Amazon & Marketplaces

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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