Amazon Sales Tax Compliance: What FBA Sellers Should Know
A major challenge for any ecommerce business owner is managing their sales tax compliance.
Understanding collection requirements, configuring your shopping cart or marketplace, managing the sales tax collected, and filing the returns is a complex and time consuming process.
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To make matters more complicated, for Amazon FBA Sellers, Amazon’s FBA service created a sales tax nexus in the 22+ states where Amazon has warehouses.
Meaning, if you are an Amazon FBA Seller and you’re making sales to customers in any of those locations, you should be collecting and remitting sales tax as well as filing sales tax returns in each of those jurisdictions.
So what should an Amazon seller do if they haven’t collected their business taxes properly?
Should they dip into their current cash flow to pay back sales taxes in multiple states?
Or, do they simply move forward, make the necessary changes to become a compliant seller, and hope they don’t get hit with an audit from the state?
Not to mention, how do you go about becoming compliant and how long does that process take?
These are just a few of the many questions that Amazon sellers face today.
We spoke with Scott Scharf, Co-Founder of Catching Clouds, a complete *sales tax management service that understands the complexities of sales tax compliance for online sellers as well as how to implement a manageable sales tax compliance process.
*Note: Catching Clouds offers sales tax management services but only as a part of their regular ongoing accounting services. They are an outsourced accounting department for ecommerce businesses.
What are the Challenges of Amazon Sales Tax & Accounting?
A. Most of the businesses who come to us don’t know if they are profitable or not.
For example, they will say, “I sold 3 times as much over the holiday season this year, but I have no idea if I made any money”, or “I don’t know if I owe a $1,000 in income tax or more?”
These questions rise up because their accountants are not technical enough and don’t understand the pace of their business. We typically work with either larger Amazon sellers or multi-channel sellers with multiple merchant accounts.
When you’re selling on more than one channel (or have more than one merchant account: Amazon Payments, Stripe, and/ or Paypal) the accounting becomes complex.
For example, you sold 100 widgets, and you shipped 100 widgets, but did you get paid for 100 widgets? And did you MAKE money on those 100 widgets?
If you don’t have accurate accounting, you can’t adapt and make the necessary business decisions.
Sellers want to know how profitable they are and how much money they can take out. For example, they need to know how much money they have available to buy inventory.
We spend a lot of time helping sellers implement the right back office tools, specifically cloud inventory solutions that allow them to create purchase orders and track what they’re purchasing. This allows them to track all of their orders so they can get profitability per order and per SKU.
It also allows them to track their inventory so they don’t run out either in their own warehouse or in FBA. We optimize this type of back office data and then we provide financial reports that they can use to better understand their business.
How Do Amazon Sellers Tackle Sales Tax Compliance?
A. Of course, the next big challenge for Amazon sellers is: Are they are willing to become compliant?
Despite what some people believe, any business that sells taxable products needs to collect sales tax in the jurisdictions where they have sales tax nexus. If you choose not to, it is a liability issue for your business.
Even though there are a lot of people out there trying to crowd source the answers about sales tax compliance, the laws are in place.
If a brand is building their Amazon business then they should be as compliant as possible (especially if they plan on selling the business one day.)
You will need to disclose your sales tax liability if you ever decide to sell the business and it’s important to note that the sales tax sticks to the original owner. For example, you can’t sell your business or declare bankruptcy and escape your sales tax liability.
If you owe California $20,000 and the state audits you requesting 50% to 100% in penalties, that’s a noticeable number! What we do is we have a risk management discussion with our clients so that they understand the cost to comply vs. the cost to their business if they don’t.
For every million dollars that an Amazon FBA seller sells (and you’re not registered in that Amazon FBA state), on average it’s going to generate about $60,000 in liability.
Sales Tax is so complex, and it’s very difficult to be completely compliant but you can get pretty close using tools like Taxify, TaxJar, Trustfile or outsourcing it to a sales and local tax expert, or to someone like us!
That’s the kind of conversation we have with sellers and then we let them decide whether they want to register in their own state, or the 5 big states (California, Texas, Florida, etc.), or in all 22 states with sales tax.
It’s not our job to enforce. If a business has made a decision to pay in 5 states and not all 22 then that is completely up to them.
I’m liable for outstanding sales tax, now what?
A. About 95 percent of all businesses will register as compliant (going forward) but prefer to run the risk of being audited for a prior period (when they were not compliant) rather than pay outstanding sales tax (plus any penalties & interest).
If you didn’t know you had a nexus and you didn’t collect sales tax during that time period, then the money you owe will probably have to come from your profits (money that you would use to pay yourself or invest in more inventory).
The bulk of business owners don’t want their sales tax liability to get worse, so they are compliant going forward but not willing to go back in time to pay an outstanding balance.
From a seller’s point of view, they might think, “Well, does the state want the $50,000 in sales tax I send in every year or do they want me to go completely out of business trying to pay back the fines that I already owe?”
It’s the seller’s choice to make that decision.
So, how long does it take to register in each state?
A. We have a partner that we work with and on average it can take about 2-3 hours to get registered in each state (sometimes faster depending on forms/process).
As soon as you are registered, you have to configure Amazon to start collecting sales tax for you. It’s better to use a tool like TaxJar or Taxify to pull the information together and then implement someone like us who can oversee to make sure all the returns get filed properly and that payments get made on time.
Keep in mind when it comes to sales tax, if you’re not registered you can be fined, but you haven’t necessarily done anything criminal.
But, if you collect sales tax and you don’t have a license or if you collect sales tax and you’re not registered in the state and you don’t give the money to the state, that’s criminal.
Are certain products exempt from sales tax?
A. Yes. We will provide high level overview but if someone wants an official nexus study, then we will partner them with a sales and local tax expert to double check the laws in their state and look at each of their products.
You might have a product like “baby formula” for example, that’s not taxed in 10 states. So, even though you have to register for sales tax in those states, you might not owe any sales tax on that specific product type.
What are your Amazon Sales Tax Predictions for 2017?
A. Unfortunately, Amazon is going to continue to negotiate deals that are better for Amazon.
Amazon is going to start providing lists of all of their Amazon sellers to the states where sales tax nexus is enforced. For example, “Amazon told us you’ve been selling products in California via FBA for 3 years, now you owe us $200,000 in sales tax penalties.”
We might see some legislation from Congress this year, but of course nobody knows exactly what’s going to happen. If they do, it will only add another layer of complexity that people will need to deal with vs. simplify and provide amnesty for everyone who didn’t know about nexus in the past.
Businesses should always stay 90% focused on the front end (selling better products, optimizing listings, etc.) but unfortunately, ignoring sales tax or not paying attention to cash flow can put you out of business.
We’re always trying to look out for sellers and help them run their business better. That way they can continue to fulfill whatever their big “why” is, whether that be paying for their kids to go to college, buying vacation homes, traveling, or donating to charity.
Money is not necessarily empowering, but what you do with it can be and we want to be able to support businesses so that they can support their lives and do something they enjoy.
For more on Amazon Seller Taxes, email [email protected]
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