Do Amazon Sellers Have to Pay U.S. Sales Tax? And Other Sales Tax QuestionsApril 12, 2018 in Amazon, Blog
Before reading this, I need the obligatory “I’m not an accountant, lawyer, or anyone else resembling a professional” preamble.
Sales tax is becoming a huge question for Amazon sellers so more and more sellers are asking whether they need to collect sales tax or not. Most of the sales discussion seems to be dominated by many of the large accounting and sales tax collection software packages out there which have completely biased opinions of sales tax collection requirements.
Once again, I am in no way a professional (although I’ve spent a lot of money talking to professionals!) but I will try and give my objective two cents as an ecommerce seller on the sales tax atmosphere and requirements for Amazon sellers and ecommerce sellers in general.
Sales Tax Nexus
The big issue around the requirement for Amazon Sellers to collect sales tax revolves around sales tax nexus, other wise just referred to as nexus. You create nexus in a state when you have what they call sufficient physical presence. Before the internet, this would largely mean having employees or offices in another state. More relevant for ecommerce sellers, you can also create sales tax nexus for yourself if you store inventory in a particular state. For example, if your office is in Los Angeles but you warehouse inventory in Phoenix, Arizona then you have sales tax nexus in both Arizona and California.
Some people argue that warehousing inventory in a state is not sufficient to create sales tax nexus but the common consensus is that it does. Each state can have their own definition of nexus, however, and some states are explicitly rewriting their laws to clarify what ecommerce activities constitute creating nexus.
In case you don’t read past this paragraph, if you’re an Amazon Seller using FBA then you likely have sales nexus in a lot of states.
Sales Tax Nexus Created for Amazon FBA Sellers
The issue for Amazon FBA sellers revolves around Amazon’s distributed inventory system. When you ship products into Amazon FBA warehouses, Amazon then re-distributes those products across the country. So even though you may only ship products to one state or a handful of states, Amazon will redistribute your products across many other states. If you want to see where your inventory is currently stored, go to Seller Central and go to Reports -> Fulfillment -> Monthly Inventory history.
When you view this report, you will likely find your inventory is stored in far more states than you actually ship products to. In each of those states, you have now created nexus for your company. Amazon has warehouses in dozens of states and they can move your inventory around at will so this is the real complicating factor. Amazon is essentially creating nexus for you and your company at will. Amazon will likely not move your inventory to all of the states it has warehouses in and not all states have state sales tax but regardless you will have nexus in a lot of states.
Sales Tax for Amazon Sellers Using Merchant Fulfilled and Not Using FBA
If you are selling on Amazon and using merchant fulfilled, i.e. not using Amazon FBA, then you will only have sales tax filing requirements in the states you actually ship your products to (and any other states you have created nexus in, in other ways). This same logic applies to ecommerce sellers not using Amazon at all.
Many larger companies cannot use Amazon FBA because of the sales tax obligations Amazon FBA creates for their entire business. Imagine a company like Nike. They may only have sales tax nexus in a handful of states for their multi-billion dollar operation but shipping products through FBA would require them to collect sales tax in nearly all American states on all of their sales. Big brands are at a significant disadvantage for ecommerce sales because of this reason.
Do You Need to Collect Sales Tax to Sell on Amazon?
Sales tax registration is not required to sell on Amazon, import products into the United States, or nearly any other business function. Contrast this, for example in Canada, where registering for our federal sales tax is required to basically do any business here.
This does not mean that you do not have sales tax remitting obligations or that you should not. However, the reality is that you can start an Amazon business without registering to collect sales tax.
Where Does Amazon Collect Sales Tax For You?
A lot of the controversy as of this writing is whether it is individual sellers or Amazon who should collect and remit sales tax. To be clear, Amazon remits sales tax in all states for products it sells but does not remit sales tax for third party sellers (i.e. sellers) except in two states.
Currently, Amazon now collects sales tax on behalf of sellers in only two states: Washington State and Pennsylvania. Amazon will collect sales tax for you in those two states automatically without you doing anything. This list of states will likely expand in the future. This means, in Washington State and Pennsylvania, you have no need to register for sales tax.
The Cost of Being Compliant
The cost of compliance is probably the biggest issue for Amazon sellers when it comes to collecting sales tax. Unfortunately collecting and remitting sales tax does not simply mean collecting and reporting to dozens of states throughout the year. It means hundreds of tax filings a year or more.
The problem with sales tax filings is very complex:
- There’s a lot of states
- Some states have dozens or hundreds of jurisdictions (some of them requiring individual filings)
- You may have to report sales tax annually, quarterly, or monthly
If we assume that we’ll remit sales tax to 40 states quarterly, that alone would mean 160 sales tax returns a year. Unfortunately, if you want to be fully compliant it will almost certainly well exceed this number. Certain states have more than one jurisdiction, i.e. each county will require its own filing.
A conservative estimate to get registered in all of the states and jurisdictions within the U.S. is the low thousands of dollars through a company like Tax Jar and estimate a similar cost to file as required annually. If you’re a company with tens of millions of dollars in revenue or more, a few thousand dollars a year is a minimal expense. But if you’re a small company, this is a considerable burden.
Other Disadvantages of Being Compliant
One of the main disadvantages of being compliant is that sellers who do the right thing and are compliant across dozens of states are at a disadvantage to Amazon sellers who are not compliant. They’re at a disadvantage for two reasons:
- The cost of being compliant
- The relative price of your products to consumers is higher than competitors not collecting sales tax
As mentioned before, there is a significant cost of being compliant. This is a cost that you will have to eat and it will either result in lower profit margins or higher prices.
The second factor is that if you are collecting sales tax and your competitors are not, then the consumer is being charged a relatively higher price to purchase your product contrary to the seller not collecting sales tax.
Furthermore, foreign sellers have far less incentive to register for sales tax than domestic U.S. sellers simply because the IRS can seize American bank accounts and assets – it can’t easily seize foreign assets, for example, in China.
How Do You Register & Report Sales Tax?
Two of the biggest tax collection software services are Tax Jar and Alvara. There’s countless other services as well with more seemingly popping up by the day (my guess is that sales tax collection must be a lucrative business).
You can, of course, self-register but given the number of jurisdictions I would opt to have back to back root canals than try and do this on my own.
The other thing that you need to be aware of is whether your sales tax collection service integrates with your other ecommerce channels such as your website and eBay (almost all integrate with Amazon).
What Happens If You Don’t File?
As of this writing, I have never heard of a state coming after a single Amazon seller for unremitted sales tax. I do not know if they have come after any seller but regardless, if they have, the number is definitely small. There could be many reasons for this, but one of the reasons is likely because of the uncertainty of a seller’s sales tax obligations vs Amazon’s. If a state chooses to go after sellers it will likely mean a big fight either with the courts and/or with Amazon.
As ecommerce grows to a more significant portion of American retail though, this is a fight more and more states may be willing to initiate. Amazon has recently released all seller information to Masachusetts. Is this a precursor to tax bills to sellers? We don’t know.
The danger to sellers is, however, that if the states do decide to go after sellers the tax consequences and bills would likely be business crippling. Imagine a seller who has been doing $1million in revenue per year for the last three years. Let’s also pretend a hypothetical average sales tax rate of 8% across all the states. This seller would have $240,000 in sales tax due. Combine this number with interest and fines and it will well exceed this number. Most sellers could not afford to pay this.
Should You Collect Sales Tax?
Officially, you should of course collect sales in all of the states you are required to.
One of the main issues of deciding to collect sales tax is that we’re in a period of relative uncertainty. Amazon is starting to collect sales tax on behalf of more and more buyers and the issue of internet sales tax is a continuous issue for congress. Deciding to become compliant today could be irrelevant tomorrow.
There is a certain degree of risk mitigation as well. If you’re a seller who sells $1,000 worth of products a year on Amazon, should you really spend thousands of dollars to become compliant in all U.S. states? Probably not. And if a state ever did come after you for unreported sales tax, you could probably afford to pay the tax and fines which would likely be in the tens of dollars. There is a certain sales threshold before which sales collection becomes an unfair burden on entrepreneurship. What is that threshold? That’s a business decision for you to make.
This article isn’t meant to steer you one way or the other as to whether you should or should not file sales tax. Rather I wanted to try and give an objective perspective on the situation that isn’t necessarily slanted by any ulterior motives.
What is your opinion on the current situation of tax collection for ecommerce sellers? If you’re you using a tax software package like Hot Jar or Alvara, what has been your experience been with both cost and the time required to stay up to date on your filings? Please comment below.