3 Sales Tax Tips for Amazon FBA (fulfilled by Amazon) and Online Businesses
As an accounting firm that specializes in helping small online businesses with their accounting and tax matters we frequently receive questions related to the dynamic topic of state sales and use tax. If you sell on Amazon or run an e-tail business and have been involved in interstate eCommerce for any length of time you are probably familiar with the complexity and constantly evolving nature of this issue.
As recently as February 14, Congress reintroduced the Marketplace Fairness Act which is designed to give states the authority to compel online sellers, no matter where they are located, to collect sales tax at the time of a transaction. If passed, this bill will essentially eliminate the issue of “nexus” (link to a state such as a physical location) in determining if state sales and use tax must be collected.
To help sort through the current laws and pending legislation, I’ll answer a few of the most frequently asked questions that we receive on this issue.
Q. What are my obligations to collect state sales and use tax today as an e-tailer who sells directly to customers in over 30 states but with only one physical location in California?
A. Today, online sellers are required to collect state sales and use tax in states where they have nexus. The determination of nexus can become complicated but there are a few guidelines as to the type of situations that may create “nexus”. You likely have nexus (and would be required to collect sales and use tax) if your e-tailing business meets any of the following criteria within a particular state:
• One or more employees reside in that state
• At least one sales person travels to that state on behalf of your company
• Your company exhibits or otherwise participates in trade shows in that state
• Your company spends a substantial amount of its advertising within that state
• And of course, if your business has a warehouse or other physical presence within that state
In your situation, it sounds as if you only have nexus in California. If this is the case, then you only need to collect and remit state sales tax in California.
Q. I run an affiliate business – how does nexus and the Marketplace Fairness Act affect me?
A. Several states (Arkansas, California, Connecticut, Georgia, Illinois, New York, North Carolina, Pennsylvania, and Rhode Island) have recently passed their own legislation, often referred to as Amazon laws, regarding online sellers and state sales and use tax. For example, as of July 2011, California passed a new law requiring online retailers to collect state sales tax if the company has any business presence in California including companies that have business affiliates in the state. It can get a bit complicated but basically if your company has an affiliate in a state that has passed an Amazon law, and annual sales in that state through the affiliate exceed the $10,000 threshold, then you are required to collect state sales tax.
The Marketplace Fairness Act of 2013, when passed, will essentially reverse the Affiliate Nexus Tax laws that have passed in the nine states mentioned above and level the playing field. But until that time, if you meet the criteria above you are required to collect the state sales tax.
Q. We sell many of our products on Amazon and use their Fulfillment By Amazon (FBA) service. What are my obligations for the collection and remittance of state sales and use tax for sales made through Amazon?
A. If you maintain inventory in an Amazon fulfillment center you most likely meet the nexus standard for that state even if you do not reside in that state and your business does not have a physical presence in that state. Under this scenario you should register your business in that state and begin collecting state sales tax on taxable sales.
The mechanism you use for collecting state sales tax is most likely Amazon’s tax collection service. This is a convenient service provided by Amazon but note that they only collect the state sales tax. You, as the seller, are required to file sales/use tax returns. The frequency in which these returns are required can vary from monthly to annual or even occasionally.
As a side note, if you are issued a filing frequency by a state you should take this seriously and ensure that you meet their deadlines. If you do not file the returns when due you will be issued delinquency notices and it is possible that the state will go ahead and estimate your tax liability and assess your business for the estimated amount until the actual tax due is paid. If you manage your own fulfillment, then you need to determine if you have nexus in a particular state and if yes, collect state sales tax on taxable sales in those states.
For details on the proposed bill click here http://marketplacefairness.org/bill-text/
As an accounting firm specializing in helping eCommerce businesses, we’ll be watching this issue closely. If you have any questions about nexus and the impending legislation, contact me at 619-819-0252 or online.
About Dave Heistein
Dave Heistein is a Certified Public Accountant in the state of California. He is a San Diego CPA, as well as an advanced QuickBooks Pro Advisor and Instructor. As a small business owner, he is dedicated to educating and informing other business owners on bookkeeping, accounting and tax matters.
This post was written by Profit Wise Accounting