect more tax. Lots of people aren’t paying attention, which is dangerous as there are massive penalties and fines if you get it wrong.
It is very important to comply with sales taxes, but you don’t want to register too early. Michael’s rule of thumb is that once your total sales tax owing exceeds $3,000 in any one state, it would be cheaper to be compliant than to pay the state out of your back pocket if they caught you. Sometimes doing nothing is the right thing, but sometimes it’s better to limit your potential exposure.
If you have a large amount of unpaid tax exposure, there are voluntary disclosure agreements which can serve to make the punishments less severe. However, most FBA sellers, no matter where they are in the world don’t want to pay past exposure and taxes – they just want to get registered going forward.
Arnold Shields – Issues that face Amazon sellers entering new markets
Arnold is a director at Dolman Bateman and Company, a CA firm based out of Sydney that specializes in Amazon accounting. Dolman Bateman has 300-400 clients that sell on Amazon, and they range from people just starting out to multi-million dollar operations. In order to gain a better understanding of what their clients are going through, Arnold and the team at Dolman Bateman started selling on Amazon around 18 months ago. In this time, they learned lots about the ins and outs of this business model, and are about to enter an expansion phase.
The Europe/UK market is more profitable, and has less competition than the US market, but there is also less sales volume. If you have less money to invest, it is a good idea to consider entering Europe instead of the US to begin with.
People just starting out on Amazon often ask Arnold which legal structure they should trade through. He says to people that businesses starting in Australia can begin as a sole trader or a limited liability company. If you don’t earn very much money (say $40-$50K) and don’t have a house or any significant assets, you could probably begin locally as a sole trader, and simply get an ABN number in order to trade around the world.
Arnold says that people should incorporate as a company when they have property that they don’t want to risk or a high income. Profits on Amazon can change quite quickly – in the first year, you might only make $10K, but the next year this could escalate to $100K. If you are being taxed at the highest personal income tax rate, this can really hurt the bottom line. Companies in Australia are taxed at 27.5%.
An LLC is perfect for sellers based out of the US. However, it is unnecessary in Australia. There are some complications that make it inconvenient to operate in Australia with an LLC. One of the key issues is that an LLC is viewed in the eye of local tax law as a ‘pass through’ organization, so it won’t be taxed in the US, but rather under your personal name in Australia.
Some people say “but I need an LLC to sell my business later on”:
- Nobody wants to buy an LLC; they want to buy the assets of the business. If they buy an LLC, they are effectively buying the liabilities as well.
- When a purchaser buys your business, they are most likely going to buy the inventory, seller central account, and maybe some trademarks. It is very rare for them to buy the entity itself.
- The argument that you need an LLC to sell your business therefore doesn’t really hold for the purpose of resale down the line.
If you are just starting out and don’t have a house, high income or any significant assets, you can test the market as a sole trader. Once you decide to get set up properly, then it is a good idea to incorporate your company.
Most failed Amazon businesses don’t go out in a blaze of glory owning lots of money everywhere. Most Amazon businesses that fail tend to just fade away. The key risks here are:
- A product you sell causes an injury, disability or damage to someone or something and they sue you. This is quite rare, and very bad news if it happens. If you are operating out of a company, you can normally liquidate your company and move on if the organization is set up correctly.
- Trademark/patent copyright disputes result in drawn-out court proceedings that drain your capital. These tend to escalate, and become more of a common occurrence as you get bigger. In some cases, these disputes are completely valid and you need to pay up.
Question for Michael: How does the argument that an Amazon third party seller is not the end seller to the customer in the US, but rather Amazon is the end seller hold up? In this instance, the seller is just a supplier to Amazon, and therefore wouldn’t owe sales tax any sales tax due to nexus concerns.
- This is the argument that South Carolina is making. They have sued Amazon and have stated that Amazon is responsible for all the back taxes because they look at Amazon as a consignment relationship.
- The crux of this argument is that inventory is on consignment to Amazon, and they are collecting the money and doing all the work. The merchant is therefore just a supplier.
- Michael recommends that until this case is over, you should get registered and stay registered. Many accountants and tax advisors have said that sellers now don’t need to worry about paying sales tax in South Carolina anymore.
- Unfortunately, that became so much of an issue that the state of South Carolina reacted. They now have a notice on their website which basically says ‘if we lose this case and Amazon is held not to be responsible for sales taxes, the sellers will be responsible, so we are accepting money from third-party sellers at this point’.
- Not all states agree about who is responsible for paying sales taxes. With some states, the regulation is written in a way that it is the seller’s responsibility to pay. Massachusetts, for example, just successfully sued Amazon for a third-party seller list, which would indicate that they are planning to go after sellers.
- A case can be made for Amazon being responsible to pay sales taxes. However, registering for and paying the taxes covers yourself. Once a state claims that you owe them taxes, the only way that you are going to be pardoned from this liability is to fight it in court, which is a costly endeavour.
- Not all accountants have the same view on this. Generally, attorneys will tell you a different story – but they are the ones who will be going to court and protecting you.
Question for Jeri: In the UK, there is VAT and the USA has sales tax. Are there apps to help with overseas sales tax compliance?
- The three apps that are most commonly used by sellers in the US and UK are Taxify, TaxJar and Avalara.
- Michael commented that there are some limitations with these apps that are not often discussed.
- They can figure out how much tax you owe, but all of them require that you have a US bank account in order to pay the taxes in America on your behalf. Many of the states will not accept money that is being transferred from overseas.
- If you don’t have a US bank account, it is one more hurdle for international sellers to go through. It is not easy at all to open a US bank account – you generally need to travel to the US just to get a personal bank account.
- Michael recommends that his clients use a service like Payoneer or WorldFirst, as they offer better rates of currency exchange and make moving money around the world a lot easier.
- Generally, you will need some type of third party such as an accountant or payments system like Payoneer to file returns on your behalf.
Question for Arnold: For a new Amazon seller starting out, which market(s) would you recommend?
- If you have say $10,000 to invest in your business, you can probably take on the US market.
- If you’ve got less than that, and you’re looking to have the business replace your income, you are going to need to build up $100,000-$200,000 of working capital and stock in your business. If you haven’t got as much money to start with, it can be a good idea to begin in the UK or Europe and expand to the US at a later date.
- You will sell less units, but the profit margins are better. Using A2X in conjunction with QBO, Arnold found that their margins are almost double for the UK/Europe compared to the US. Their gross margins were around 47% compared to 25% respectively.
- There is very little happening in the Australian Amazon market (as it is very new), so if you don’t have much to invest, it can also be a good idea to gain a foothold here before the masses get established.
- Another issue is that people enter these markets too quickly. They enter the UK, US and Europe within short order of each other, and don’t allow the time to build up sufficient inventory levels.
- The trouble with this is that you’re splitting your stock, and this business is all about the cashflow game. If you’re splitting stock, you will find that you don’t have enough inventory to keep fulfilling the orders on your initial products.
- Arnold suggests that you should enter these new markets as an add-on when you have the cash to spend.
Question for Paul (A2X) and Jeri: How does A2X fit into the picture in the future for QBO and inventory systems?
- A2X looks at the seller’s Amazon merchant account, and searches for settlements in the seller’s bank account.
- It then collects all transactions together that make up the total settlement balance in the seller’s bank account. A2X summarizes these transactions and posts them into the general ledger with a few important structural points:
- A2X enters the information using the accrual accounting method, with everything posted into the correct financial period.
- It provides reconciliation to the bank accounts so that you know everything has been accounted for specifically.
- A2X is designed specifically for Amazon merchant accounts. For transactions that go through other sales channels, they have to come from somewhere else to enter the accounting system.
- One of the biggest problems A2X solves is that it shows the bigger picture in your accounting system.
- For example, if you sell $500 worth of product, then Amazon takes $30 in fees, $470 will be deposited into your bank account. Most sellers will treat this as $470 in sales revenue.
- With this inaccurate information, it is very difficult for people to sell their business, as they cannot see their true cost of sales or the real financial picture of their business.
- When you have an inventory system that manages your stock levels, you also need to track the sales in order to handle inventory units.
- The inventory system manages your sales at a product level. Even when you have an inventory system putting your sales into the accounting system, you still need A2X to handle the fees, and manage that side of information collection.
Question for Jeri: For merchants just starting out, there can be a lot of apps to choose from. How do these companies find you or find out how to get apps into their accounting software?
- One of the best places to find out which apps are available for QBO is apps.com
- There are about 250-300 apps that you can add to QBO in the Australian market.
- Apps aren’t a one-size-fits-all paradigm. Depending on the nature and size of your business, different apps will likely be suitable based on your unique requirements.
- Amazon also has a brand new app store for sellers.
Denym Bird is the marketing manager for A2X accounting and in his spare time is a Bitcoin broker, and runs a Paint and wine night each week. Learn more about how to supercharge your Amazon FBA business in our new ebook how to sell your Amazon business.