How-To Guide to Collecting Amazon Sales Tax
Collecting sales tax on Amazon - A how-to guide for Amazon sellers in the US and Canada
As an e-commerce seller, you know you should be collecting sales tax. Items sold and distributed within the US and Canada are usually subject to sales tax. That part’s straightforward, but how much to collect is a different story altogether.
In the US, each state has its own state or local tax rate – some have both. In Canada, you pay a federal-level tax called GST, then depending on where the sale was made, you’ll also pay varying levels of local tax.
It’s a lot to get your head around – even the experts who have been working with sales tax for 20 years joke they’ve still yet to master it. Thankfully, for Amazon sellers, most of the collection of sales taxes is done automatically through the Amazon platform.
If you believe you might have tax liabilities, or simply need to get your books in order, this guide is your go-to. By the end of it, you’ll be ready to start confidently collecting your sales tax on Amazon Seller Central.
Let’s get started!
Understanding sales tax
Saying that sales tax in the US and Canada is complex is a massive understatement, but don’t let that scare you away. It’s important to take an interest in your sales tax obligations – whether you work with an e-commerce accountant or not. It’s the mark of a responsible e-commerce seller.
While sales tax isn’t the only tax you need to worry about, it’s the one that comes with the most complexities.
Nexus in the US
In the US, each state has its own state and/or local tax. In the past, e-commerce sellers only needed a physical presence in a state – like a store or employees – to create nexus. When you have nexus, it means you need to start collecting sales tax in that state.
Over the years, physical nexus has developed to include inventory stored in an Amazon FBA warehouse. More recently, states were given the right to collect sales tax on remote sales (that meet a state threshold) without a physical presence – known as economic nexus.
GST and more in Canada
In Canada you have 10 provinces and three territories, all of which pay the federal-level VAT tax called goods and services tax (GST) of 5%. You pay this at every step of the supply chain. So long as your revenue in Canadian dollars is less than $1.5 million, you will file this return annually. Then you have local level taxes for the 10 provinces only, which differ between provinces and come into effect once you’re registered for GST.
Are you taxable?
Once you’ve determined if you have nexus in a state, the next step is to figure out whether what you are selling is taxable. As a general rule, tangible personal property is taxable, services are not – but again, every state has their own way of doing things. Best thing to do is check with a state’s tax authority.
Leading US/Canada sales tax expert Michael Fleming of Sales Tax and More explains that these changes are the reason why so many Amazon sellers are being chased for back-dated sales tax – and why it’s important to stay on top of things.
“All of a sudden, a lot of e-commerce sellers have this linker connection (nexus) where they may have never had it before,” Michael says.
“In a state like Washington, where Amazon was originally located, they have been going back 7 years. The penalty in the state of Washington is 39%.
“In California, the penalties are a lot less, they’re 10%, but sales in California are generally a lot higher. California goes back to 2012 when the first Amazon FBA warehouse opened, and they want all their back tax, the penalty, and any interest,” Michael says.
Collecting sales tax on Amazon Seller Central
First things first – you need to register with each state to collect sales tax. States consider it illegal to collect sales tax without a permit. If you’ve asked an e-commerce sales tax professional to help you with this, make sure it’s someone who understands how, Michael says.
Once registered, you’ll be assigned a sales tax filing frequency and due dates. This may be monthly, quarterly or annually – depending on your sales volume. Remember, registering for sales tax in each state may mean you end up with numerous sales tax frequencies and due dates you’ll need to stay on top of.
Michael advises considering this before registering: “I think we need to look at the materiality when deciding whether it makes sense to register for tax. What the states say doesn’t always make good business sense.
“If you’re trying to be compliant, you may end up paying more to register and for the compliance than you would if it was back tax – including any penalties and interest.”
Where and how to start collecting
Second step in the chain is to ensure you’re collecting sales tax from your customers. As mentioned earlier, it’s good news for Amazon merchants because the platform does a lot of the work for you. However, you do need to make sure you’ve done your due diligence, and your account is set up correctly.
By law, as a marketplace facilitator that contracts with third-party sellers like you, Amazon is legally required to collect sales tax on your behalf. What Amazon needs to know is on which products, at what rate, and in what states they need to collect tax (and yes, Amazon keeps up with all the changes, hallelujah!)
It does this with product tax codes, which ensure you’re charging the right amount of tax on each product, and whether you need to charge tax on shipping and packaging.
Small disclaimer: Amazon does charge a small fee on each transaction to collect sales tax. There is an alternative: paying sales tax out of your profits, but this option comes with a lot of added stress.
Getting set up
In a few simple steps, you can make sure you’re correctly set up to collect sales tax in Amazon Seller Central.
- Login to Amazon Seller Central.
- Click Settings>Tax Settings.
- Choose to View/Edit your tax collection and shipping/packaging obligations settings.
In here, you can choose which states you want to collect sales tax in (not all states are in Amazon Seller Central yet, but almost). You’ll also need to enter your state sales tax registration number.
Next, configure your product tax codes by navigating back to Seller Central>Settings>Tax>View Master Product Tax Codes and Rules.
Choose the product tax codes that most closely fit your products. If you’re struggling to find a product tax code that is suitable, label that item with ‘A_GEN_TAX’.
Filing your return
Very quickly, your first sales tax filing due date will roll around. You need to remit the amount of sales tax you’ve collected in each state – and file a return.
This is where A2X for Amazon comes in handy. Michael says A2X’s value is in being able to tell you – quickly and accurately – what your Amazon sales are for each state.
“A2X makes it easy to get out of Amazon and Shopify the information you may need for a plethora of reasons, and quickly import it into QuickBooks or Xero. Using a tool like A2X gives you more confidence that you’re actually getting all the information you need.”
Whether you file your sales tax return yourself or get an expert to help you, there are a couple of ways you can go about it:
- Online via each state’s tax authority website – where you can pay through the state’s payment gateway
- Automatically via sales tax software – some are more accurate than others
Remember to keep in mind, once you’re registered for sales tax, you must file a return on time – even if you’re reporting zero sales tax collected.
Get your other platforms sorted
Hopefully, you’re now feeling more prepared and on top of your sales tax obligations. The most important thing to note is that this guide has provided you with the steps on how to get started collecting your sales tax – on Amazon only.
It’s essential you don’t forget that you need to collect sales tax on all sales made in the US and Canada, from any marketplace or on any platform. If you need help getting started with sales tax on Shopify, read How to collect sales tax on Shopify.
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