10 Sales Tax Myths Every Amazon Seller Needs to Know
- August 2, 2015 | Michael Ansaldo
Sometimes it seems as if Amazon’s third-party sellers have spawned more myths than the ancient Greeks. Most of them center around the collection of sales tax, and taking them as writ is as good as sending an engraved invitation to the tax man. Here, we put our polygraph to 10 of the most popular and give you nothing but the facts.
1. Internet sales are tax-free.
While fading fast, one of the most persistent myths is that online retail is a tax-free zone. It’s not. Sales tax is triggered by nexus: if the retailer has a physical presence--a distribution center, administrative office, or even a single employee--it is subject to the sales tax laws of that state. Currently, Amazon says it charges sales tax on items shipped to 25 states.
2. Collecting sales tax is Amazon’s responsibility.
Amazon calculates and collects sales tax on orders on your behalf according to your instructions. But that’s as far as its responsibility goes. You’re responsible for understanding your sales tax obligations--which will depend on the location(s) of your business and the tax laws in those states--and communicating them to Amazon. Once it has collected the money on your behalf, Amazon won’t touch the sales tax; the onus is always on you to manage, file, and remit.
3. Amazon automatically collects sales tax.
The truth is you have to enable sales tax collection. To do this, you must provide your state tax registration number for each state in which you want to set up Amazon’s tax collection service. If you haven’t yet registered to collect sales tax in the states in which you do business, our handy guides can help you get started.
4. My products sitting in Amazon fulfillment centers don't trigger nexus for me.
Wrong. Amazon charges you a storage fee--based on calendar month and your daily average volume--for anything you house in one of its fulfillment centers. Essentially, you are renting that space, and nexus in that state is passed on to you. How FBA nexus affects your sales tax responsibilities varies by state, so check out our detailed FBA Seller's Guide to Sales Tax for more information.
5. To limit nexus exposure, I can request Amazon put my inventory in a single state.
Like the hippest DJs, Amazon fulfillment centers don’t take requests. Amazon chooses the destination fulfillment center where your inventory will be stored based on your address, the shipping address, the size and category of the product, and “other fulfillment factors.”
Don't be surprised if the inventory you initially shipped to the FBA warehouse in Arizona is transferred to a warehouse in a different state--thereby triggering nexus in that state.
6. Amazon's Inventory Placement Service will let me choose where my goods are stored.
Some sellers believe they can get around myth No. 5 by using Amazon’s Inventory Placement Service, but that’s based on a misunderstanding of how this option works. Normally, when you create a shipping plan, your inventory might be split into shipments to different fulfillment centers based on the types of products and the location from which you’re shipping. By enabling the Inventory Placement Service, you’re requesting that your entire inventory be sent to a single fulfillment center. However, the location of the fulfillment center is still determined by Amazon.
7. I’ve signed up for Fulfillment by Amazon so I have to register to collect sales tax in every Amazon state.
Not necessarily. As we mentioned above, your sales tax obligation is determined by various factors, and our FBA Seller's Guide to Sales Tax is a good place to bone up on the details for each state. But you should definitely keep a close eye on where your products are being stored so you can get registered in those states if you’re not already.
8. The Amazon Seller Central forums can provide expert tax advice.
The forums are useful, but the suspicious word here is “expert.” As with any online forum, opinions are the coin of the realm here. And though many Amazon sellers offer valuable information based on practical experience, it pays to remember you are most likely not speaking with a qualified tax professional.
9. I’m not based in the United States so I don’t have to worry about sales taxes.
OK, technically this is true--if you’re not participating in the FBA program (or any other fulfillment service based in the United States), which as we mentioned above in No. 4, will trigger nexus.
10. The government doesn’t care about me. I’m just a tiny seller.
There’s a grain of truth to this. If you neglect to pay sales tax on your Amazon sales, you’ll likely suffer no consequences at first and may even boost your bottom line. But eventually, there's a good chance a tax auditor will catch up with you, and you’d be lucky if he did so sooner rather than later as he’ll require you to pay all uncollected taxes out of your own pocket. Considering it can take years to end up on the tax collector’s radar, there’s a real risk rectifying your tax situation could bankrupt you and destroy your business. Is it worth it? Only you can decide.