If you are an Amazon Seller, then you must read this article to know:
- What is Amazon FBA Sales Tax?
- How to Calculate Amazon Sales Tax for FBA Sellers?
- Will Amazon Collect Sales Tax From Third-Party Sellers?
Say you are an existing merchant (seller) or planning to sell on Amazon. One of the typical questions you may have is “Will Amazon Collect Sales Tax From Third Party Sellers like myself? Or does Amazon pay sales tax on my behalf?” Well, there is no doubt that merchants are increasingly encashing the opportunity to approach the large pool of customers through online marketplaces like Amazon. As per Online Marketplaces Report 2021, 62.5% of the global spending took place through online marketplaces.
Now, selling goods and services on online marketplaces may be easy. But, merchants must be aware of how these online marketplaces function and what are the laws that govern them.
Let’s first have a look at the key parties or players in the online market places. Once you are clear with this, we will then move on to the important online marketplace laws that you must be aware of as a seller. These laws will help you understand Amazon’s sales tax, why is it charged, how is it calculated, and will Amazon collect sales tax from third party sellers.
Key Players in the Online Marketplace
There are two parties involved in the online marketplace. These include
1. Marketplace Facilitators
Online marketplace facilitators are businesses that come into agreement with third parties for selling goods and services on their online platforms. These facilitators provide infrastructure to third parties so as to support sales.
Further, there are a host of services that these facilitators provide to third parties to facilitate sales on their platforms. These include:
- providing customer support
- listing products on their platform for sale
- processing or collecting payments
- setting product/service prices
- taking orders
- storage and fulfillment
- facilitating product returns or exchange
Amazon takes the lead in the United States when it comes to online marketplace facilitators. Other online marketplace facilitators include Walmart, Etsy, eBay, etc.
One thing that most third parties get confused with is that not all eCommerce platforms are online marketplaces facilitators.
2. Marketplace Merchants (Sellers)
These are third parties who sell their products or services by using the physical or digital infrastructure provided by the marketplace facilitators. Thus, merchants or sellers do not have to worry about having their own digital platform, payment processing, taking orders, etc.
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They simply use the digital platforms provided by marketplace facilitators to sell their goods or services. Some of the key advantages of selling through these marketplace facilitators include:
- increased brand awareness and visibility
- access to a large number of customers
What is Amazon FBA Sales Tax?
FBA sales tax refers to the tax that is charged on the sale of third-party products sent to the Amazon fulfillment centers as a part of its FBA program.
Fulfillment by Amazon (FBA) is a service in which Amazon provides access to its logistics network to businesses and thus helps them grow. In this model, businesses send products to Amazon fulfillment centers. Further, when a customer makes a purchase, Amazon handles receiving, packing, shipping, customer service, and returns for those orders.
Thus, the tax charged on the sales made by the third-party sellers under Amazon’s FBA program is FBA sales tax.
When a seller starts selling on Amazon, he must provide his identity and business location details for tax purposes. Amazon makes use of these details to calculate tax on sellers’ Amazon Store transactions if required under applicable law.
Note that, Amazon is obligated to calculate, collect, and remit applicable national, state, or local sales tax if the destination of the customer order is a location where Marketplace Facilitator Legislation is applicable.
Some countries have implemented Marketplace Facilitator regulations. These regulations require Amazon to collect and remit tax from the customers on behalf of the third-party sellers selling products on Amazon. In such cases, Amazon uses the details that third-party sellers provide to determine whether it should calculate tax on seller’s sales or whether it is the obligation of sellers.
Thus, it is extremely important for sellers to keep their account details accurate and up-to-date. In case a seller fails to provide accurate details, it may result in incorrect tax calculations and additional costs to the seller’s business.
What is Sales Tax For Amazon FBA sellers and Why They Should Charge?
Typically, it is the responsibility of a seller to determine their own sales tax calculation and remittance obligations. In addition to this, they are also required to register for sales tax with all the required states, set up their tax calculation, and remit any tax calculated on their orders to the state.
Note that Amazon will automatically collect and manage sales tax if the order is delivered to a state implementing the Marketplace Tax Collection laws at the time of order.
Thus, U.S. third-party settlement organizations and payment processors, including Amazon, are required to file Form 1099-K for U.S. taxpayer sellers who meet the following criteria in a calendar year:
- The minimum gross payment transaction threshold for a merchant to receive Form 1099-K from PSEs for FY 2022 is $600.
- The number of transactions for which the taxpayers had to file such a return prior to FY 2022 was 200.
In case the seller does not meet both of these thresholds, he will not receive an IRS Form 1099-K.
The Amazon seller must update the following tax information to complete his U.S. Tax Identity Information Interview:
- Taxpayer Identification Number (TIN), an Employer Identification Number (EIN), or a Social Security Number (SSN).
- Appropriate tax identity in the form of a W-9 in case of the U.S. taxpayer, Form W-8 for merchants, individuals, or entities who are not U.S. persons, or W-8BEN in case of a foreign taxpayer asking for tax exemption.
- US address, US banking information, or other identifying information of a non-U.S. taxpayer to connect such a seller to the US.
However, it is the responsibility of the seller to collect and manage sales tax for orders on which Amazon does not automatically collect tax.
Also, the seller selling goods on Amazon must provide Amazon with an appropriate tax identity in the form of a W-9 or W-8BEN form. Provided, the seller is a U.S. taxpayer. A seller needs to complete the tax interview in their Amazon seller account in order to provide an appropriate tax identity.
Note that the IRS requires U.S. taxpayers to provide their Taxpayer Identification Number (TIN) for the administration of tax laws. In most cases, the taxpayers’ TIN is either an Employer Identification Number (EIN) or a Social Security Number (SSN).
In case the taxpayer is a foreign seller and not a U.S. taxpayer, he will still need to complete the tax interview. The responses that the taxpayer provides to the tax interview questions will create the appropriate tax form on their behalf.
The IRS regulations require non-U.S. taxpayers to provide Form W-8BEN to Amazon in order to be exempt from U.S. tax reporting requirements.
Thus, the Form 1099-K that Amazon provides the sellers is reported to the IRS based on the information the sellers provide during the US tax identity interview.
The seller can generate the IRS Form 1099-K using the information from his Selling on Amazon activity, Amazon Pay, Mechanical Turk (MTurk), and Flexible Payments Systems (FPS), plus Invoicing.
Note that the taxpayer must calculate the unadjusted gross sales in the Gross Sales section of Form 1099-K. The seller needs to add the following amounts for both Standard and Invoiced orders to calculate Gross Sales:
- Product sales
- Product sales tax
- Shipping credits
- Shipping credits tax
- Gift wrap credits
- Gift wrap credits tax
- Promotional rebates
- Promotional rebates tax
Likewise, the income section in the Amazon Seller Account of a seller showcases the amounts against sales, credits, and refunds. The following are the line items in the income section that a seller can use to fill Form 1099-K:
|Seller fulfilled product sales||The total amount of seller’s product sales for seller-fulfilled products.|
|FBA product sales||The total amount of seller’s product sales for Amazon-fulfilled products.|
|Shipping credits||The amount that the buyers pay for shipping.|
|Gift wrap credits||The amount that the buyers pay for gift wrap.|
|Promotional rebates||The amount deducted from the seller’s account balance for promotional offerings.|
Finally, the Sales Taxes section in the Amazon Seller Account includes the taxes collected on product sales and services. The sales tax is collected from buyers for product sales, shipping, and gift wrap. This amount may include deductions for promotional rebates.
How to Calculate Amazon Sales Tax for FBA Sellers?
To know how to calculate Amazon Sales tax, it is important to understand where you as a business must collect and remit tax. Remember, you as a business are not obligated to collect and remit sales tax everywhere.
To know the places where you have such an obligation, you need to know the states where you have an economic nexus. The economic nexus depends on the volume of sales you are able to make in a particular state. Thus, economic nexus is not based on the physical presence of your business but on the level of economic activity undertaken in a particular state.
Now, there are various business activities that can create the nexus obligation with a particular state. Some of these include drop shipments, multistate locations, commissions to resellers, etc.
Accordingly, as marketplace sellers, you need to be cautious of the following two things.
1. If you have your inventory stored in a particular state, this may prompt a nexus with that state apart from New York.
2. Likewise, you must be wary of your economic activity in a particular state. This is to see if you have created an economic nexus with that state and if such a state has marketplace facilitator laws.
States Having Both Economic Nexus and Marketplace Facilitator Laws
There can be various scenarios under this.
1. If You Are a Remote Multichannel Seller
This means that you sell your products on the marketplace as well as via other channels and have no physical presence in that state. In such cases, you must register and collect sales tax on sales that the marketplace facilitator does not tax.
2. Being Only a Remote Marketplace Seller
This refers to the case where you sell only as a remote seller via the marketplace facilitator and have no physical presence in that state. In such cases, you don’t need to register and collect taxes even if you share a nexus with that state.
3. You are an In-State Multichannel Seller
This relates to the case where you have a physical presence in the state and sell goods both through the marketplace and other channels. In such cases, you must register and collect sales tax from customers on sales that are not taxed by the marketplace facilitator.
4. You are an In-State Marketplace Seller
This is the case where are have a physical presence in a state and sell goods only through the marketplace. In such a case, you must register under state sales tax and get in touch with the state for further details.
What to Do With All the Sales Tax You Have Collected?
Once the sales tax is collected, Amazon sellers need to file sale tax returns. Such returns need to be filed with the state and local authorities with which sellers have an economic nexus. The frequency of tax return filing depends on the number of revenue sellers collect from taxable sales.
Note that businesses with growing revenues need to file tax returns frequently to facilitate the remittance of tax. Remittance of sales tax and filing of sales tax are two separate things.
Remittance of sales tax is also called payment of sales tax. Whereas, the filing of sales tax returns is the process of determining the jurisdiction where the sales tax needs to be filed. Further, it filing of sales tax also involves completing the required paperwork for sales tax filing to the appropriate state and local authorities.
Now the question that arises is what are the circumstances in which an Amazon seller must file sales tax returns? To understand this, let’s first have a look at the three laws that Amazon sellers must know.
I. Marketplace Facilitator Legislation
As per the Marketplace Facilitator legislation, Amazon is responsible for calculating, collecting, and remitting sales tax on behalf of third-party merchants. These merchants are the ones who sell their physical products, digital goods, and services through Amazon. This means Amazon is a Market Facilitator for these third-party sellers.
Thus, it is responsible to calculate, collect, and remit the sales tax on the goods that merchants sell and deliver to their customers. These customers are located in the states that have enacted Marketplace Facilitator legislation.
Marketplace Facilitator legislation is a set of laws that shifts the sales tax collection and remittance obligations from a third-party seller to the marketplace facilitator.
Note that Amazon collects sales tax on behalf of its third-party sellers only when Marketplace facilitator laws are imposed in a state where sales are made. In simple words, only the states on Amazon’s marketplace facilitator list have sales automatically collected and remitted.
II. Economic Nexus Rule
Another rule that marketplace sellers need to understand is the economic nexus rule.
Economic nexus is an obligation on the part of the sellers to collect sales tax depending upon their level of economic activity within a state. This means the economic nexus law is based entirely on sales or transactions made into a state. It is no more about having a physical presence in a state to collect sales taxes.
Note that once the seller reaches the sales threshold in a state, the seller is required to register for sales tax in such a state.
III. Non-Collecting Seller
There are sellers who are not obligated by law to collect sales tax in a jurisdiction. But this does not stop them from tax reporting to the appropriate state and local authorities.
Such sellers are required to intimate customers about their potential use tax liability. Also, such sellers need to supply customers with annual purchase summary reports.
In addition to this, such sellers must provide the taxing authority with customer information so they can ensure use tax is reported on sales.
To understand, what happens once sales tax is collected, we need to consider the following scenarios.
I. Alabama Has Both Marketplace Facilitator and Non-Seller Use Tax Reporting Laws
As per Alabama’s tax laws, any marketplace with sales exceeding $250,000 is required to collect & remit sales tax on behalf of its sellers. In such a case, there is no need for the marketplace sellers to collect and remit sales tax.
Also, any marketplace facilitator that exceeds the threshold of $250,000 in sales may opt out of collecting sales tax. This can happen provided the marketplace facilitator complies with the state’s non-collecting seller use tax reporting requirements. Thus, if the market facilitator does not comply with reporting laws, then marketplace sellers may be required to do so.
II. New Jersey Has Only Marketplace Facilitator Laws
The next scenario is the case where a marketplace facilitator sells products in a state, say New Jersey, that has only marketplace facilitator laws. In such a case, the marketplace facilitator is required to collect and remit sales tax on sales made into the state on behalf of the seller.
This is despite the fact that the seller is registered with New Jersey for the collection and remittance of sales tax. Although, the marketplace facilitator and marketplace seller may enter into an agreement with each other regarding the collection and remittance of sales tax.
Will Amazon Collect Sales Tax for Third Party Sellers?
Many third-party sellers selling their products on Amazon have the following questions:
- Will Amazon collect sales tax from third party sellers like myself?
- Does Amazon Pay Sales Tax on My Behalf?
Well, the answer to these questions is both ‘Yes’ and ‘No’. Amazon is a marketplace for sellers to sell their products and services alongside those sold by Amazon. As per the Marketplace Facilitator legislation, the sales tax collection and remittance obligations get shifted from a third-party seller to the marketplace facilitator.
Accordingly, Amazon is responsible for calculating, collecting, remitting, and refunding state sales tax on sales that third-party seller makes in states where Marketplace Facilitator legislation is enacted. This means the state where Marketplace Facilitator legislation is applicable, in such states, it is the responsibility of Amazon to calculate, collect, and remit sales tax to local or state governments on behalf of the third-party sellers.
Note that there are certain states where the local taxes are not included within Marketplace Facilitator Legislation. For sales tax on transactions affecting in such states, Amazon is not responsible.
Further, the tax collected will depend upon the product that third-party sellers sell based on each jurisdiction’s marketplace tax collection legislation on Amazon. Further, to determine whether the product is taxable, Amazon requires product category and the item description that the seller provides or selects when creating a product listing.
However, if the products are shipped to a customer in areas not covered under Marketplace Facilitator Legislation, the seller is responsible for tax calculation, collection, and remittance obligations.
It is important to note that Amazon is only responsible for collecting and remitting taxes that state law requires. It is not responsible for filing taxes on the seller’s behalf. This includes any income or gross receipts taxes that may be due on the sales made by the seller into the state.
In Which States Will Amazon Collect Sales Tax From Third Party Sellers?
The following table showcases the states where Marketplace facilitator legislation is applicable. In these states, Amazon needs to collect sales tax on behalf of third-party sellers.
|3.||Alaska (no sales tax)||25.||New York|
|7.||Delaware (no sales tax)||29.||Oklahoma|
|8.||Georgia (starts April 1st, 2020)||30.||Oregon (no sales tax)|
|19.||Montana (no sales tax)||41.||Wisconsin|
|21.||Nevada||43.||Colorado (Amazon Sellers have to pay)|
|22.||New Hampshire (no sales tax)||44.||Illinois (Amazon Sellers have to pay)|
|45.||Washington State (Amazon Sellers have to pay)|
The following table showcases the states where Marketplace facilitator legislation is not applicable. In these states, Amazon is not responsible to collect sales tax on behalf of third-party sellers.
Amazon Sales Tax Loophole
In 2017, the states realized that Amazon was taxing sales of its own products and not the sales made by the third-party sellers on the platform. This meant that a huge part of sales was not taxed given that more than half of all Amazon transactions take place through its marketplace.
The very reason Amazon did not charge sales tax on third-party supplier transactions was the fact that it was a marketplace facilitator and not the actual seller. Amazon was of the view that it just provided a platform to facilitate the sales that the third-party sellers made on its platform. Hence, it was not responsible for collecting the sales tax. Amazon emphasized that the collection and payment of sales tax was the responsibility of the seller, not the market facilitator.
This meant a huge loss of revenue for states from marketplace sales. Thus, to overcome such an issue, the Marketplace Facilitator Legislation was launched in 2017. This legislation has shifted the burden of sales tax collection to the marketplace facilitator. Further, each state has its own set of Marketplace facilitator laws.
In addition to this, sellers including marketplace facilitators can opt-out of the marketplace facilitator law. For this to happen, the sellers must comply with the non-collecting seller use tax reporting requirements as mentioned above.
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