Guide to Sales Tax Collection in Amazon
Chapter 2: Sales Tax 101
Amazon has changed the way we do business. It has also changed the way in which we think about sales tax. For years, consumers shopped online shielded form sales tax (but not consumer’s use tax, but that is another story). However, with increased online spending, local tax jurisdictions have taken notice of the millions of dollars in lost sales tax revenue.
Amazon has taken very deliberate steps to shield sellers utilizing Fulfillment by Amazon from the long arm of state Department of Revenue offices. However, with the ongoing growth of Amazon and the need to find further efficiencies to offset investments in the company, Amazon has set down roots in a collection of states by opening warehouses. The creation of warehouse locations exposes Amazon to state nexus – a critical criteria for the legal responsibility of the state DOR to require sales tax collection, filing, and remittance.
Sales Tax 101 for Amazon Sellers
Did you know not everyone selling products on Amazon has to bother with collecting and filing state sales tax? It’s true. Before we talk about which Amazon sellers do and do not have to manage sales tax, let’s talk about how states determine who they need to collect sales tax from. It all comes down to something known as nexus.
Nexus is defined as a “connection to or presence within a state” and it’s the first thing you want to consider when looking at how your business will manage sales tax exposure. For most businesses this starts with their home state. Wherever your business is headquartered, you have nexus and must collect and report sales tax on the taxable goods you are selling through Amazon, through a brick and mortar store, or any other e-commerce platform. However, many businesses operate beyond the borders of their home state. Whether it’s a remote office, a traveling sales person, or product stored in a state warehouse location, there are many triggers that can open a business up to nexus beyond their home state.
Once a business has determined they have nexus in a state, the next step is register with the state Department of Registration to collect sales tax. This can be done online by visiting the appropriate state DOR website and completing the registration process. Once the application has been processed, the business will receive a sales tax permit they must display at their place of business. They may now collect sales tax from customers at a rate determined by the local taxing authority.
Collecting Sales Tax
Once you’ve successfully registered to collect sales tax, you are ready to start collecting sales tax. Sales tax is generally collected at the point of sale. Businesses are required to show the sales tax amount separately so customers can easily see the amount of the tax. For brick and mortar sellers, this typically isn’t a problem as sales receipts and checkout systems are set up to print the amounts separately. For online sellers, however, the “shopping cart” page needs to mimic this presentation showing the sales tax calculation separate from the cost of the purchased item. Amazon, of course, handles all this for you. Your only responsibility is to hold the sales tax you’ve collected until you are required to remit it to the appropriate taxing authority.
It is important to remember when a business collects sales tax it is not collecting revenue and the funds should never be treated as such. Rather, sales tax belongs to the appropriate taxing authority and, in the case of an online purchase, is taxed based on the shipping address of the purchaser. Businesses serve only as trustee or custodian of these funds until they are remitted to the state.
Origin vs. Destination States
Determining which tax rates to apply to a sale is based on a topic known as “sourcing”. States have either “origin based” or “destination based” sourcing.
Filing Sales Tax Returns
Depending on how much a business collects in sales revenue, they are assigned a sales tax filing schedule. Typically, this is annually for every business during the first year of existence. However, with more revenue comes more collected sales tax. As one might imagine, state taxing authorities are always anxious to get their hands on tax dollars. As your business grows, you’ll find your filing schedule accelerate from annually to quarterly and eventually monthly.
It’s important to point out that filing sales tax returns is not the same as remitting sales tax (also known as paying sales tax). Filing involves the process of breaking down the sales tax collected by jurisdiction and completing and submitting sales tax paperwork to the appropriate State Department of Revenue. However, for all practical purposes, we think of filing sales tax returns as a combination of filing and remitting.
Sales Tax Risks
Collecting and filing sales tax returns isn’t without risk. Any business collecting sales tax can be audited at any time by the state Department of Revenue. As such, businesses should be careful to keep their books in order and log all sales, sales tax collected, and receipts.
Filing sales tax is another area where businesses are exposed to risks. Missing filing deadlines generally results in fines and interest on the taxes due. It’s always best to file on time (or early).