The Ultimate Guide To Amazon Sales Tax [Full Resource]
Estimated reading time: 18 minutes 30 seconds.
In 2020, the US is estimated to have spent over $370 million on retail ecommerce sales.
By the end of 2021, this figure is expected to surpass $400 million.
When Amazon was founded, the internet was relatively new and sales tax was something cemented in bricks and mortar. People shopped on streets - not online - so a physical address was enough for states to keep tabs on businesses.
Today, an ecommerce business might have no address or multiple. These might span US states and other countries. With the digital space trading in the hundreds of millions, sales tax laws needed to catch up. Governments were missing out big time.
Sales tax for Amazon sellers used to be a bit blurred and barely enforced. That is far from the case today. Sales tax should be a top priority of any ecommerce seller.
Why? Because they’re onto you. And, if you’ve been non-compliant for some time, you may be faced with hefty penalties and fines for the backlog.
Don’t worry though, we’re here to help. In this guide, you’ll find everything you need to know about Amazon FBA sales tax.
Table of Contents
What is Sales Tax?
Taxes have been around for almost as long as human beings. So where did sales tax come from, and why the sudden implications for ecommerce?
A quick history of sales tax
For much of its infancy, America was tax-free. It was taxes that spurred the country to rebel against Britain in 1773, in the lead up to the Revolutionary War.
After the war ended, the American government had to be calculated in its direct taxation approach. The constitution actually prohibited this, and an amendment was made some years later to be able to charge the American people income tax (one of its main sources of revenue even today).
Taxes in the US have largely come before or after wars, in order to pay for them. Personal tax rates and regulations fluctuated from president to president, but in 1947, it was retail sales tax keeping the government afloat.
Since the 1970s, the sales tax base (the stuff that can be taxed) has been shrinking whilst the percentage rate, to make up for that, has been rising. The nature of what was taxed, what should be taxed (and how), has needed to change in order to keep tax rates low but revenue sufficient.
As a result of the changing nature of consumption and trade, ecommerce sales tax rules have become a focus in the last few years. Business owners used to need a brick-and-mortar store and address to qualify for economic nexus. Nexus is a significant financial link to a location which makes you liable to pay tax.
With global ecommerce sales now in the trillions of US dollars, the laws around economic nexus everywhere needed a digital upgrade too.
Why and how does sales tax impact ecommerce sellers?
Ecommerce has become too big a pie for governments not to partake in. So, how have they approached charging intangible businesses?
Quill & Wayfair and the new nexus
In 1992, the Supreme Court ruled in the Quill Corp vs. North Dakota case that states may only collect sales tax from a business with physical presence there.
In 2018, this was overturned.
The ruling had become outdated. Stores weren’t just brick-and-mortar anymore, and governments were losing billions by not targeting ecommerce retailers.
Not only that, but the physical stores with tax bills were disadvantaged - the playing field desperately needed levelling.
States argued in the courts that online businesses could have substantial nexus with a state without a physical presence. These might be through affiliates, or “click-throughs”, for example.
In the landmark 2018 South Dakota vs. Wayfair Inc. case, the court ruled in SD’s favor, recognizing that nexus could indeed be non-physical. This “Wayfair decision” marked a pivotal shift in ecommerce sales tax rules.
Sales tax is commissioned at the state level. Each state, and sometimes the multiple jurisdictions within them, have their own rules and rates. Whilst there are some similarities and general patterns, sellers need to be aware of all individual state regulations that are relevant to them.
This is where economic nexus comes back into play.
But first, you might be pleased to know that Amazon may be responsible for your sales tax remittance, too.
Marketplace facilitator laws
Many sellers will want to know: “does Amazon collect sales tax for you?”
In some states, yes, it does. In fact, 45 of the states in the US may force Amazon to collect for you.
States quickly realized that policing marketplace facilitators (like Amazon, eBay, Walmart etc.) instead of individual sellers when it comes to sales tax would make far more administrative sense. There are a lot less of them.
For this reason, some states have made it the responsibility of the marketplace facilitators to collect and remit sales tax on behalf of their sellers.
In these states, sellers don’t need to do anything. The tax is added at checkout automatically and collected directly by Amazon.
Check out this short video from Quaderno to see what marketplace facilitator laws mean for sellers, the platforms themselves and which states currently have them or may have them soon.
These are also listed in our table below.
- Sales tax, like all taxes, is a critical source of income for governments.
- When ecommerce exploded worldwide, so did the need for an upgrade in sales tax laws. Ecommerce is worth too much money to ignore.
- Governments are onto sellers, so sellers need to make sales tax compliance a top priority.
- US states handle sales tax in their own ways which makes things complicated for sellers.
- In states that have marketplace facilitator laws, Amazon may collect tax on your behalf.
Your Amazon Tax by US State
When figuring out where you need to pay tax and how much, you have two key steps. The first is finding your nexus states and the second is figuring out which rules and rates apply to you.
Let’s break these down.
Where are your nexus states?
As we have discussed above, economic nexus is the metric used to determine who is liable to pay tax and to which state.
A physical address is no longer the pre-requisite. Now, other business activities are taken into account which cover those typical of ecommerce.
Each state has its own rules for what it considers economic nexus. The revenue threshold in Maine may be different to Arizona, for example. So if you do business in both of these states, it won’t necessarily mean you have nexus with both.
Step one in sales tax compliance is finding your nexus states.
How do you do this?
List all of the states you have business links with.
These may consist of one or more of the following:
- Customers (buying over a certain threshold - but we’ll get to this)
- Inventory storage (including FBA*)
*If you use Amazon FBA, your stock is probably stored throughout the US. This gives you multiple nexus states, even though you aren’t managing that fulfilment yourself. You can find out which states store your inventory with WhereStock.
Once you have your list of potential nexus states, you’ll need to check the individual requirements and thresholds of each (scroll down for our comparison table with all of this information).
If you meet the threshold in a state, you have nexus and must remit tax there.
Now, you should have a list of your confirmed nexus states.
This seems kind of straightforward so far, right? Well, the next step is working out the rates you need to pay.
And this is where things get juicy:
- States operate on either an origin or destination basis when it comes to tax rates. What that means is, if you have nexus with a state, the rate you pay may not necessarily be the rate of that state.
- A state could have one tax jurisdiction with its own rate, or hundreds, each with their own. Alabama for example, has 805 jurisdictions. If you need to pay tax rates based on the location of your sellers, you have some calculations to do.
- Also, there are 5 so-called N.O.M.A.D. states which don’t collect sales tax at the state level, although some of their jurisdictions may.
If you haven’t got a pen and paper by now, perhaps grab one. Or bookmark this page.
What are the rules of my nexus states for Amazon taxes?
Now that you have your list of nexus states, you need to find out the individual rules and rates of each. And, don’t forget to apply for permits in these states before collecting tax - our table below has links for where to do this in each state.
The rate of tax you pay depends on whether the state is origin or destination-based.
- Origin-based states: The rate of tax paid is determined by the location of the seller.
- Destination-based states: The rate of tax paid is determined by the location of the buyer.
Origin states are pretty easy. You only need to take your own location into account.
Destination-based states are more complicated. No doubt you will have multiple buyers, and they’ll probably be spread across the country. The local rates of those buyers will include both their state rate and any jurisdictions applicable to them on top.
Here’s an example from Taxjar:
“Let’s say you live and/or sell in Columbia, South Carolina. You sell a taxable product to a customer in Chesterfield, SC. According to the State of South Carolina Department of Revenue, you are required to charge that customer 8% sales tax. That 8% is the sum of the state rate of 6% [South Carolina] PLUS a 2% local tax [Columbia].”
To make things easier if you are not using an accountant or tax app (although we do recommend these - start with our trusted accountant directory here), you can use averages.
Sales tax rates across the US states
*The data in this table was correct at the time of writing, but always check the authority channels for the most up-to-date information.
In this table, you can find the basic information you need to get started as well as links to the official state pages for more information.
The “Average Combined Tax” rate listed here gives you an average across the state and its jurisdictions. You can use this to simplify the tax collection process whilst getting close enough to compliance that any amounts owing at tax time shouldn’t sink you.
|State||Marketplace Facilitator Laws?||Tax Basis for Home Sellers||Tax Basis for Remote Sellers||Nexus Threshold in $/per Annum*||Link to Official Site||Average Combined Tax||No. of Jurisdictions||Shipping & Handling Tax||Register for Tax Permit|
|District of Columbia (DC)||✅||Destination||Destination||$100,000+||DC||6.00%||1||✅||Here|
|Kansas (KS)||Destination||Destination||(All sellers)||KS||8.05%||594||✅||Here|
|New Hampshire (NH)||Destination||Destination||$50,000+||NH||0.00%||0||Here|
|New Jersey (NJ)||✅||Destination||Destination||$100,000+||NJ||6.63%||2||✅||Here|
|New Mexico (NM)||✅||Origin||Origin||$100,000+||NM||Calculate||145||✅||Here|
|New York (NY)||✅||Destination||Destination||$500,000+||NY||8.19%||78||✅||Here|
|North Carolina (NC)||✅||Destination||Destination||$100,000+||NC||6.90%||106||✅||Here|
|North Dakota (ND)||✅||Destination||Destination||$100,000+||ND||5.51%||154||✅||Here|
|Oregon (OR)||Destination||Destination||(All sellers)||OR||0.00%||0||Here|
|Rhode Island (RI)||✅||Destination||Destination||$100,000+||RI||7.00%||1||✅||Here|
|South Carolina (SC)||✅||Destination||Destination||$100,000+||SC||7.36%||46||✅||Here|
|South Dakota (SD)||✅||Destination||Destination||$100,000+||SD||5.60%||258||✅||Here|
|West Virginia (WV)||✅||Destination||Destination||$100,000+||WV||6.10%||62||✅||Here|
*There may be more nexus criteria than revenue each year alone. For example, in many states where the threshold is $100,000, it is in fact either this revenue or 200 transactions. So please refer to the relevant authority’s website, as linked, for more information.
- When figuring out where you need to pay sales tax, start by defining your nexus states.
- To do this, make a list of all the states where you may be considered to ‘do business’. This could be through customers, storage, affiliates and more.
- Next, check our table against your list to see which state thresholds you meet and confirm where you have economic nexus.
- Apply for sales tax permits in these states before you start collecting.
- Check whether these states have marketplace facilitator laws, making Amazon responsible for collecting the tax on your behalf.
- Find out whether these nexus states are origin or destination-based so that you know which rates are applicable to your incoming transactions.
- If you have nexus with a N.O.M.A.D state, double check that the jurisdiction relevant also doesn’t require you to collect sales tax - some do!
- Pro tip: If you sell on other platforms which meet thresholds in some states that your Amazon business does not, all your businesses by extension have economic nexus. They should all be paying taxes to the same states.
Amazon Sales Tax
Now, let’s look deeper into all the answers to your burning Amazon tax collection questions.
Does Amazon charge sales tax?
Sales tax must be applied to Amazon transactions when certain economic nexus criteria are met.
In the US states that have marketplace facilitator laws, Amazon is legally required to collect sales tax from your buyers and remit it on your behalf. In this instance, you do not need to worry about sales tax - it’s all done for you.
If you have economic nexus in states that do not require this of Amazon, you will need to collect and remit sales tax yourself.
Why is Amazon charging tax now?
Since the 2018 Wayfair decision, some states enacted marketplace facilitator laws to police ecommerce sales tax compliance.
Having platforms like Amazon, eBay and Walmart administer sales tax collection is far simpler than states needing to monitor and audit individual sellers.
This is why, in the states that do require this of marketplace facilitators (not all of them do), Amazon has started charging sales tax on your behalf. Remember, if you have nexus in a state where Amazon does not collect for you, you need to do it! Use our table above to see which states require Amazon to collect.
How much is Amazon sales tax?
The rate of sales tax applied to a transaction depends on the seller’s economic nexus states and what those states' requirements are.
Some states do not collect any sales tax, whereas others sit anywhere between 1-9% plus. Amazon may add this automatically if the state requires it to by law, but it may not, so sellers need to be vigilant to stay compliant.
Use our table above to figure out the rates relevant to you.
Does Amazon collect sales tax for sellers?
In the states that have enacted marketplace facilitator laws, Amazon is responsible for collecting and remitting sales tax on behalf of their sellers. This is not the case in every state however, so it is important to know which states you have nexus with and whether they will be covered by Amazon.
If they aren’t, you are responsible, so make sure you understand your obligations.
How does Amazon determine sales tax?
If Amazon is collecting sales tax for you, it will calculate the rates automatically and apply these at checkout for your buyer. As a “pass-through” tax, you as a seller won’t see this money; Amazon will send it on to the state.
If Amazon is not collecting sales tax on your behalf, you will need to figure out the correct rates to charge. This is where having an accountant, or at the very least, a tax app integrated with your accounting software and A2X, becomes invaluable.
These will keep you up-to-date on the latest rates as they continue to evolve.
How does Amazon tax collection work?
This depends on whether Amazon, as the marketplace facilitator, needs to collect tax on your behalf. Some states require this by law and some do not. If you need to collect the tax, you will have to calculate the rates for each of your buyers individually.
Use our steps under Your Amazon Tax by US State above to get started, and for more information, see our blog: How to Collect Sales Tax on Amazon.
Where can I find an Amazon sales tax calculator?
The most efficient way to handle your taxes would be either to work with an accountant, or integrate a tax app like TaxJar, Avalara or Taxify with A2X and your accounting software. These can do all the Amazons sales tax calculations for you.
To calculate this yourself, try the following:
Are there any Amazon sales tax exemptions?
Some buyers or businesses may be eligible for certain tax exemptions. A buyer might present you with documentation proving them tax exempt, or you may wish to apply for this yourself. You would need to do this with the specific states in which you believe you meet tax exemption criteria.
Amazon has a Tax Exemption Program (ATEP) available for eligible individuals or businesses. You would need to present Amazon your tax exemption certificate from the relevant states in order to qualify. See their page here for more information.
How to avoid Amazon sales tax?
You are legally obligated to collect sales tax in the states with which you have economic nexus. Whether you comply with this is up to you.
If you collect and remit sales tax as you should do, the money comes out of your buyer’s pocket - not yours. If you don’t collect and you are audited, any missing funds are your responsibility, along with any potential fines and penalties imposed on you for non-compliance.
Some sellers are calculated in where they pay tax based on the penalties they would face if audited. We recommend working with an ecommerce accountant to figure out the best route that will keep you compliant and not up at night!
How to set up taxes on Amazon?
In our guide How to Collect Amazon Sales Tax we go through all the key things you need to know and do as part of your Amazon tax collection. Here, you will find more detail on the steps below along with screenshots.
To summarize the setup steps:
- Login to Amazon Seller Central.
- Navigate to Settings > Tax Settings.
- Choose to View/Edit your tax collection obligations.
- You will need to select the states for which you wish to collect sales tax and enter your sales tax registration number.
- Finally, you’ll need to map out your product tax codes. Navigate to Seller Central > Settings > Tax > View Master Product Tax Codes and Rules. Choose the product codes that most closely suit your products.
How can I tell how much sales tax I’ve collected on Amazon?
Amazon sends you settlements with raw data that you would need to sift through to find exactly where sales tax has been collected and how much.
Needless to say, this can get time consuming. Not to mention, it’s frustrating if the data isn’t clear.
A2X was designed specifically to solve this problem for Amazon sellers. There’s a lot of information that sellers need in order to manage their books properly - detail that they don’t have time to figure out manually each month (or at tax time).
Check out this video from LedgerGurus CEO Brittany Brown about why A2X is the “Amazon seller’s best friend” and how much smoother it can make your accounts:
*Hint: Skip to 26m in to see a comparison between A2X displaying your data versus Amazon.*
You can also see numerous case studies and reviews on our websites of Amazon sellers and accountants who have come to rely on and trust A2X.
Where can I find more Amazon tax information?
For additional resources related to Amazon taxes, check out the guides below.
US sales tax for Amazon sellers:
- How-to Guide: Collecting Amazon Sales Tax
- The Definitive Guide to Amazon 1099-k Reports for Amazon Sellers
VAT for Amazon sellers:
- The Ultimate VAT Guide for Amazon Sellers in the UK & Europe
- VAT Obligations for Amazon Merchants
- Amazon FBA in the UK and A2X
- How to Collect VAT Through UK Amazon Seller Central
Australia & NZ GST for Amazon sellers:
Guides about ecommerce taxes in general:
- Amazon Taxes: Beginner’s Guide to Doing it Right
- The A2X Ecommerce Sales Tax Hub
- Options for Filing & Automating Returns
Creating an Amazon Tax Strategy
If you want to stay compliant and keep your costs to a minimum, planning for and staying on top of your Amazon tax obligations requires some strategy.
In our guide, Sales Tax Strategies for Amazon FBA Sellers, we discuss the three common approaches that sellers usually take.
Here we will summarize these options. See the blog for more detail on each:
- The “by the book” approach: Exactly as it sounds, this involves taking the safest course of action which might also be the most time-consuming. Register in every state that you believe you have nexus with, and collect sales tax for all of them.
- The “wait and see” approach: This involves registering to collect tax in your home state but not in any others. It’s cheaper in the long run but of course, if you’re audited, you could be liable for back pay with fines and penalties.
- The “stair step” approach: The middle of the spectrum. You start with registering in your home state and as your business grows, you register in more. Over time, you become more compliant, and you can pick up some momentum in your business before biting off more than you can chew.
The best way to come up with a sales tax strategy to suit your unique business needs is to work with an accountant, either full time or just to get you going. Check out our accountant directory for a list of trusted ecommerce specialists.
You can also integrate tax apps into your accounting software stack which will help calculate what you should collect, have collected and need to remit.
With sales tax rules still evolving, this is a good way to stay up-to-date and compliant without having to keep checking state regulations.
Don’t Lose Track of Amazon Sales Tax with A2X
A2X was designed to solve a specific problem for Amazon sellers: interpreting and organizing transactional data.
By automating your accounting, you can gift yourself an easy reconciliation process taking minutes rather than hours, peace of mind that your accounts are accurate, and the time to focus on growing your business.
Find out how A2X can make your accounts a breeze, and start your free trial today!
Also on the Blog
- The A2X Amazon Accounting Hub
- Sales Tax Strategies for Amazon FBA Sellers
- Amazon FBA Warehouse Locations and Sales Tax
- The Definitive Guide to Amazon 1099-k Reports for Amazon Sellers
- The Ultimate VAT Guide for Amazon Sellers in the UK & Europe
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