Even in E-commerce, You Cannot Escape the Tax Man
They say that nothing in life is certain except death and taxes. You can be sure that the tax part is a certainty for your Amazon FBA business. As a seller on Amazon, you are going to be required to collect sales tax from many of your customers. You will not be able to escape this part of the business world. What follows is a little guide to help you understand the tax system and how it applies to your e-commerce business.
The Sales Tax World for Beginners
The first thing to know is that if your customers live in one of the 45 states and the District of Columbia that have a sales tax, you must collect it from them. This sounds pretty easy, but it is a little more complicated than that. Some of the 5 states that do not have a sales tax have cities or counties that do. That means you have to track those local areas and charge the right tax to your customers. Then, because the federal government provides wide latitude on sales tax rules, each state and DC have different rules to follow. You need to make sure you know the rules for each state and local area. They are some quirky rules like applying sales tax to shipping charges. Not all states have that regulation though. One good thing is that you do not have to send in the sales tax after each purchase. There are remittance rules which allow you to save the tax and submit it at one time.
When do you collect sales tax? Despite the different regulations, there are two firm requirements that are consistent throughout all tax levying states.
- Sales tax nexus- this simply means when you have a significant connection to a state.
- Product taxability- simply means if a product is taxable
What qualifies as sales tax nexus?
Here is how you can determine if you need to charge sales tax through the sales tax nexus criteria:
- You have a physical presence in a state
- Your employees live in those states
- You have business affiliates working in those states
- You use a 3rd party to deliver your goods to your customers in those states
- You sell products through trade shows, etc.
- You store inventory in those states
The best thing to do is find a tax consultant who is an expert on this criterion and let them help you make the correct tax identification. They will also help you find the exceptions to the rules as well.
What qualifies as product taxability? Services are not taxable but the real personal property is. Each state may have exceptions to this rule. Plus, they may have reduced tax rates for different items like grocery products. Again, it is best to get together with a sales tax expert and see where your products and services lie before attempting to charge or ignore sales tax.
Collecting Sales Tax The bad news is, if you try to collect sales tax from individual customers after every sale, you will lose money. It is just too time-consuming and costly to do this on an individual basis. The good news is that the online marketplace has this feature and will do the work for you. All you have to do is set up your seller settings through your central selling account and the Amazon will collect the sales tax for you. Simply go to:
- Seller central
- Click settings
- Find tax settings and click that
- Choose view/edit your tax collection…
- Select the states you are selling in and need to collect sales tax for
Keep in mind when you get Amazon to collect your sales tax, they will charge you an additional 2.9% for the service. Also, you will need a state sales tax registration number before Amazon lets you do all of this. This requirement protects you from breaking sales tax laws. The bad news is, this is just the first step in collecting the right sales tax. You may need help to complete the next step. After collecting the sales tax, you have to determine how much you owe each state and local community. This step is further complicated by the fact that along with state rates, local and city rates are added to your tax responsibility. Different zip codes have different rates added to their sales tax rate.
For example, one California zip code has the state’s 6.5% rate as its base rate. The Los Angeles county adds in their 1% rate. Plus, an additional 1.5% is also added to cover local rates. This means the sales tax for that zip code is not 6 ½ % but 9%.
Because there is nothing simple about collecting sales tax in any state, it is wise to make sure you double check all figures. Being safe is better than being sorry.
Becoming Sales Tax Compliant Like sales tax rates, there are rules to follow to make sure your e-commerce business is compliant with the different sales tax laws in each state. There are several steps to follow:
- Determine your nexus- you have to make sure you meet this criterion first before you start charging sales tax.
- Determine if your product is taxable- this is the other criterion you have to meet before charging sales tax.
- Determine the number of states you have nexus or taxable product- in other words, how many states are you selling it and how many of them charge sales tax.
- Determine the local rate- if you are selling in non-sales tax states make sure you know which local communities or cities charge a sales tax fee.
- Register with each state- Make sure you get a guide for each state you are to charge sales tax in and register with each state government. It is illegal to charge sales tax without a sales tax permit.
- You will receive your frequency submission timetable- once you get your permit, you will be assigned the date or dates you are to submit the collected sales tax. This may be monthly, quarterly or annually and the frequency depends on your sales volume. The more you sell the more frequently you have to submit the sales tax.
One note of caution. After you register, the state will communicate with you. Make sure not to ignore those letters or toss them out. If you want to add a product tax code to your Amazon FBA website, go to:
- Seller central
- Click on settings
- Click on tax
- Click on view master product tax codes & rules
- Choose the codes that will help you the most
What happens if you do not collect sales tax? You may skate by for a little while, but the IRS is like an elephant. They have a long reach and never forget. There are problems when you do not collect sales tax:
- You have to pay the uncollected tax yourself
- You will pay penalties and fines
- You can ruin your business and personal reputation
- You could go to jail
Some final words You may not like tax or collecting it. But you have to do it. The process is complicated as well as difficult to navigate. One way to make sure you handle each step of the process is to call a professional. They know the ropes and they can provide you with expert advice on how to get sales tax compliant. It may cost you a little extra money, but it is better than the alternatives You may want to be seen as the good guy and not collect sales tax. As you can see that is not a smart business move to make. Good businesses are the good guys as they protect themselves from violating laws and sales tax laws. They protect their employees, affiliates and other people using their services to help your business grow. If you do not collect sales tax you will be seen as a bad guy to them. Be businesses smart and make sure you follow the sale tax rules.