Practical Ecommerce

Getting Sales Tax Setup Right on Amazon

Every seller on Amazon has the responsibility of paying sales tax in those U.S. states where it has tax nexus. When the tax isn’t paid, that seller builds a tax liability that can be costly down the road. So why are so many Amazon sellers getting the sales tax process wrong?

To get sales tax right, there are three issues to tackle.

  • Where does a seller have tax nexus?
  • Is the sales tax being collected properly?
  • Is the sales tax being properly remitted to the appropriate states?

Tax Nexus

Tax nexus exists in the states where a business has a presence. Ecommerce sellers typically need to consider where they have physical offices and call centers — although many states include other factors, such as affiliates in that state and the location of Fulfillment by Amazon warehouses and whether those warehouses constitute nexus for FBA sellers. (If you are unsure which states you have a nexus, consult with a tax attorney.)

Regardless, if the seller has a tax nexus in a state, the seller is responsible for collecting and remitting sales taxes on deliveries to that state.

Collecting the Tax

Amazon allows sellers to opt into a program where Amazon will collect sales tax for sellers, based on the seller adjusting its tax settings in seller support to reflect those states where the seller wants sales tax collected.

For this service, Amazon will charge sellers a fee of approximately 2.9 percent of the collected sales tax. The seller is responsible for getting a sales tax ID number from each state where tax is to be collected. Then the seller has to add the tax ID number(s) into seller support.

Amazingly, I regularly see sellers that go through all of this work but then forget to click the boxes next to individual states to have the tax collection initiated at the state, county, and city level.

Amazingly, I regularly see sellers that go through all of this work but then forget to click the boxes next to individual states to have the tax collection initiated at the state, county, and city level.

But here’s the second step in the tax collection process: The seller either has to click the Tax Manager page’s “Use default Product Tax Code” box with the correct tax code, or assign each of its listings one at a time with a proper tax code so that the sales of those products are properly taxed.

If a seller doesn’t do either of these two steps, Amazon won’t collect state sales tax. Even though the seller entered specific state sales tax IDs in the tax manager tool, Amazon will instead use the “A_GEN_NOTAX” code, which applies no tax collection to the individual product.

It is critical, therefore, for sellers to refer to seller support’s guide of tax codes to see which of the dozens of tax codes should be applied to each product. The A_GEN_TAX code is the easiest default one to use to ensure sales tax is collected. But some items may qualify for a lower tax rate, requiring one of the many other tax codes available.

If sellers are assigning tax codes one listing at a time (likely because the same tax code doesn’t apply to every single item), those sellers should periodically request the Category Listing Report from seller support so they easily check the tax codes in place on every single listing in their catalogs.

Thus, only when the seller has indicated in what taxes sales taxes are to be collected, and on which products sales taxes are to be collected, will Amazon actually collect the sales taxes for the seller.

Paying the Tax

If a seller handles tax remittance itself, that task might be easy if the tax nexus responsibilities of the seller are limited, and those tax nexus states have simplified tax remittance cycles and processes. But even small sellers with tax nexus in at least two states have found this process of remitting tax time consuming.

Sellers should therefore consider low-cost software solutions provided by such companies as TaxJar, Taxify.co, Avalara (TrustFile), and Vertex SMB. These services keep track of the tax rates and rules in the more than 3,000 tax jurisdictions — states, counties, cities — across the U.S. and offer a streamlined process for sellers to make their tax payments quickly, on-time, and in full.

Sales Tax’s Impact on the Buy Box

A seller’s ability to win the Buy Box is not impacted by whether sales tax collection is turned on, as sales tax is not factored into the Buy Box algorithm. For participating sellers, the sales tax is added to the shopping cart only after the customer has selected the seller from which it will buy the product.

While customers can seek to avoid paying sales tax by not buying from sellers that share tax nexus in states where the customer is having its order shipped, Amazon has repeatedly seen that most customers do not change their seller choice once sales tax is added to the cart, near the end of the checkout process.

James Thomson

James Thomson

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  1. Tej December 8, 2015 Reply

    Thanks for the article.
    I sell like $200-$300 on Amazon and I don’t collect Sales Tax,I can pay estimated sales Tax on Tax Reurns.
    If Amazon collect Sales Tax,then Amazon will let me know,how much Sales Tax they collected.
    Please advise.

    • James Thomson December 8, 2015 Reply

      Thanks for your note, Tej. Whether you collect sales tax or not, you are responsible for paying it. Amazon can help you collect it through the “Tax Settings” in Seller Central, but that requires you get a sales tax ID for the states in which you have tax nexus. Once Amazon collects the tax, you are still responsible for making the tax remittance payment yourself.

  2. Carlos Rivera December 8, 2015 Reply

    Last year I had difficulty setting up my Amazon sales tax settings from within Seller Central. Just like your article stated, I thought I had my settings correct, only to find out that Amazon was not collecting taxes as I expected. Amazon’s Seller Support helped me correct this issue.

    I think the confusion with the tax settings can be partially blamed on the unique way Amazon sets up its tax settings (unlike other platforms), and the confusing Amazon interface /instructions on the tax settings page.

  3. Mike December 8, 2015 Reply

    Hi James, thanks for the article.

    I’m wondering if you have any advice for international (I’m Canadian) sellers selling within Amazon.com (US only).

    I’m selling through FBA and haven’t collected taxes since there’s been SO much confusion on how exactly international sellers actually pay/collect taxes. I’ve heard so many mixed messages since we have a tax treaty with the US and that I don’t have offices or anything in the US.

    Any assistance, links, articles, etc. are much appreciated!

    Thanks again :)

    • James Thomson December 8, 2015 Reply

      Thanks Mike – as a fellow Canadian, I feel your pain trying to do the right thing yet understand what you are actually supposed to do. I’ve seen articles like this one: http://www.salestaxsupport.com/blogs/industry/us-sales-tax-for-foreign-sellers/tax-treaties-us-sales-tax-nexus-foreign-sellers/
      that would suggest Canadian companies can still be subject to tax nexus, regardless of Canada-US tax treaties. However, the big question I would ask is in which states do you have FBA inventory? There definitely is a lot of speculation about what rules apply to FBA inventory, and the verdict is clearly not consistent across states. I have seen recent materials that say the Department of Revenue in California does not treat FBA inventory as alone triggering tax nexus for a non-California seller, whereas other states may treat this otherwise. Honestly, and yes I am putting this in writing, I suspect the vast majority of Amazon sellers could be in violation of tax nexus somehow as it relates to FBA inventory, but few states will go after these sellers until such time as there is a clear, national tax policy for Amazon FBA. Managing taxes is all about managing risk, and I suspect you will be fine as long as you never have a physical location of your own in the US and don’t sell millions in any particular state (so as to draw their attention)….but let me remind you that I am NOT a tax accountant or attorney, and the letter of the law and how it is being implemented right now are not particularly consistent because there is so much confusion.

      • Murray Kester January 13, 2016 Reply

        Do you have a link to those docs which say the Department of Revenue in California does not treat FBA inventory as alone triggering tax nexus for a non-California seller? I’d be very grateful to find those!

  4. Alba Rivera August 4, 2016 Reply

    Thank you. Very useful. This article really helped me with many questions I had. I’m having a hard time getting Amazon seller support to help me in setting up the tax collection page. They say that they can not help with my private tax info but I just don’t find codes for my handmade items.

    • Alba Rivera August 4, 2016 Reply

      I only have nexus in the state I live. Could you tell me if there any other Amazon form regarding taxes that I have to fill out prior to start selling on amazon.

  5. Megan Latek January 11, 2017 Reply

    Hi,

    Good read! Taxes confuse the hell out of me and as Im sitting here trying to fix my tax settings, Im seeing where I have to enter a tax ID for each state. Do I really have to get a number for each state or can I just use the one I have where I conduct my business?

    • James Thomson January 11, 2017 Reply

      Megan – if you are using FBA, you have most likely triggered sales tax nexus in more than a dozen states. I would encourage you to read the blogs of Taxjar, Avalara and Taxify.co to see more details on which states are most likely impacting your FBA business today. For most FBA sellers, they have unaddressed sales tax liability as they are not properly collecting or remitting sales taxes – while they probably won’t get audited by the individual states, that liability is nonetheless there, and growing every day that it is not addressed.
      If you aren’t using FBA, then sales tax nexus is a much easier issue – you need to look at where your company has offices, warehouses, call centers, etc. Those geographies will almost certainly cause you sales tax nexus issues.

  6. Kelly March 7, 2017 Reply

    Hello! thanks for this article… So now that Amazon is required to pay taxes in certain states, does this mean that Amazon will be collecting and readmitting sales/use tax or does the seller still have to do that? I’m confused?? Didn’t we (as a seller) have to alway be collecting taxes and then filing to the states where we have nexus?
    Thanks
    Kelly

    • James Thomson March 7, 2017 Reply

      Thanks for your note, Kelly. The issue has to do with who the seller is: while Amazon is required to pay taxes in certain states on products that it sells to Amazon customers, those requirements are not the same as what specific third-party sellers need to do when they are selling to Amazon customers. Each third-party seller has to evaluate its own sales tax nexus position – if it has a tax nexus situation, it can ask Amazon to collect the sales tax on Amazon marketplace sales, or the seller could choose to not collect the tax (paying out of its own pocket), or the seller may choose to ignore its tax nexus situation and neither collect nor remit the sales tax due (unfortunately all too common).