While state governments may jump for joy over sales tax prospects, the average Amazon Seller may be confused and annoyed by having to deal with the patchwork mess of sales tax in the United States. Unfortunately, there is no way to avoid paying Amazon sales tax as a seller.
This guide will provide you with a framework to understand how sales tax works in the United States.
The Lay of the Land
While most states collect sales tax, there are some that have zero sales taxes. Each state has its own set of rules on state tax revenue collection. Sales tax rates or percentages may vary among states, even for localities within a state implementing it.
For those states that require sales tax, there are often differences in how sales tax is collected:
- Type of Product or Service: Branded jeans may be taxed in New York but not in New Jersey, which charges sales tax on other items instead*
- Amount of Tax to be Collected: Pennsylvaniacharges 8% sales tax while only 6% is being collected in Virginia for a pair of sneaker*
- Frequency of Filing by the Seller: Sales tax remission may be required twice a year in Denver, while you can do it annually in Los Angeles*
- Deadline for tax remittance: Due date for filing in South Carolina is set every 15th, while California requires sales tax return filing during the last day of the month*
*examples are for purposes of illustration and are not actual sales tax laws by the cited states and localities.
Takeaway: sales tax requirements are different among each state and this is something you should keep in mind as you go through this guide.
So, let's get started - here are 5 steps/questions to make sure you are on the right track to fulfilling your sales tax obligations:
Step 1: Do you have a sales tax nexus?
Amazon sellers are required to collect the sales tax on behalf of states where nexus is present. A sales tax nexus generally refers to the physical presence or connections a seller may have to a particular state.
Consider the following factors that may be applicable to establishing a sales tax nexus.
A) Physical presence of your enterprise (e.g., office, branch, warehouse, and other brick and mortar structure).
B) Other types of personnel (e.g., sales agent, contractor, third party supplier, or anyone involved in your business one way or another).
C) Any warehouse or facility where your inventory or supplies are stored
D) Third-party retailers selling your product or service on a commission basis
E) Temporary sales channel via trade show, state fair, or pop-up store which feature your product or service
If any of the above is present in your business, proceed with the following 3R steps:
- Read up on the state’s sales tax nexus laws and focus on the details,
- Request for corresponding legal writing from the state's taxing authority,
- Reach out to a legit sales tax expert.
Step 2: Is your product or service taxable?
Generally, most products and services are taxable for states where sales taxes is applicable. For example, jewelry and designer clothing are, more often than not, taxable for being premium items.
So, what is not taxable?
While most products fall into the taxable bucket, there are still a number of goods that may not be subject to sales tax in certain states.
Non-taxable goods may include household groceries, articles of clothing, over-the-counter and prescription drugs, vitamins, and supplements, hard copy and online reading materials ( e.g., books and magazines) and subscriptions, and digital media entertainment in the form of music and film.
However, the above exceptions are not across the board so it's safe to always verify with the particular state’s sales tax laws.
What are Amazon Seller product tax codes?
Amazon really comes through BIG with its product tax codes. Amazon Pro Sellers can use product tax codes (or PTCs), which will determine your sales tax obligations for products in particular states.
Let's look at an example. Say, a Christian book is up for sale, you would select the particular product tax code (A_BOOKS_RELIG) in Amazon. Amazon will automatically exempt it from sales tax collection as long as it is non-taxable in the state selected.
Using the PTC feature is much, much easier than doing it manually, so give it a try!
Step 3: Have you registered for a permit?
If you answered YES to questions 1 and 2, you have a sales tax nexus and a taxable product/service in a particular state. Unfortunately (fortunately for the state) you need to obtain a sales tax permit.
For nearly all states, you can register via the online platform of the Department of Revenue of the applicable state. Alternatively, you can also assign a professional to register for a permit on your behalf.
Step 4: Are you are aware of which sales tax collection system and frequency are applicable in your state?
A. Sales Frequency and Due Dates
Due Dates: Mark on your calendar the sales tax filing due dates for each applicable state. These dates often fall on the 15th, 25th, or last day of the month.
Frequency: You may have to send in your sales tax filing monthly, quarterly, yearly, or even bi-monthly. Sellers with high-volume sales may be required to file more frequently than average retailers.
B. Origin-Based vs. Destination-based
When determining your sales tax obligations, you must check where the state is origin-based or destination-based.
A state is origin-based when you are required to collect sales tax due to your location in the state as a seller.
For example, if you are selling in Texas (origin-based system), you will charge your own local sales tax rate to all your buyers in Texas.
Most states use destination-based sourcing in applying sales tax rules. If you are located in a state with a destination-based state, the sales tax depends on the state's address of your buyer.
So if you are a retailer in Seattle and your buyer's shipping address is in Dallas, you will apply the sales tax in Dallas.
Step 5: Do you know how much sales tax you have collected?
Eventually, you will need to file your sales tax returns. This can be quite overwhelming especially if you have made multiple sales to buyers from different states.
You will find it easier to file in origin-based states where a single tax rate is applicable (within a given state) than destination-based where complications may arise.
There’s no denying that sales tax filing can be tedious especially for those who have many transactions and even have sales tax nexus on different states.
Okay, so when should I start filing?
If the answer is YES to questions 2 to 5, then you are ready to file your sales tax returns accordingly.
A YES reply to question number 1 means, you will need additional measures in charging your sales tax.
You can do your filing electronically using the state’s taxing authority website or manually submitting the necessary forms. Don’tdelay or better yet, do it early so you do not incur penalties as a result.
If for some reason you filed late, some states may let you slide if it’s a first-time offense. Best to call them in this case and hope the customer service rep is having a good day.
Disclaimer: The above information is made available on a good faith basis and is intended only for general education. The article is not to advise on tax or legal issues. We recommend getting in touch with a duly certified tax professional or CPA to assist with any topics raised by this article.