Entrepreneurs and startups have recently become very unclear about how to start an Amazon business because the responsibility of online sellers to collect and remit sales tax has been an issue under debate for quite some time.
Entrepreneurs who have brick-and-mortar stores in jurisdictions that have enacted sales tax clearly must add state (and sometimes local) sales tax to customer’s bills when selling taxable goods. And then send they must send those funds to the proper tax authorities.
But what if you sell your products online to customers in other states? The rules haven’t been completely clear in the past, so a lot of confusion has plagued the business community. Many online sellers had not been collecting and remitting sales tax outside of their home states because they either didn’t realize they were supposed to or it wasn’t enforced.
But since a June 21, 2018 U.S. Supreme Court ruling, things have been changing. The Court’s decision allows states to require online sellers to collect sales tax even if they don’t have a nexus (generally, a physical presence, inventory presence or substantial sales volume) in a state. Before the ruling, the tax burden (via a “use tax”) for goods sold online from out of state was on the consumers who bought the products. As you can imagine, many did not report or pay the tax. And states began to realize they were missing out on a lot of revenue.
Now, in an effort to level the playing field for businesses with a physical presence within their borders and to stop their budgetary bleeding, states have started putting sales tax laws in place to crack down on online sellers that haven’t been filing sales tax.
Before I go any farther, I must mention that the sales tax issue is a complex one for online sellers, including Amazon sellers. The requirements are dependent on many factors and will vary from one business to another and from one state to another.
What I am about to share is meant for general informational purposes only; it is not intended as legal, accounting, or tax advice. I hope that it will help you understand some of the considerations you will need to address, but it is no substitute for professional tax, accounting, and legal guidance.
Do Amazon Sellers Need to File Sales Tax?
To clearly have all the information to know how to start an Amazon business, State laws and rules vary, so businesses selling online to customers in other states will have to learn whether collecting and remitting sales tax applies to them.
In states that have passed “Marketplace Facilitator” legislation, online marketplace’s—Amazon, for example—are now responsible for calculating, collecting, and remitting sales tax on sales by third-party sellers.
According to Amazon’s website page Marketplace Tax Collection:
Marketplace Facilitator legislation is a set of laws that shifts the sales tax collection and remittance obligations from a third party seller to the marketplace facilitator. As the marketplace facilitator, Amazon will now be responsible to calculate, collect, and remit tax on sales sold by third-party sellers for transactions destined to states where Marketplace Facilitator and/or Marketplace collection legislation is enacted.
The states where Marketplace Facilitator legislation has been passed include:
Amazon determines the taxability of items in orders by the categories and details the seller has entered in its product offers.
But what about Amazon sellers’ sales tax responsibilities in other states? According to Amazon Seller Central’s tax policies, sellers are responsible for the calculation, collection, and remittance of any and all of taxes, except for in states where marketplace tax laws are in effect.
Amazon will calculate sales tax for sellers that subscribe to Amazon’s tax calculation services, but it appears that those sellers must collect the sales tax from their customers and remit the funds to the appropriate tax authorities.
In Amazon’s words:
Professional sellers with an obligation to calculate tax on their orders will need to set up their tax calculation settings and remit calculated tax to the state. Amazon does not automatically calculate, collect, or remit sales tax for any state unless the state has enacted Marketplace Facilitator or similar laws.
Sellers that must collect and remit sales tax need to abide by each state’s rules. This can get complicated because different states have different requirements and the tax rates vary widely.
Why Is Calculating Sales Tax So Complex?
Among the 45 states (and District of Columbia) that charge sales tax, the rates vary (sometimes significantly). Also, some states only require online retailers to collect sales tax if they hit a certain sales dollar threshold while sales others want all online businesses to remit sales tax regardless of their sales numbers. Some states require sales tax when sales originate from them, and others require sales tax when products are shipped to customers there. And if orders are fulfilled through a warehouse (such as an Amazon fulfillment facility) outside of the seller’s home state, there might be sales tax implications there, as well.
To make matters more confounding, some states allow local municipalities to charge sales tax, too.
The sales tax return filing schedule an Amazon seller must follow will depend on the state’s rules and often the amount of tax due. Generally, retailers that collect larger sums will need to file and remit their sales tax more often than businesses that don’t collect significant dollars.
What Does an Amazon Business Need to Do to File State Sales Tax?
Below are the basic steps to consider in starting an Amazon business, but these are not intended as a substitute for legal or accounting advice. Sales tax is a tricky matter and state laws and Amazon’s policies and procedures are subject to change. For those reasons, it’s critical to get tax and legal professionals’ expert guidance so that you’re in compliance with the law and meet all requirements before you start an Amazon business.
1. Determine for which states sales tax must be collected.
Amazon sellers must determine for which states they will need to collect and remit sales tax. As I mentioned earlier, this can get complicated, so it’s wise to consult a tax professional who has expertise in working with businesses that sell online.
2. Register with the state’s tax agency.
Before a business can collect sales tax in a state, it must obtain a sales tax permit or license. Usually, states will require that a business is registered in the state before it will issue a sales tax ID. If a business is selling in states outside of where it is registered, which is highly likely with Amazon sellers, it may need to apply for foreign qualification to collect and remit tax there. Foreign qualification provides a way for companies to expand their presence without formally registering new business entities in every state.
3. Identify the applicable sales tax rates.
With states’ rates that range from approximately 4 percent to almost 10 percent and varying local sales tax rates (in 38 states), it’s critical for sellers that don’t have Amazon calculate the tax for them to know how much they will need to collect and remit to whichever tax authorities they will owe it to.
4. Make sure all information is set up accurately in Amazon
Amazon’s Seller Central platform has settings that sellers with professional seller accounts can update to ensure the right amount of tax is applied to product sales in the states where their businesses have sales tax obligations. It’s important for sellers to accurately enter their state tax registration information (for all states in which they’re registered to collect tax), tax codes for the products they sell, and the other information requested by Amazon so that it can apply and collect sales tax.
(Note that individual seller accounts (which are primarily used by people or entities that have fewer than 40 sales per year) might not have the same tax calculation and collection capabilities through Amazon that professional accounts do.)
5. Report sales tax to the appropriate states and local tax authorities.
Different states and local tax authorities have different filing frequency requirements. Sellers may need to file sales tax returns monthly, quarterly, or annually— and that will vary depending on the state and possibly even according to sales volumes. Online sellers may want to explore software products that automate and streamline sales tax reporting and filing to help them stay compliant in all states where they have sales tax obligations.
CorpNet Can Help You!
After you’ve consulted with legal and accounting professionals about your business formation and tax obligations in the states where you’ll be selling products online, CorpNet is here to help you prepare and submit your business registration filings. From forming an LLC or incorporating to filing for and renewing foreign qualifications and sales tax permits, and more, we can make the process more efficient, cost-effective, and easier on you.
Contact us today to learn more—we’re here to help your online business succeed!