An overview of the basics of retail sales taxes
Amazon has revolutionized the way we do business. It has also changed the way in which we think about sales tax. Online shopping has been a popular way for consumers to shop. However, they were not subject to sales tax. Local tax authorities have noticed the loss of millions in sales tax revenue due to increased online shopping.
Amazon has taken deliberate steps to protect dropship sellers who use Fulfillment by Amazon against the long arm of state Department of Revenue. Amazon’s continued growth and the need for efficiency to offset its investments in the company have led to the establishment of fulfillment warehouses in many states. Amazon is now subject to state nexus, which is a crucial criteria for the DOR of each state to collect, file, and remit sales tax.
More recently, changes in tax compliance laws as a result of South Dakota v. Wayfair, Inc. have completely changed how Amazon marketplace sellers are exposed to sales tax compliance issues.
Amazon dropshipping sellers must be familiar with the following four components of tax management in order to avoid being audited and remain tax compliant.
- Determining which states you have nexus.
- Registering to apply for a sales permit in every state where you have nexus.
- To collect the correct amount in sales tax, set up an Amazon account.
- Timely filing and submitting state and local sales tax returns.
Nexus and its effect on compliance with sales tax
Did you know that not all Amazon dropship sellers must file state sales taxes? It is true. Let’s discuss how states decide who they must collect sales tax. Before we get into which Amazon dropshipping sellers have to pay sales tax. It all boils down to a concept called nexus.
Nexus can be defined as “connection to or presence in a state”. It’s the first thing to think about when assessing how your business will handle sales tax exposure. This is the home state for most businesses. You must report the sales tax you collect on the taxable goods that you sell through Amazon, brick and mortar stores, or other e-commerce platforms. Many businesses do business outside their home state. There are many factors that could open up a business to outside connections, such as a remote office, traveling salesperson, or product stored at a state warehouse.
Amazon dropship sellers: The impact of South Dakota v. Wayfair, Inc.
Economic nexus is spreading across the country in the wake of South Dakota, Inc. v. Wayfair, Inc. It’s important for ecommerce dropship sellers to use Amaon, as well as any other marketplaces such Etsy, Walmart or Craigslist, to keep in mind that states can tax remote sales in other ways. These are the nexus-triggering events
- Affiliate nexus: ties to affiliates in-state
- Click-through Nexus (links to in-state websites).
- Cookie nexus: Putting software or apps on devices in-state
- Tax on marketplace sales (facilitator liable)
- Non-collecting seller tax reporting (noncollecting sellers must share information about consumer use tax)
Register with the state tax authorities
Once a company has established nexus with a state, they must register with the Department of Registration in order to collect sales tax. You can register online at the state DOR website. After processing the application, the business will be issued a sales tax permit that they must display at the place where they work. The local taxing authority may determine the rate at which they can collect sales tax from customers.
Once you have successfully registered to collect sales taxes, you can start collecting sales tax. Sales tax is usually collected at the point where the sale occurs. Customers can see the exact amount of tax by asking businesses to display the sales tax amount separately. This is not a problem for brick-and-mortar sellers as the sales receipts and checkout systems can print the amounts separately. Online dropshipping sellers will need to replicate this page showing the sales tax calculation separately from the item’s cost. Amazon handles this all for you. You are only responsible for the sales tax that you have collected and submitting it to the appropriate taxing authority.
It is important to understand that a business collecting sales tax is not revenue collection and should not be treated as such. Sales tax is collected by the appropriate taxing authority. Online purchases are subject to tax based on the buyer’s shipping address. These funds are held by businesses until they are transferred to the state. Businesses act as trustees or custodians.
State sales tax sourcing
Amazon sellers don’t have to calculate sales tax rates. This will be done for them by Amazon. It is helpful to understand how sales tax is calculated. Understanding which state’s sales tax rate is used, the ship from state rate or ship-to rate, is the first step.
Each state can be classified as an “origin-based sourcing”, “destination-based sourcing” or “mixed source” state. The following are the differences in how each state treats taxation:
Source state based on origin
- Sales tax is applied to products based upon their origin (ie. Ship from address) to facilitate intrastate transactions (transactions that take place within the same state).
- There are currently eight origin-based sourcing states. These include Arizona, Illinois Mississippi, Missouri New Mexico Tennessee, Utah, Virginia, and Tennessee.
Source state based on destination
- Sales tax will be applied to products that are located at their “destination”. The ship-to address.
- There are 38 origin-based sourcing states currently: Alabama, Alaska Arkansas, Colorado. Connecticut. Delaware, Florida. Georgia. Hawaii. Idaho. Indiana. Iowa. Kansas. Kentucky. Louisiana. Minnesota. Montana. Nebraska. Nevada. New Hampshire. New York. North Carolina. North Dakota. Oklahoma. Rhode Island. South Carolina. South Dakota. Vermont. Washington. West Virginia. Wisconsin. Wyoming.
Mixed sourcing state
- Sales tax can be applied to products that are based on product, service, and unique jurisdiction rules.
- There are currently four mixed sourcing states: California (Ohio), Pennsylvania (and Texas).
You can find more information about state sourcing by visiting our help video or downloading our whitepaper on origin vs. destination tax.
Amazon dropship seller filing sales tax returns
Amazon marketplace dropshipping sellers who collect sales tax must file regular returns with local and state tax authorities, depending on where they are located. The amount of revenue a seller collects from taxable sales will determine the frequency of tax returns filed. For the first year of their existence, most businesses will file returns every year. As a business grows, and its revenues increase, sales tax is collected more frequently. To facilitate tax revenue remittance sooner, the state and local tax authorities will likely set quarterly or monthly filing deadlines.
Important information for Amazon sellers: filing sales tax returns is not the same thing as remitting sales taxes revenue (also known under paying sales tax). Filing a sales tax returns involves the breakdown of sales tax collected by the jurisdiction, and the completion and submission of the required sales tax paperwork. Businesses often file returns and remit taxes simultaneously. We think of filing sales tax return as the act of filing , and remitting.
Amazon sellers need to be aware of potential sales tax compliance issues
Common risks for Amazon dropship sellers who collect and file sales tax returns. The Supreme Court’s recent South Dakota v. Wayfair, Inc ruling has overturned Quill Corp. in North Dakota and drastically changed the sales tax compliance of Amazon sellers. Sellers should ensure that their books are in order. They must log all sales, sales taxes collected, receipts, returns and tax-exempt purchases to avoid being audited. These are the four most important risks that Amazon dropship sellers need to avoid.
Not collecting sales tax on Amazon sales
The days of Amazon selling online could not be trusted with sales tax. The South Dakota v. Wayfair, Inc Supreme Court ruling in favor of state overturned Quill Corp v. North Dakota (1992), and allowed states to tax remote sales. Based on the amount of sales you have made, sales tax may be due in all remote states. You must understand your tax exposure and collect it accordingly.
Businesses are also at risk when it comes to filing sales tax returns. Failure to file by the deadlines can result in penalties and interest. It is always better to file early or on time.
Incorrect amount of sales tax
Even if you collect sales tax from Amazon customers, do you know if the tax rate you are paying is appropriate based on state rules and the product? Understanding the impact of your Amazon store’s setup on sales tax collection can help you to make an informed decision.
Missing sales tax filing deadlines
There is no one-size fits all deadline for filing tax returns for local and state sales taxes. Make sure you know which deadlines apply to each state and local filing location. For late filings, most tax authorities will charge a small penalty.
Sales tax filing form errors
You can still make mistakes if you are filling out local and state sales tax filing forms manually. In the last decade, technology has advanced tremendously. Amazon dropship sellers now have access to cloud-based sales tax filing services such as Avalara Returns for Small Business that help to automate the sales tax compliance process.
Amazon’s Sales Tax
It is worth taking a moment to understand how Amazon collects sales taxes. The Amazon marketplace is able to calculate the tax due for all 50 states and Washington DC. It also has some local jurisdictions.
Amazon does not collect product-specific excise or gross receipt taxes. It is not prohibited for states to refer to sales tax in other ways than “excise” or “gross receptions tax”. These terms are often used interchangeably with sales tax.
Amazon sellers of taxable items are subject to taxes based on the total sale price. This price includes item level shipping, handling and freight charges, as well as item-level discounts and charges for gift wrapping. There is an additional charge for handling and shipping, as well as a discount at the order level.
The amount of sales tax that is applied to an order will depend on many factors, including the buyer, type of product, and ship-to address.
How to export Amazon’s sales tax data
Every day, we receive questions from users who want to export their sales data in CSV format from their ecommerce, shopping Cart, or accounting software. We can help! Although many platforms have instructions, they can be hard to find. Amazon users have the answer.
Here are step-by-step instructions on how to export sales tax data from Amazon Seller Central. To get started, log in to your Amazon account.
Before we begin, however, it’s important to note that Avalara Returns for Small Business users can connect directly to their Amazon Seller Central account and sync data automatically – no CSV files, Excel files, or other complicated nonsense. That being said…
Instructions for downloading the Amazon sales tax report
- Log in to your Amazon Seller Central Account
- Navigate to “reports”.
- From Sales Tax Report, click “View the Report”.
- A popup will appear when you click “Generate a new report”
- Select the period you wish to export sales data from within the popup
- Download the sales tax report after it is generated.
You should also consider other tax-related topics for Amazon sellers
Apart from properly setting up an FBA account for sales tax collection and filing tax returns, dropshipping sellers should also be aware of other tax-related situations and events.
How to manage refunds and exemptions
You don’t need to worry about tax-exempt purchases and refunds if you’re enrolled in Amazon FBA. The responsibility of managing these events falls on the shoulders of Amazon ATEP program. To receive a refund on sales tax, purchasers must submit tax exemption documentation from the state where your items were shipped.
Customers may contact you to request a refund of sales tax if you are not an Amazon FBA participant. To manage tax exempt customers, consider using Avalara CertExpress, our free-to-use exemption certificate management software.
The effect of state sales tax holidays
Sales tax holidays are temporary periods during which no state sales tax is collected on qualifying items. There are two types of sales tax holidays. The first is a holiday that occurs at the start of school, which allows consumers to buy educational items like clothing, computers, school supplies, and other school supplies without tax. The second, which is set before the hurricane season begins, allows consumers to buy hurricane preparedness supplies without tax.
Amazon participates with sales tax holidays. This means that qualifying products purchased from customers in qualifying states during these periods will be exempted from tax.
Changes in economic nexus thresholds
States are now publishing new guidelines regarding remote sales taxation in light of South Dakota v. Wayfair, Inc.
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