Amazon sales tax is a complex and ever-changing topic, so it's essential to stay up to date on the latest changes so you can run your business successfully.
In this article, we'll outline everything you need to know about sales tax, including when it applies and how to collect, report, and file it. By the end of this article, you’ll be able to ensure your business complies with current regulations, saving you hours of headache in the process.
Let's get started.
What Is Amazon Sales Tax?
Amazon sales tax is a one-time tax that sellers collect from buyers at the time of purchase. Sales tax on Amazon is a percentage of the purchase price of an item paid to the state government. Amazon sellers are responsible for collecting and reporting their state's sales tax, no matter where they are.
The image below shows the states where Amazon sales tax is currently collected.
Sales tax is also charged by special taxing districts, cities, and counties. For example, the combined tax rate for Ontario, California is 7.75%. See the image below for a breakdown of the local sales taxes.
Let us now look at when you should collect sales tax.
When To Collect Sales Tax From Customers
Amazon sellers should collect sales tax where their selling meets the following criteria:
Let’s explore these concepts in more detail.
Sales Tax Nexus
Sales tax nexus means that your business is connected to a state. This means you'll have nexus in your state and other states, depending on your business. Most states consider that economic presence or physical connection creates a nexus.
Here are various ways that you can have sales tax nexus:
Inventory nexus is relevant for FBA sellers who use Amazon fulfillment centers. If you store your inventory in an Amazon fulfillment center, then that center's location creates a sales tax nexus. Using the Inventory Event Detail Report, you can check where your inventory is stored. To get this report, log in to seller central, click on reports, and click on Inventory Event Detail on the left side.
Most states where Amazon has fulfillment centers have Marketplace Facilitator Laws that expect Amazon to collect tax on behalf of sellers.
Product taxability means that you're selling taxable items. Most tangible products are taxable, but services are not, but depending on the state, these general rules may differ. Common products categories with varying tax rates include grocery items, textbooks, and clothing.
How To Become Sales Tax Compliant
There are three steps you should follow to become sales tax compliant:
Let's look at these steps in detail below.
Register For A Sales Tax Permit
You should first register for a sales tax permit because collecting state sales tax without a permit is illegal. To register for a sales tax permit, visit a State's Department of Revenue website. The websites vary depending on the state. When registering, have personal and business information ready such as an address, EIN (Employer Identification Number), and SSN (Social Security number).
For more detailed information on each state's requirements and process, read this article on how to register for a sales tax permit.
Once you get a permit, you will be given a filing frequency that depends on sales volume. The frequency can be monthly, quarterly, or annually. Filing frequencies can change if your sales increase or decrease substantially.
Collect Sales Tax
You're now set to collect sales tax from buyers with a sales permit. As we've seen above, Amazon now collects sales tax in most states where there are fulfillment centers. The steps outlined below apply to states where Amazon is not responsible for collecting tax on behalf of sellers.
Amazon has a tax collection system that helps collect the right amount once you input the correct information. Amazon's tax collection system will also consider tax rate changes and whether tax charges should be destination-based or origin-based.
Destination-based means the seller must calculate tax based on the buyer's location. For example, if you live in Vermont and sell to a buyer in Alabama, you should use Alabama's sales tax rate.
Here is a list of all destination-based states:
Origin-based means the seller is required to calculate tax according to the seller's location, not the buyer's. For example, if you’re an online seller who lives in Ohio and sells to a buyer in Florida, you should charge Ohio's tax rate (not Florida's).
Here is a list of origin-based states:
*California is different from others because it is a modified origin-based state. This means district taxes are based on the buyer's destination, but state, city, and county taxes are based on origin.
To collect tax using Amazon, you should be on the professional selling plan that costs $39.99 per month. You will also pay 2.9% per transaction to Amazon when collecting sales tax.
Setting Amazon Sales Tax Collection
Let's look at the steps you should follow to set up tax collection on Amazon:
If you're new to the platform, you should review the tax methodology document explaining how to calculate your taxes. You should also check product tax codes, which you can use as defaults on individual products.
Once you have followed these steps, click on "Save Settings" to begin collecting sales tax.
Reporting And Filing Amazon Sales Tax
After collecting sales taxes, you're required by authorities of each state to report and file your tax returns. Most states ask for reports on how much revenue you've collected in the state, country, city, and districts within the state.
To get a report on how many sales you've made, log in to Amazon seller central and navigate to reports, then click on Generate Date Range Report. Select the filing period plus the state, county, and city you want a report on. You can also get reports using automation solutions like Taxjar. Taxjar will help you get comprehensive reports of the collected sales tax.
The next step is to file tax returns according to the filing frequency given by the local government. The typical frequency for various states is the 20th each month. You can file your taxes online or using tax software.
To file online, log in to the relevant state taxing authority website, submit your returns and make a payment.
When filing tax returns, ensure that you report all sales and taxes collected, even if Amazon collects sales tax on your behalf. You should also file zero returns even if you didn't make any sales in a state where you have a sales tax permit. Zero returns should be filed by the deadline to avoid fines and penalties.
Amazon Sales Tax FAQs
Amazon's fee for collecting tax is 2.9% per transaction.
No, Amazon doesn’t charge sales tax because only local governments can charge tax.
No, state sales tax is charged by state governments.
Yes, Amazon collects and remits sales taxes for sellers in states where laws such as Marketplace Fairness and Marketplace Facilitator are enacted.
Yes, Amazon only helps in collecting sales taxes, but it is the seller's responsibility to report and file sales tax returns.
Sales tax is a complex topic that is ever-changing because it is based on state government laws. Sellers should always read all communications and letters from states with sales permits.
To recap on how sellers can be tax compliant, these are the steps to follow:
Now that you've learned all about sales tax including how to collect Amazon FBA sales tax make sure you remain tax compliant to avoid any unnecessary penalties.