Disclaimer: Please note this article is not financial advice. The purpose of our blog is purely educational, so please consult a professional accountant or financial advisor before making any financial decision.
When you purchase items on Amazon, you might see an additional tax in the amount you need to pay on your receipt. Amazon is an eCommerce site, and it is no different when you buy goods in grocery stores or dine-in restaurants, and you need to pay for value-added tax (VAT) or sales tax. Just like other stores, the government mandates Amazon to collect taxes on its behalf.
Amazon created internal settings connected to collecting taxes that made it easier for business owners to remit sales tax to the government. Does Amazon charge taxes, and how does it work? Dig deeper, and let’s answer this million-dollar question.
A sales tax, particularly in the United States, is when the state and local governments such as counties, districts, or cities collect a percentage of the sale of a commodity from business to customer. The charge is a portion of the item's price, and there could also be charges on transfer costs. In Canada, sales tax is equivalent to goods and services taxes (GST).
Remember that income tax differs from sales tax or GST—income tax is a portion paid by the seller from their income, while sales tax or GST is a percentage of the retail price paid by the buyer. The government collects both taxes. An entrepreneur must know what items are subjected to tax and where to send the tax money. Here are the following steps you can apply to collect taxes on the goods or services you sell:
STEP 1: You have to register your business in states where you must collect sales tax.
STEP 2: Collect sales tax when customers buy your products or services.
STEP 3: File your sales report to the relevant state and turnover those sales taxes to each state.
Another thing you need to keep in mind is that you do not have to pay sales tax when buying goods to resell them. You can register for tax redemption status with retail companies such as Target, which allows you to increase your profit by removing the sales tax—this is known as Amazon arbitrage. Every state has its own unique sales tax rates and rules. If you fail to pay for sales tax, local governments can find ways to ruin your business.
Sales tax is regulated locally, not nationwide or globally—this is either by city, county, or state. When a sales tax is collected in multiple levels, it is now called the combined rate. Each of the 50 states and non-state United States territories, such as the District of Columbia, formulated their own sales tax laws independently from one another. Alaska, Delaware, Montana, New Hampshire, and Oregon are the five states that don't collect taxes.
You also need to remember that sales tax may vary from product to product. Clothes come at a lower rate of 0.50%, while restaurant foods are at a higher rate of 4.20%.
If you are selling in Amazon, you are considered a remote seller—an entrepreneur located in one area but ships products to customers in another area. A remote seller can collect sales tax if the seller has a nexus in the recipient’s state. When we talk about nexus, it simply refers to your presence in one area or state and can be classified as physical and economic.
A physical nexus is composed of employees, contractors, and warehouses. If you are a remote seller and you have an employee, contractor, or warehouse in a different state, it means that you have a physical nexus on that specific area.
You can have an economic nexus when you attain a minimum amount of annual sales in a state. Your annual sale is measured using your sales revenue and the number of valid transactions. Currently, 28 out of 50 states require sales tax upon reaching the $100,000-mark or 200 transactions.
The nexus works differently in Canada. In case you are a non-resident who has business in Canada, you need to register for GST/HST purposes once your business exceeds the $30,000 annual threshold. You have to register for PST if you have a physical presence in the form of a third-party warehouse in Canada.
For example, if you sell your product for $60 and when that product ships 200 times or more within a year to customers in Indiana, congratulations because you reached the economic nexus in the state of Indiana.
Keep in mind that as a remote seller who has a physical or economic nexus in a state, you are already required to collect sales tax. When collecting sales taxes, you don't need to worry about collecting the correct rate for every sale. There are applications available that contain all the tax jurisdictions you need for your business.
Does Amazon charge sales tax on purchases? Technically speaking, Amazon does not have the power to charge taxes because only the government can exercise such authority. However, Amazon has a user setting where a business owner can set up tax collection depending on the state or location.
Here are the steps you need to follow to collect taxes:
TIP: You can easily find the right code for whatever you are selling when selecting a category code for Default Product Tax Code. If you're not sure or your product is not on the selection, select A_GEN_TAX since it is a generic product tax code.
REMINDER: You can apply the same steps above if you need to collect GST/HST in Canada. All you need to do is go to Tax Settings and select the province where you need to collect the tax.
Now that you know how to set up tax charges and add states using Seller Central, it is very important for you to familiarize yourself with where to file your sales tax report. You can hire a bookkeeping business like Unloop, which is partnered with TaxJar—a leading technology solution for business owners to manage their sales tax. You may also file your sales tax report online by simply logging into your account and then filling out the forms required.
If somebody asks you the question: Does amazon charge sales tax on purchases? You already know the answer. It is clear that Amazon does not charge tax, but business owners can collect sales tax using Amazon. Having a sophisticated program, Amazon makes it easier for its users to compute sales tax by providing options and the correct tax rules for each location. Remember, even if Amazon is remitting the sales tax on your behalf, you are still responsible for filing the return. You can also hire accounting firms that are experts in eCommerce sales tax compliance.Are you looking for better ways to spend your profit? Then read Businesses In Ontario After-Tax Income: 5 Brilliant Ideas On How To Spend Your Profit and do the right things for your hard-earned money.
Unloop is the first and only accounting firm exclusively servicing ecommerce and inventory businesses in the US and Canada. With the power of people and technology, our team dives deep into COGS and inventory accounting. You are paired with a dedicated bookkeeping team that prepares accurate financial statements, financial forecasts, and can also pay bills or run payroll for you. Come tax time, everything is organized and ready to go, so you don't need to worry. Book a call with an ecommerce accountant today to learn more.