How does Amazon Sales Tax Collection Work for Sellers?
Amazon began collecting sales tax from Washington sellers in 2018. From then on, Amazon sales tax collection spread across the US in a heartbeat.
This is a consequence of Marketplace Facilitator laws. Such statuses compel ecommerce platforms to collect and pay sales tax on behalf of sellers.
Online brands should be well aware of how Amazon sales tax collection works. It may seem complex at first glance. But it’s actually quite effective, once you have the know-how.
That’s why we’ve prepared a small guide to help you navigate Amazon sales tax collection successfully. Let’s dive right in.
What is Sales Tax?
A sales tax is a one-time fee which customers pay when they buy goods and services.
Then, the seller collects said percentage from the sale, and remits it to the government.
Note that state and local policies determine sales tax fees. For example, Amazon sellers must add 2.9% in Colorado, but 6.25% in Illinois.
In the end, it’s the customer who pays taxes, and online sellers must collect it. But for Amazon, this wasn’t always the case.
Back in the day, online consumers could buy a product and walk away without paying sales taxes. Things are quite different nowadays, and no one is more affected than retail hubs like Amazon.
The Marketplace Facilitator Law
Amazon did tax sales on its own products. However, it hasn’t always charged VAT on third-party sales. That’s why many US states have begun to enforce Marketplace Facilitator laws since 2017.
This came in part as a consequence of Amazon’s warehouses. By having a physical location in most US states, Amazon became liable for sales tax nexus.
A sales tax nexus means that you have a significant presence in the state, and that you need to pay sales tax.
Marketplace Facilitator laws encourage platforms like Amazon, that hold an active sales tax nexus, to do the following:
- Collect and pay seller sales tax on behalf of merchants.
- Post notices and report dues to customers and the government.
In the latter case, sellers should state that sales tax is due on a product purchase. They can do this using order forms, invoices and receipts to customers and the Department of Revenue.
But overall, it’s the selling platform who handles sales tax collection. However, third-party brands would still need to collect taxes from their own sales.
The problem is that sellers feel that charging taxes would discourage customers from buying products.
Plus, the reporting process can be quite complex. And the hassle of creating and delivering reports to each customer only adds to the weariness.
Luckily, Amazon has taken the initiative to comply with sales tax collection. Let’s find out how Amazon sales tax collection works for sellers.
How Amazon Sales Tax Collection Works for Sellers
As we said, the marketplace will take care of tax collection and remittance. This means sellers don’t need to worry about the sales tax nexus.
Plus, there are no extra fees for the tax collection services. Amazon will even take care of filling and submitting 1099-K forms.
That said, merchants still require sales tax permits. They also need to authorize Amazon sales tax collection in Seller Central.
It’s also important to learn how Amazon sales tax works. This will allow you to handle the legwork by yourself, in case Amazon does not collect taxes in a specific state.
Here are the steps to do so:
- Go to Amazon Seller Central
- Click on the “Settings” tab, and select “Tax Settings”.
- Select “View/Edit Your Tax Collection and Shipping & Handling and Giftwrap Tax Obligation Settings.”
Choose the states in which you want to collect sales tax by yourself. As of July 2021, Amazon does not collect taxes in Missouri. Plus, there are 4 states that do not have sales tax. These are Montana, Delaware, Oregon, and New Hampshire.
Amazon is set to collect the right sales tax for each US territory. You can also include product tax codes to charge the right amount of sales tax on specific items. For example, this includes apparel and groceries.
The collection is so well-oiled that it detects rate changes. It also tracks whether a state is “destination-based” or “origin based.”
Note that the marketplace usually charges 2.9% of each sale to collect taxes. Plus, sales tax collection is US-exclusive. International sellers must collect taxes by themselves in foreign countries.
Note: Make sure you have a state sale tax registration number before you set up your own sales tax collection status on Amazon.
Related content: Mexico: New Income Tax Considerations for Amazon Sellers in 2022
A Few Extra Tools
It’s paramount that Amazon sellers keep tabs on their tax sales information.
This is quite crucial, in case you collect and remit sales tax by yourself.
Luckily, there are a few great tools that can simplify the data for you. Let’s take a look at them:
Amazon Tax Document Library
Amazon can provide you with a full sales tax report.
Here’s how you can get it:
Go to Seller Central and open the “Reports” tab. Here you’ll find several types of Amazon Reports. These documents provide key insights of your Amazon selling strategies.
Here you’ll find the “Tax Document Library”, which compiles a lot of useful information about your Amazon sales taxes. For example:
- Tax Invoices for seller fees
- Tax-exemption certificates
- Tax Invoices for the Marketplace
Amazon’s Tax Document Library also features 3 types of sales tax reports:
- Marketplace Tax Collection
- Sales Tax Calculation Report
- Combined Sales Tax Report
Each option offers valuable insights that will help you stay on top of your Amazon sales tax duties.
Now, if you’d like to export your sales tax report, follow the next steps:
- Go to Sales Tax Reports and select “View the report.”
- Click on “Generate new report.”
- Choose the time period of the sales tax you want to export.
- Download your CSV file.
Tax Automation Software
Brands are always looking for all-in-one software to step up their Amazon game. One of the most sought-out solutions are tax compliance automation suites.
Such programs help sellers deal with local and state tax laws, so they can file their sales tax reports on time.
Two of the best options are TaxJar and Avalara. Both tools can collect sales tax data from your Amazon platform. Then, the apps take care of compiling the data in a simple CSV file.
Both software suites are also capable of VAT calculation, reporting and filing taxes.
Avalara is better suited for large brands, while TaxJar is ideal for small to medium sellers. We recommend you try each app separately, and decide which is the best fit for you.
Related content: TaxJar vs Avalara Review
It makes sense that Amazon handles sales tax collection and notices. Otherwise, brands would need to display the sales tax data on each of its product sales.
This would ruin the user experience, of course. But Amazon is a customer-centric business, and will always strive to give users the best experience.
Now, that doesn’t mean Amazon sellers are completely covered. For example, you’ll still need tax permits, and to pay the VAT applicable to your sales tax nexus. This is especially true if you also sell off-Amazon.
The good news is you don’t have to deal with much of the hassle of sales taxes.
So, prepare yourself to have Amazon sales tax charged. Also, consult with an accountant so you can sort out all the details involved. But rest assured that Amazon sales tax will have your back every step of the way.
Esteban Muñoz is an SEO copywriter at AMZ Advisers, with several years’ experience in digital marketing and e-commerce. Esteban and the AMZ Advisers team have been able to achieve incredible growth on the Amazon platform for their clients by optimizing and managing their accounts and creating in-depth content marketing strategies.
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