What Amazon FBA Sellers Should Know About Sales Tax Nexus
What Amazon FBA Sellers Should Know About Sales Tax Nexus
Sales tax laws vary from one state to another, and even from one city or county to another in home rule states. This has created many headaches for eCommerce businesses that sell to customers all over the United States. If your business has enough of an economic connection to a particular state, such as by selling a substantial amount of products to that state’s residents, you could be responsible for collecting and paying sales tax there. This economic connection is known as “nexus.” If you use a third-party service, such as Fulfillment by Amazon (FBA), to handle fulfillment and shipping for you, that service might be responsible for collecting and paying sales tax for you under “marketplace facilitator” laws. An eCommerce accountant who has experience dealing with multistate sales tax issues can advise you on what you need to know.
What Is Sales Tax Nexus?
The word “nexus” simply means a connection or link between two or more things. In the context of sales tax, it means a connection between:
- A business that provides taxable goods or services; and
- A state that collects sales tax.
A business automatically has “physical nexus” with the state where it is located. Out-of-state businesses could have physical nexus with a state where they store inventory. They may have “economic nexus” once their sales hit a certain minimum amount. While the minimum amount for economic nexus differs from state to state, it starts at $100,000 in sales or two hundred transactions in a year. Some states set the minimum higher than that.
A business that uses a service like Amazon FBA can sell their products to customers all over the country, and possibly internationally. If they sell enough in a state with economic nexus laws, though, they might be responsible for sales tax.
Failure to collect and pay sales tax when required can result in serious penalties, starting with civil fines that can be in the thousands of dollars. Most states have an exception for out-of-state businesses that use services like Amazon FBA, however, known as “marketplace facilitator” laws.
What Is a Marketplace Facilitator?
As the name suggests, a marketplace facilitator facilitates sales for other businesses. Amazon’s FBA service is one of the biggest examples of this. Marketplace facilitator laws require the facilitator to collect and pay sales tax on behalf of the sellers that use its services.
Amazon has developed a sophisticated system for tracking, collecting, and paying sales tax on behalf of its FBA sellers. If you are a seller with Amazon FBA, you can set up sales tax collection in the “Seller Central” area of the website. This takes the burden off each individual seller to handle sales tax in many states.
Five states currently have no marketplace facilitator laws. Four of those states, Delaware, Montana, New Hampshire, and Oregon have no general sales tax. The fifth state, Missouri, has a law that includes economic nexus and marketplace facilitator sales tax provisions, but it will not become effective until January 1, 2023.
All of the other states, plus the District of Columbia and Puerto Rico, have marketplace facilitator laws. Kansas and Missouri were the last two states to enact such laws. Kansas’ law took effect on July 1, 2021.
What Products Are Taxable?
Even if you have determined that you have nexus in a particular state, you will only have to collect and pay sales tax on products that are taxable. As with so much involving sales tax, every state has its own laws, and they can differ from one another in unexpected ways.
As a very general rule, tangible goods are subject to sales tax. Certain goods that are considered essential, such as groceries, might not be taxable. Again, though, the rules about what is taxable and what is not taxable vary greatly between states. Some states tax grocery sales. Others do so at a lower rate.
Since we are talking about sales through Amazon, it is likely that many or most of the products you sell will be taxable. You can contact the taxing authority in a particular state to get more information.
How Does This Affect My Business?
Suppose you have a brick-and-mortar store, and you also sell products online both through your own website and with Amazon FBA. Amazon will collect and pay sales tax for online sales in most states with marketplace facilitator laws.
You are responsible for sales tax on products you sell from your physical location. You are also responsible for sales tax on sales you make across state lines through other means, such as mail-order catalogs, your own website, or other websites besides Amazon, if there are enough sales to create economic nexus.
Do I Have Physical Nexus in a State Where Amazon Stores My Products?
This is a controversial issue with no easy answer. Amazon has fulfillment centers in at least twenty-six states. FBA sellers can obtain information from Amazon about where the company is storing their inventory. Storing inventory in a state is often construed as creating physical nexus, and Amazon FBA sellers have no control over where Amazon stores their goods. An eCommerce accounting professional can help sellers keep track of inventory stored by Amazon.
Whether you owe sales tax in a state because of physical nexus may depend on which states are involved. Each state has its own definition of “physical nexus.” One state’s laws might specifically mention that inventory stored by a third-party fulfillment company does not count towards physical nexus, while another state might define the term so broadly that any inventory stored in the state counts. On top of that, states have different approaches to enforcement. Some states, like California, are particularly aggressive about collecting sales and other taxes from eCommerce businesses. They might be likely to scrutinize who has inventory stored there. Other states are less assertive.
What Do I Need to Do, and What Happens if I Do Nothing?
Hopefully, this post has not been too discouraging so far. Everyone finds this subject to be head-spinning. You are probably wondering what you need to do.
If you have not already done so, you need to register in every state where you have sales tax nexus. This most likely includes the states where you sell through Amazon FBA. You need a sales tax permit even if Amazon collects and remits sales tax on your behalf.
You should also familiarize yourself with Amazon’s sales tax tools for FBA sellers. Amazon can provide a wealth of information to help you prepare sales tax returns, if necessary. It is prudent to keep track of your sales tax obligations, even if Amazon is handling the collection and remittance. Additionally, using FBA services could have implications for sales made through non-marketplace facilitator channels like Shopify.
As mentioned before, Amazon handles collection and remittance of sales tax when legally required to do so. That could change in the future. The company is mounting a legal challenge to at least one state’s marketplace facilitator law. State revenue agencies are likely to focus on Amazon, at least for now, since it has the deepest pockets. If the laws change, though, states might start looking to the sellers themselves, and they might not care whether an eCommerce company was overwhelmed with uncertainty. Failure to pay sales tax can result in serious penalties, starting with civil fines. Luckily, sales tax accounting professionals are available to help you.
Learn More About Your Sales Tax Obligations
If you would like to know more about marketplace facilitator laws, economic nexus, and whether your eCommerce business should be collecting sales tax in certain states, please contact us today to learn more. Our experienced eCommerce accountants are available to help you.
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