Amazon Taxes: A Beginner's Guide
It’s something few of us learn at school, and yet the tangled knot of taxes is something just about everyone on the globe deals with at some stage in their lives.
Income tax is probably familiar, but you might associate this with salaried employment. Unfortunately, it’s not just those with an employer that should be paying income tax. In fact, ‘income’ could be as little as a few hundred dollars made in a garage sale and this technically, should be declared and taxed.
Then there’s sales tax. It’s different not only between countries but between states in the US too. For Amazon sellers with customers based all over, this makes compliance easier said than done.
But don’t worry, in this guide, part of our Amazon accounting hub, we’ll take you over the basics of what you need to pay, how and where to find the next level of detail.
Table of Contents
An Overview of Taxes for Ecommerce Sellers
Tax can be a tad daunting.
For anyone new to finance and accounting, taxes might feel like a big black cloud on the horizon, moving closer at the end of each financial year.
Did you file the right forms? Have you paid enough? Will you receive a bill that sinks your business?
That’s no fun. It’s also completely avoidable.
We highly recommend hiring the help of a specialist ecommerce accountant - at least in the beginning to get you set up, or around tax time, if you need to be selective. The tax rules for ecommerce sellers are relatively new and still changing, so having an expert on your side could save you hugely in the long run.
And if you’ve set up your accounting well from the start, they shouldn’t need to do too much number crunching for you (but we’ll get to that). Find an accountant from our trusted directory here.
Whether you are able to hire an accountant or not, understanding your tax obligations will ensure you remain in control and informed of your business financials.
In this guide, we’ll cover the basics of the two taxes you as an Amazon seller need to know about: Income tax and sales tax (plus the overseas versions).
For each, we will briefly cover what it is, who needs to pay it, how it’s paid and what you need to do next. We also have more in-depth guides for each, so if you want to delve deeper, links will be provided too.
Ready to talk Amazon taxes? Let’s do it.
Amazon Sales Tax
Sales tax wasn’t something that the early Amazon sellers needed to worry about so much. That’s not the case today. Sales tax should be at the top of your priority list, because coming after ecommerce sellers is certainly at the top of the IRS’ list.
In this section, we will breeze over the basics you need to know about sales tax and finish up with where to get more information, and what to do next.
What is sales tax?
Sales tax (as it is called in the US) is a tax charged on goods sold. The buyer pays the tax at checkout, the seller holds onto it and then remits it to the relevant tax authority at the end of the financial year.
In some states, Amazon collects the tax and remits it on behalf of the seller. For these states specifically, you don’t have to worry about sales tax. (Woohoo!)
Which Amazon sellers need to pay sales tax?
Those that have economic nexus with a state.
If you do enough business with a state to meet its threshold for nexus, then you are considered eligible to pay sales tax there. Every state has its own threshold, so if you have buyers in multiple states, you will need to check all their thresholds to see whether you qualify.
Important tip: Amazon FBA warehouses count towards your nexus. So if you store inventory in another state through FBA, you will likely qualify for nexus there.
To find out where your inventory is being stored, head to Seller Central > Reports > Fulfilment and select your Inventory Event Detail report. Open the report in Excel and navigate to the Fulfilment-Center-ID column. The location codes are the same as the nearest airport to that warehouse. Find those codes for quick answers here.
How much is sales tax?
Sales tax is a percentage of the overall sale. The percentage rate due depends on which state you need to pay, and this is where things get a little bit juicy. In some states, you need to collect and remit the tax but in others, Amazon does this for you.
States where you need to collect sales tax
If you have nexus with a state, you need to find out whether they operate under an origin or destination basis.
If they are origin-based, your buyer pays the rate of the state YOU are based in (the origin of the purchased product). If they are destination-based, your buyer pays the rate of the state THEY are based in (the destination of the purchased product).
Then as well as state rates, you have jurisdictions within them. So in order to be compliant to the cent, you need to add these jurisdiction rates on top.
For example: Say you have a buyer in Columbia, South Carolina, and you have sold enough to other buyers in that state to qualify you for nexus there. South Carolina is destination-based, so you need to charge your buyer the sales tax rate relevant to THEIR location. Let’s say South Carolina’s rate is 6% and Columbia also has a local rate of 2%, the sales tax rate you need to charge is 8% in total.
States where Amazon collects sales tax for you
Good news! Some states have enacted marketplace facilitator laws which make the collection and remittance of sales tax the responsibility of platforms like Amazon, not sellers.
It’s much easier to police one authority than millions of individuals. In these states, you don’t need to worry about sales tax at all - Amazon adds the tax automatically at checkout and deals with it for you.
How is sales tax remitted?
If you have nexus with a state that doesn’t require Amazon to collect sales tax on your behalf, you’ll need to register for a permit before you begin collecting.
The permits are unique to each state, so you will need one for every state applicable to you. And don’t forget as your business grows to keep checking whether you meet a new nexus threshold in another location!
Once you are registered, you will need to modify your Amazon tax settings to begin collecting. See our blog How To Collect Amazon Sales Tax for step-by-step instructions with screenshots on how to do this.
What to do next
This is just the tip of the sales tax iceberg.
Head to The Ultimate Guide to Amazon Sales Tax for:
- More background on the laws that changed everything for ecommerce sellers.
- A comparison table of all the states with their nexus thresholds, rates, destination or origin bases and links to file permits with them.
- The states that Amazon deals with for you.
- How to build an Amazon tax strategy.
- FAQs on all things Amazon sales tax.
If you’re keen to continue with our basics overview, our next stop: Income tax for Amazon sellers.
Amazon Income Tax
Income tax is not exclusive to the salaried employee. Income can be any money earned from selling a service or goods, whether that’s a few hundred dollars or a few thousand. Your Amazon income more than likely qualifies you to pay income tax.
What is income tax?
Income tax is collected by the government to pay for the infrastructure of our countries, cities and communities. In 2020 it accounted for about 47% of the US government’s revenue.
For many employees, income tax comes out of our payslips automatically - we don’t have to do anything. Sometimes at the end of the tax year we might get a refund or owe something, but largely, this is taken care of.
For those that earn income in other ways though, like Amazon sellers, it’s not quite so easy.
Which Amazon sellers need to pay income tax?
The safest route when it comes to tax is always to declare your income, no matter how little it might be. So that means that, in general, all Amazon sellers should consider filing for income tax.
If you want a threshold, multiple sources suggest that anything above $600 in a financial year is considered best practice. It’s still a pretty low bar, so if you want to stay compliant and not take any risks, it may be better to file any income you have no matter the value.
There are of course some Amazon tax exemptions, which make allowances in specific circumstances. See more about those here.
How is income tax remitted?
The first two forms you need to download and complete. The final form is something that Amazon will fill out and send to you, based on the records it has of your transactions. You will need robust financials to check the form is correct before filing that as well.
Please check your individual requirements as these may vary between sellers unique to your circumstances. An accountant can help you with yours - find an ecommerce specialist here.
What to do next
This is just an introduction to Amazon seller income tax.
Check out our Amazon Income Tax Guide for:
- More background on income tax in general.
- Where to find the forms you need and how to fill them out.
- Tax deductibles and how to save money when filing your taxes.
We’re almost there!
Next stop: Overseas taxes. If you sell overseas or want to in the future, this section is important too. You’re just as liable internationally as you are domestically.
Overseas Amazon Taxes
Opening yourself up to a global market has many obvious advantages - but taxes aren’t one of them. Unfortunately, if you build up a nexus with another country, you will need to be aware of their tax requirements too and possibly register.
In this section, we’ll discuss GST and VAT and what they mean across the world.
What is GST and VAT?
GST stands for Goods and Services Tax. Canada has a version of this, as do Australia and New Zealand.
VAT stands for Value-Added Tax, and you will find this throughout the UK & Europe.
Which Amazon sellers are eligible?
Just like with US states, Amazon sellers need to keep track of two things:
- How much they sell in certain countries and regions, and
- What the nexus thresholds are in those locations
The good news is that, as of June 2021, all EU member states (now excluding the UK), have the same threshold: €10,000.
How are these taxes remitted?
You have a few options here which have come about as part of the 2021 EU Ecommerce VAT Package.
You can either register with and remit to each individual state with which you meet that €10,000 threshold.
Or, you can opt for the new One-Stop Shop (OSS system) and manage all your tax remittances in one place.
If you import goods to the EU under €150 in consignment value, you can also use the Import One-Stop Shop (IOSS) which fast-tracks the customs process and makes things more transparent for your customers.
What to do next
With overseas taxes being such a huge, multi-faceted subject, check out our specific guides for more help:
- Amazon Tax Canada
- The Ultimate VAT Guide for Amazon Sellers in the UK & Europe
- An In-Depth Tax Series for Amazon & Shopify (Australia & New Zealand)
Tools to Help You Manage Amazon Tax
Managing your Amazon taxes effectively relies on one thing: detailed, accurate financials. Easier said than done, right?
Nobody thinks taxes are easy, and you’re certainly not alone.
But there are plenty of specialist tools and resources out there to help you get it right every time. Here, we’ll focus on the automated option (tax apps) and the human option (accountants).
If you aren’t using proper accounting software for your Amazon business yet then forget this section - get that first! Accounting software is a crucial step towards robust financials.
If you are on top of things and have that sorted, then tax apps might interest you.
You can integrate apps like Avalara, TaxJar and Taxify with your Amazon account and accounting software to stay on top of your taxes. These apps will have the most up-to-date rates, help you collect the correct amounts by location and file your forms correctly at the end of the tax year.
With rules and regulations constantly changing, having these integrated directly with your business operations will mean minimizing the risk of a nasty surprise at tax time.
Specialist ecommerce accountants
If you are in the market for a specialist ecommerce accountant, their value will go beyond helping you with your taxes.
Wisdom based on experience is a uniquely human offering. This can’t be automated - and having an expert on your side will help not only ensure that your taxes are done correctly, but that you claim as many deductions as you can and strategize for the future and growth of your business within your legal obligations.
It’s easy to see how this investment could save you time and money in the long run.
Alternatively, you could seek out expert advice just to get you all set up. If budget is an issue, have an accountant help you start strong and manage the rest yourself with apps and automation.
A2X for Amazon Tax Tracking and Compliance
Interpreting the numerous Amazon fees and expenses for each of your bank deposits can be time consuming, to say the least.
Then there’s itemizing your sales tax and figuring out whether you have charged and collected the right amount for every single transaction.
If you’re managing ten orders a week, calculating everything you need to know manually might be doable. But more than that? It doesn’t leave you much time to think about growing and branching out.
This is where A2X comes in.
Designed to solve this specific problem for Amazon sellers, A2X captures your financial data before it reaches your accounting software, splits settlements by month and organizes each deposit into neat journal summaries.
Each summary lists all the line items you as a seller need to know, things like your sales tax collected, shipping costs paid, reimbursements received and each type of Amazon fee paid.
It’s automatic, ensuring accuracy, efficiency and seamless accounts anytime, anywhere.
Amazon Tax Basics FAQs
Which taxes do Amazon sellers need to pay?
Most Amazon sellers will need to collect and remit sales tax, and file for income tax. The sales tax you pay will depend on the various countries and/or states that you do business with, so you’ll need to check the requirements of each for your obligations.
Tax obligations are unique to each business owner, so it’s always best to check with an accountant for the correct information relevant to you. Find one from our directory here.
Does Amazon charge sales tax?
In the states that have marketplace facilitator laws, Amazon will collect and remit sales tax on your behalf. It is required to do this legally.
In the states that do not have marketplace facilitator laws, if you qualify for nexus, you will need to charge and remit the sales tax. See our Amazon sales tax guide for more information and how to figure out your nexus states.
Which are the states where Amazon collects sales tax?
The following states had marketplace facilitator laws at the time this article was published. Please always check the official state tax pages for the latest information and to ensure you are following the correct requirements. Links to these can be found in our comparison table here.
Amazon may collect sales tax for sellers in the following states: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, DC, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming.
How much does Amazon tax?
If Amazon collects sales tax for you, it will charge the percentage as dictated by the relevant state and its tax jurisdictions. This could be anything from 0-9%+. See the full list of states and their combined average sales tax rates in our table here.
Why is Amazon tax so high?
If Amazon is collecting sales tax for you, it will be charging the rate as per government regulations for the appropriate state. Tax rates are not set by Amazon.
If you think you are paying too much in tax, consider hiring the help of a specialist ecommerce accountant to look at your books for you. They may be able to explain where the rates have come from and whether you can benefit from any deductions. Find one from our directory here.
How do taxes work on Amazon?
Some states require Amazon to collect sales tax on your behalf. In these states, you don’t have to worry about sales tax at all.
If you have nexus with a state that does not require Amazon to collect on your behalf, you will need to register for a tax permit in that state, calculate what to charge and add it to your Amazon orders manually. For the practical steps of collecting sales tax on Amazon, use this guide.
If you are filing income tax, you will need to manage this process yourself. If you meet certain criteria, Amazon will send you a pre-filled 1099-k form. It is your responsibility to check this is correct and file it along with your other documents. Find everything you need to know about Amazon income tax here.
Are there any tax exemptions on Amazon?
There is the Amazon Tax Exemption Program (ATEP) which allows businesses and individuals to apply for certain deductions and exemptions.
Can I get an Amazon tax refund?
This is a question for your accountant. Tax refunds will depend on whether you claimed deductible expenses in your tax return, and if these were eligible to be refunded to you.
Our Amazon Income Tax Guide lists examples of tax deductible expenses to get you started.
Next in the Series
The blog is part of our A2X Amazon Accounting Hub. So far in the hub, we’ve covered the key 5 setup steps for your Amazon accounting, the accounting software you should be using, seller fees and transactions and now, taxes.
Next up, we cover some of the most common mistakes that sellers make with their accounts. Learn from these and skip ahead to the good bits!