FBA (fulfillment by Amazon) has made it possible for entrepreneurs to tap into the company’s logistical operations and earn big profits. If you are a new Amazon seller, you may have come across the FBA sales tax guidelines.
With its confusing terminology and varying tax rates in all 50 states, FBA sales tax can be overwhelming. This beginners guide helps you navigate sales tax requirements, including different tax terms, how it’s calculated and tax compliance.
A quick note: This guide is only an overview of Amazon FBA sales tax and does not constitute tax advice. If you require tax advice, please consult a reputable tax advisor or accountant.
With that out of the way, let's unpack the topic of FBA sales tax.
What is sales tax?
Also known as consumption tax, sales tax is a one-time tax that applies specifically to the sale of goods and services. Retailers must collect the right amount of tax from their consumers based on tax laws in their area and where they do business.
Entrepreneurs pay the sales tax they collect to the state they do business in. Different states have different legislation, and you will need to learn what applies to you — and what doesn’t.
Do Amazon FBA sellers have to collect sales tax?
Generally, yes. If you want to become a seller on Amazon, you need to know when to pay sales tax. It’s not as easy as it sounds — you can have different sales tax collection obligations depending on the products you sell, where you operate and where your customers are located.
Some items you sell may be taxed, while others may not be. Plus, you may need to add together district, city, county and state sales tax rates to get a combined tax rate.
Luckily, Amazon does this for you by automatically adding the sales tax when a consumer purchases a product. But you still want to be aware of different ways sales tax is applied and when you might not have to pay it.
What is sales tax nexus?
A sales nexus is a legal term used if a business has a significant presence in a given state. It establishes a connection between your business and a taxing jurisdiction. If your business establishes a nexus, the state will collect sales tax from you.
As an FBA seller, you may have nexus in multiple states depending on how you do business. Some of the elements that create a nexus include:
- Physical location
- Employees and contractors
- Selling at craft markets or trade shows
Knowing about the sales nexus is crucial to how you conduct business. If your business collects sales tax in a state where you’re not registered to do so, it’s performing an illegal activity. You could face significant consequences if any state decides to conduct a sales tax audit of your business.
FBA tax depends on your state
Different states charge sales tax rates according to various criteria. Most states are destination-based, but some are origin-based. Here’s what that means:
- Destination-based sourcing uses the buyer’s local rate to calculate the sales tax amount regardless of where your business is when you sell the item.
- Origin-based sourcing is based on your location when selling to a customer, no matter where the product is shipped to or picked up from.
Remember that your business may have a nexus in more than one state, especially as an FBA seller. You can review the list of Amazon fulfillment centers to discover where you might have established nexus. But to find out where your Amazon inventory is, follow these steps:
- Sign in to Seller Central
- Select the Reports tab and choose “Fulfilment” from the drop-down menu
- Find the Inventory Event Detail report under the Inventory section
- Specify the date and download the file
- Open the report in Excel and look for the column “fulfillment-center-id”
The spreadsheet will show the fulfillment centers where your Amazon FBA inventory is currently stored.
Who is exempt from paying Amazon sales tax?
Some sellers don’t have to pay Amazon sales tax. Amazon FBA sales tax doesn't apply if you:
- Don’t have a sales nexus
- Sell tax-exempt products (groceries, supplements and clothing)
- Operate in a state that doesn’t have a sales tax (New Hampshire, Oregon, Montana, Alaska, and Delaware)
If any of those apply, you won't have to collect and pay tax on Amazon sales.
How do you collect sales tax on Amazon?
You’ll need a sales tax permit to collect tax. After that, you’ll set up a sales tax collection with Amazon. Here’s how:
Step 1: Get a sales tax permit
Your business must have a sales tax permit before it starts collecting and paying sales tax in most states. You’ll need to comply with the sales tax laws in states where you have a nexus.
Visit the state tax authority website to learn the rules and get the forms. Some states have a streamlined process, while others are complex and expensive, so your experience depends on where you’re doing business.
Step 2: Turn on tax collection
Your Seller Central account is the hub where you set up Amazon tax calculation services. Once you log in, go to the Settings drop-down menu and select Tax Settings.
You’ll need a state tax registration number for each state you need to collect tax in. From there, Amazon has a detailed step-by-step process that walks you through from start to finish.
How do you report and file Amazon tax?
Amazon calculates, collects, reports, and refunds sales tax in states where the Marketplace Facilitator legislation is authorized. To see the total sales tax Amazon collects:
- Start by signing in to your Seller Central account
- Go to the report tab and select the Tax Document Library
- Scroll down and click Generate a Tax Report
Amazon will ask what report type you need. Once downloaded, you navigate to find the information relating to the total tax collected.
Protecting your Amazon business with NEXT
Collecting and paying Amazon sales tax is never going to be the best part of being a seller. However, understanding basic terminology and context helps you make better business decisions in the long run.
While NEXT can’t make managing taxes simpler, we do make it simpler for you to insure your business. Trusted by over 300,000 small businesses, NEXT Insurance can help Amazon sellers find the right business insurance coverage at an affordable price.
We help you meet Amazon’s insurance requirements if you have a Pro Merchant account or want coverage to protect your e-commerce business. You can get a quote, buy coverage and have a certificate of insurance in less than 10 minutes.