5 Common Sales Tax Questions – Answered!
by Mark Faggiano, on June 23, 2016
The views and opinions in this post do not necessarily reflect those of eComEngine. Seek proper tax and accounting advice.
Author Mark Faggiano is the founder and CEO of TaxJar
At TaxJar, we’ve long found that, when it comes to sales tax, getting started is the hardest part. So today I thought I would address some of the common questions that new Amazon sellers ask about sales tax.1. Does storing inventory in a state really mean I have to charge sales tax to the buyers in that particular state?
The short answer is: yes. Storing goods for sale in a state creates “nexus” with that state. Nexus is just a fancy way of saying a significant-enough connection that the state can require you to charge sales taxes on purchases in the state.
But don’t take my word for it. You can see what every state has to say about sales tax nexus here. Also, Virginia and New York (a state with no fulfillment centers owned by Amazon.com, Inc. (“Amazon”)) have both ruled that if your only nexus with the state involves third-party fulfillment then you don’t need to collect sales tax from buyers in the state.2. When Should I Register for a Sales Tax Permit?
As for registering in your other nexus states, there are a lot of opinions around this topic, but they all boil down to one thing: your appetite for risk. First of all, you should always register for a sales tax permit in your home state.
As for registering in your other nexus states, the most conservative approach would be to register for a sales tax permit as soon as your inventory is stored in a fulfillment center in a state, which occurs through participation in the Fulfillment by Amazon (FBA) program. This abides by the letter of the law and will mean that you don’t have to worry about any fines or penalties down the line. If you ever plan to sell your business, you should probably take the conservative approach as well, because sales tax compliance is a big part of the due diligence a buyer will perform.
That said, if you possess a higher appetite for risk, you might wait until your sales tax liability in that particular state becomes significant enough to worry you or harm your business.
Here’s an example:
A typical FBA seller, Jed, has inventory stored in Amazon fulfillment centers in 10 different states. But the vast majority of his sales come from buyers in South Carolina and California, and he collects quite a lot of sales tax from buyers in those states. But over his first year in business, he has barely made any sales in his other eight nexus states and should have collected less than $50 in sales tax in each one. Jed might decide that he’ll register for a sales tax permit and collect sales tax in his home state, California, and South Carolina because he feels like he risks a lot of money in fines, penalties and interest in those states if he’s caught not observing the sales tax laws. On the other hand, if he does get caught being non-compliant by those other states, his business can absorb the small amount of interest, fines and penalties he would incur.
As you can see, registering for a sales tax permit can be a big decision for your business. If you need more information, I advise contacting a vetted CPA for advice.3. If Selling on the Amazon Marketplace Gives me Sales Tax Nexus in a Particular State, Then Do I Only Need to Collect Sales Tax from Amazon Buyers in that State?
Once you have sales tax nexus in any state, then you are required to collect sales tax on a sale to every buyer in the state in question, even if that’s through the Amazon marketplace or through another marketplace.
4. How do I Set Up Sales Tax Collection Correctly in the Seller Central Dashboard?
Sellers have a lot of questions about configuring sales tax in the Amazon Seller Central dashboard, especially if selling items that are taxed differently in different states, such as grocery or clothing.
Fortunately, the Amazon sales tax engine is incredibly robust. As long as you have your state settings and product tax codes set up correctly, then you shouldn’t have to worry about charging an incorrect amount of sales tax to customers.
This video provides you with a step-by-step guide to setting up sales tax collection when you sell via the FBA platform:
What Do I Do with All This Sales Tax I’ve Collected?
When you register for your sales tax permit, each state will assign you a filing frequency and due dates. This can be a little confusing since states will likely assign you different filing due dates and frequencies. For example, one state might want to hear from you annually while another wants to hear from you monthly. Also, state due dates fall on different days of the month. For example, California’s due dates are always on the last day of the month while South Carolina’s are always on the 20th.
When it’s time to file your state taxes, your job is to figure out how much you’ve collected in each state over the taxable period and remit what you’ve collected. Most states want you to break this amount down by county, city and other special taxing districts, which is a time-consuming hassle involving figuring out in which taxing districts each sale was made.
Fortunately, a sales tax automation solution will do all this for you, and – if you want sales tax completely off your plate – even file your sales tax returns for you, too!
I hope these questions have assured you that, while sales tax can seem complicated at first, it isn’t as tough as it seems. For a whole lot more on Amazon sales tax, check out our free Sales Tax 101 for Amazon FBA Sellers guide.
TaxJar a service designed to simplify sales tax reporting and filing simple for sellers in the eCommerce industry. Try a 30-day-free trial of TaxJar today and take the stress out of sales tax compliance!