Is a Sales Tax Permit Needed to Sell on Amazon?
- April 10, 2015 | Ryan O'Donnell
Most questions related to sales tax don’t have a simple answer and sales tax permits for Amazon sellers fits squarely into that category. For most sellers, the answer is yes, to sell on Amazon, you will need a sales tax permit - at least in your home state. To better understand why this is the case, let's consider the details impacting Amazon sellers and how they dictate where you need to apply for sales tax permits.
Setting Up Taxes in Amazon Seller Central
If you're new to selling on Amazon, we recommend you review our Amazon Sellers Guide to Sales Tax. It will help you understand the Amazon sales tax setup process. It is important to remember Amazon doesn't know who your customers will be so they cannot advise you on setting up sales tax settings. It is up to the seller to do the necessary research and understand where sales tax should be collected.
Suppose you plan to have Amazon charge sales tax to customers located in New Jersey. You will want to navigate to your Amazon Seller Central tax collection dashboard and check the appropriate boxes for the state of New Jersey. Before you can save this setting, Amazon requires you to enter your sales tax permit number (in this case, the New Jersey permit number). However, turning these fields on and entering these numbers are not required and are easy to overlook if you don’t understand the tax implications. Since Amazon doesn’t know where you are selling when you set up your account they can’t require the proper information to be completed. Let’s start with the simple example.
Collecting Sales Tax in Home State
The most obvious place a business must register to collect sales tax is their home state. The very essence of nexus is satisfied by your presence in your home state. All sales of taxable goods to residents of your home state require the seller to collect and remit sales tax. Where you are selling (Amazon or otherwise) is irrelevant. Nexus laws are very clear about seller responsibility for home states. Before you sell your first item, get a valid permit.
The Tax Implications of FBA
After you've started selling, your business starts to grow and you decide to sell on Amazon. You join Fulfillment by Amazon and ship your product to one, or several of Amazon’s fulfillment centers. This is where things gets tricky.
Nexus, also known as sufficient physical presence, is the determining factor of whether an out-of-state business selling products into a state is liable for collecting the tax on sales in the state. It is a topic unto itself and we will cover nexus in a separate post. Nexus is created once a substantial physical presence is established. Unfortunately, substantial physical presence is not clearly defined by each state. The regulations around this are rapidly evolving as states try to close the loopholes in laws and regulations that have diminished sales tax revenue as a result of internet purchasing.
Generally speaking, the shipping of goods to an Amazon Fulfillment Center creates nexus in that state. Let's imagine the Fulfillment Center housing your inventory is located in California. Since your business is in Washington and the Fulfillment Center is in California, you now have nexus in at least two states - Washington and California. You would now need to have a valid sales tax permit in California as well as Washington. You would be required to collect and remit sales tax on sales to residents of either state.
Exceptions to the Rules
As with anything in the world of sales tax, there are some rare exceptions you should be aware of. A good example is a casual sale (a one-off sale...imagine selling your used blender). Casual sales do not require sales tax to be collected. Another example is selling tax-free goods. In Minnesota, for example, clothing is tax exempt. This is somewhat irrelevant for Amazon sellers not located in Minnesota as there are no Amazon warehouses in the state, but it highlights the fact that some states have unique tax exemptions. Be sure to do the necessary research on the states in which you have nexus and are selling goods through Amazon. It is up to you to make sure you remain in compliance with state and local taxing authorities.