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.
Taxes are burdensome for businesses, but they are a significant obligation. We all need to comply with it to build a strong business foundation and tap on limitless opportunities.
However, tax compliance is easier said than done. It's a complex system that can cause you deep financial trouble when you don’t take it seriously and carefully. What's more, it gets even more confusing in e-commerce.
If you're new to Amazon sales tax and want to minimize financial trouble in the long run, let this article serve as your guide.
The Basics of E-Commerce Sales Tax
Before we get to sales tax on Amazon, here are a few things you should know about e-commerce sales taxes.
- The South Dakota v. Wayfair, Inc. is a 2018 court decision which states that online merchants must collect sales tax regardless of physical presence.
- Sales tax is a consumption tax that covers a minor percentage of your e-commerce sales.
- E-commerce businesses must use the “sales tax nexus” as a basis to comply with their tax obligations.
- A tax nexus refers to the connection between a business and a tax authority.
- The online sales tax rate for each country, state, and region is different.
- Washington D.C. and 45 other states in the USA implement online sales tax.
- The formula for calculating sales tax is
(Item Cost) × (State-Mandated Sales Tax Rate) = Total Sales Tax.
- To comply with your online sales taxes, you must (1) register for a sales tax permit, (2) set up your e-commerce tax platforms, and (3) file and remit sales tax according to the required schedule.
Sales Tax on Amazon: Things You Should (and Shouldn’t) Handle
Undoubtedly, Amazon is a massive and popular marketplace. It presents an exciting but challenging opportunity for online sellers.
You need to comply with Amazon sales taxes to stay in business. But which tax-related duties should you handle, and which are for Amazon to manage? Familiarize yourself with these things to save time and increase productivity.
Seller’s Tax Obligations
Determine Crucial Tax Variables
First, you must know three important variables before tax collection takes place:
- Identify where your business has a tax nexus or nexuses.
- Determine the tax authority.
- Understand how the tax compliance process works for each location you have a tax nexus in.
Without these, it is impossible to comply with consistent accuracy.
Configure Your Store for Tax Collection
If you're a US seller and want Amazon to collect sales tax for you, go to the Seller Central tax settings. There you can view or edit tax collection, shipping and handling, and gift wrap tax obligation settings.
Note that Amazon charges 2.9% per transaction to collect sales tax. However, letting Amazon collect sales tax on your behalf is only optional; you can pay out of your profits as an alternative.
Customizing Your Tax Receipts
You might need different sales tax receipt formats depending on the location and customers you sell to (for example, the B2B sector).
On Amazon, you can customize the logo and information of your receipts. However, it doesn't allow you to change all information. Therefore, you need an extension or a third-party service to help you automate your tax receipts.
Monitor Your Tax Registration Threshold
Suppose you surpass the sales threshold limit required in a specific state. In that case, you get an economic nexus. As a result, it changes your sales tax calculations.
Unfortunately, Amazon doesn't notify you about it, so make sure to monitor your sales constantly. Installing an automated alert system can help reduce the time and effort it takes to work on this.
Gather Necessary Data for Tax Returns
Amazon doesn't give you detailed information for tax returns. You will have access to an Amazon sales tax report, but it might not have all the data you need. However, you can still find the rest of the information you need within your Amazon account, albeit it can be a hassle.
Amazon’s Sales Tax Obligations
Collect Sales Taxes (For US Sellers Only)
As briefly mentioned, you can let Amazon take over sales tax collection in exchange for a 2.9% charge per transaction.
However, let's say you're collecting Amazon sales tax in Canada. Amazon won't pay or file sales taxes, but they can collect and send tax as an inclusion in your regular settlement. Still, you will need to conduct tax return filing and tax remittance to your tax authorities.
Provide a Sales Tax Report
Amazon gives you access to a sales tax report. It shows you (1) the states where Amazon collects tax on your behalf, (2) the states where you are obligated to collect and remit tax, and (3) the amount of sales tax required for states where you have a nexus.
Go to Seller Central, find Reports, and click Tax Document Library to view the report. From there, you may choose which of the following reports to generate:
- Sales Tax Calculation Report
- Marketplace Tax Collection Report
- Combined Sales Tax Report
Then, you may explore the available information from these reports and modify them according to your needs.
Amazon Sales Tax Exemption
Amazon allows tax exemption for individuals or organizations through the Amazon Tax Exemption Program (ATEP). They support tax-exempted items sold through Amazon.com and Amazon Services LLC, Amazon Digital Services, Warehouse Deals, and third-party sellers.
An Amazon Business seller is qualified for this program, while ATEP participants automatically get tax exemptions.
Seamless Tax Compliance with Unloop
Tax compliance on Amazon can be challenging. You need to understand what Amazon can help you with and which aspects you're solely responsible for. We hope this article has helped clarify these matters. However, if you're still a little lost, Unloop can be your reliable bookkeeping and accounting service provider.
Our sales tax filing services apply to Amazon sellers in Canada and the USA. We help you determine nexuses, register for tax permits, set up and manage sales tax platforms, and continuously monitor compliance.
Contact us today for more information.