Sales tax: Understand your obligations and make a plan
In the United States, there is lots of confusion surrounding sales tax among Amazon FBA sellers. This is due to a concept called nexus, which refers to having an economic connection or link to a State. To understand why nexus is such an important consideration for Amazon sellers, we need to take a look at how the retail landscape has changed over the past few decades. Before eCommerce and large scales online marketplaces such as Amazon and eBay gained prominence, most retail business in the US was conducted by bricks and mortar stores. It was simple for States to collect sales tax and the process of remitting taxes (and understanding where you have obligations) was straightforward for businesses - simply register where you have employees or a physical presence. Online business has now grown to represent 10% of all retail sales in the US. This has resulted in the individual States collecting fewer sales tax, as their local stores are increasingly moving online. “The days of buying items on the internet because you “don’t have to pay sales tax” are pretty much over. It won’t happen overnight, but we’re definitely moving in that direction.”
- Patti Scharf, Catching Clouds
Earlier this year, a supreme court ruling gave States the ability to set their own rules regarding sales taxes and pressure anyone selling to people in their State to register for sales tax. This presents a challenge for businesses that sell on Amazon, as the online platform allows anyone to purchase goods for sale, regardless of their physical location. As an Amazon seller, you can take orders from all 50 States. Whilst this presents an enormous opportunity for growth, it also casts a wide net of potential tax exposure for sellers.
So how should you go about deciding where to register for sales tax?
Crafting a strategy for how to handle sales tax obligations is important to consider early on - however, it is even more important to get your business up and running and prove your idea out first. If you are storing and shipping products yourself, then you will only need to register for sales tax in your home state to begin with. If you are using Amazon FBA to manage fulfillment, then your products will be stored in warehouses spread across 25+ states, which creates nexus throughout much of the country. For a small business, registering and filing regular returns in numerous states can become very expensive and time-consuming. Luckily, there are apps such as TaxJar and Taxify that automate away the calculation and filing of returns. They help you to gain a clear understanding of where you owe sales tax, and how much is owing in each State. At the end of the day, it’s a risk management decision and you need to weigh up the cost vs. potential risk in every scenario. Scott Scharf from Catching Clouds shares his thoughts about where you should register for sales tax in this video
A common way to manage sales tax registration is to set thresholds:
Once your Amazon FBA business has gained some traction, the question of where to register for next might come to mind. To minimize risk, whilst keeping costs down, some sellers set thresholds to help determine which States they will register in next. “When the sales tax I should have collected in any given State crosses $500 or $1,000 or $2,000, that’ll be my alert to go register in that State.”
- Jeremiah Kovacs, Muse Minded
Some States have a minimum threshold where you don’t need to file a tax return until you have made a certain number of sales in that State. South Dakota for example, does not require sellers to collect sales tax until they have sold $100,000 worth of goods or made 200 sales. This resource by TaxJar provides more information about filing frequencies and tax rates for each State. As a new seller, your chances of being caught out for not paying sales taxes are very low. The States have limited resources, so you would expect them to chase larger sellers first. However, Amazon does share information with States such as Rhode Island, so there is a risk of receiving notices. If you can’t sleep at night knowing that you might be caught out, it’s probably worth registering for sales tax wherever you have nexus.
Australia is a new market with plenty of potential - what about GST?
Goods and services tax (GST) is the Australian version of sales tax. In Australia, you can get set up and sell goods without being registered for GST to begin with. This can be a good way to test the market before investing larger amounts of money. However, you will be charged import GST on any products over the value of $1,000 - so it may be worthwhile registering in order to claim back the cost of GST on the stock that you bring in. As we mentioned in the previous article, selecting the right products is a key part of succeeding on Amazon. When you’re entering new markets such as Australia, this is more important than ever before. Make sure that you conduct proper product research to ensure that your product meets the country’s requirements. Make changes to the product specifications if needed (for example, different plugs for electronic appliances) and find a good local accountant that understands Amazon and the specific needs of eCommerce operators.
Good systems make life much easier
Comprehensive systems can be very helpful to ensure that you don’t miss any important information, or forget a tax filing date. Set up your tech stack to automate away as much work as possible. When cloud-based software handles repetitive tasks, not only does it free up your time to do higher level work, but it also ensures that information is entered accurately by removing the possibility of human error. A2X connects your Amazon seller account to cloud-based accounting software such as Xero and QuickBooks to simplify settlement accounting. There is a wide range of different integrations and plugins that can be used to automate your systems and ensure that your backend is as efficient as possible. Our free eBook, “how to sell your Amazon FBA business” covers this topic in much more detail.
Ready to get started?
Save time, work smarter and get reliable Amazon and Shopify financials you can trust, in a matter of minutes.