All About Sales Tax (Amazon FBA)

It's intimidating, it's overwhelming, and it can be massively confusing sales tax. As an online seller or business owner, you need to know about it. And today, I will help you understand how it works, set it up correctly, and get a system in place for Amazon FBA sales tax collection so that you can run your business with confidence. First of all, let me establish what sales tax is and what it is not.

What is sales tax?

Sales tax is when the state and local governments collect a retail product from business to customer. The charge is a percentage of the product's price, and sometimes there's going to be a tax on the shipping. Now, you've experienced this more times than you probably want to. Even now, in a brick-and-mortar retail store. 

You go to Target, you purchase a new cat hammock for your favorite feline, and even though the retail price is $20, you're going to pay an additional amount on that product.

You see, the store collects it from you and then delivers that sales tax to the government or remits it to the government, who then uses it to fund schools, roads, fire departments, and tons of other things. If you're from Europe, you know this as VAT; value-added tax. In the US, we call it sales tax and sometimes just tax.

So, how is sales tax different from income tax?

 

Income tax is when you pay a percentage of your net income to the government. But the sales tax is when the buyer pays a portion of the retail sale to the government.

Do I have to pay sales tax when I purchase products to sell?

And the answer is no. You do not have to pay sales tax when you buy from a manufacturer. Second, you don't have to pay sales tax when purchasing from Walmart or Target to resell Amazon.

Pro-tip

Register for tax exemption status with retail companies like Walmart, so you can do Amazon arbitrage without the hassle of paying sales tax, which will increase your profits.

So, how does sales tax work?

You're Doing the business. How do you know what to collect and where to send the money? I'm going to give you several steps.

Step one

You register in states where you are required to collect sales tax.

Step two

You collect sales tax when customers buy your products.

And step three

You will file a report for your sales to the relevant states and remit that sales tax to each State. Now get this, not only does every State have different sales tax rates and laws, so do local governments, like the city, the Country, the township.

How can I possibly keep up with the tax laws for 11,000 tax jurisdictions?

Well, the good news is you don't have to, but if you were dead serious about building and scaling a business that makes you a ton of money, you need at least to understand

some basic principles, and then you'll know what to do in any situation without having to learn 11,000 tax jurisdictions across the excellent US survey.

Now, before I show you exactly how to set yourself and your business up for success, you may be thinking, "Why can't I ignore sales tax? Is anyone going to come after someone like me?"

Yes. Local governments can and will ruin you if you fail to pay. I know a guy who started his own lawn care product company in Nevada. He grew his business incredibly fast, selling all across the US and a lot in California. He was supposed to collect sales tax from customers, but he didn't.

Even though he operated out of Nevada, California took notice. In three years, he gets a letter from the California Franchise Tax Board. He opens it, and to his horror, not only did he owe tens of thousands in fines and back taxes, but he did not have a collected sales tax to remit.

To protect my business, what do I need to understand about sales tax?

Sales tax is determined at the state, country, and city level, not the federal, international level. Sales tax is collected on these multiple levels, State, county, and city. So, when you combine all these rates for local and State taxation, this is called the combined rate. 

Each of the 50 states and non-state US territories like DC wrote up their own set of sales tax rules independently. The five states that will never collect sales tax from you unless something changes in Alaska, Delaware, Montana, New Hampshire, and Oregon. Even though Alaska has a sales tax, they do not have it on a state level. 

Therefore it's not relevant to you unless you are in Alaska selling to Alaskan customers. Arbitrage Amazon sellers like to buy products from these five sales tax-free states before reselling the consequences because this saves them much money, and of course, it increases their profit margins.

Well, who keeps that trail paved? Who holds the trash picked up?

Services are paid with sales tax. Second. Sales tax can vary from product to product. So, cities will often tax some goods like restaurant meals at a higher rate, like clothing at a lower rate. Some cities also collect taxes for other things like purpose districts and what is called Transit Authority Tax. Austin does this.

So, for example, take a look at the combined tax rate for Austin, Texas. El Paso, Texas, however, collects sales tax at a combined rate of 7.25%. All sales tax for states was initially set up before the internet and before online entrepreneurial-ism like Amazon private label before it even existed. And then it became the opportunity it is today, increasing the number of remote sellers. So, 

What is a remote seller?

You, the online seller, are classified as a remote seller for more than pay than, but pay than, but0,000 than $100,000 when you are someone whose business is located in one State, but you're shipping products to customers in another state.

Just like that lawn care seller who's located in Nevada, but he was selling in California. He is a remote seller. Remote sellers only have to collect sales tax when you have nexus in the State where the product is received.

In other words, where the customer's located, nexus is just a fancy word for presence in a state, And there are two kinds of nexus: physical and economic. So, you can have a physical presence in a form and have an economic reality in a state.

So, what is the physical nexus?

If you have an employee, a contractor, or a warehouse, then you have physical nexus in that State where they're located. If your products, for example, are stored in an Amazon. The Fulfillment Center in that State also counts as a physical nexus. For instance, if your business is located in Texas, then you have physical Nexus in Texas.

So, when you sell products to Texas customers, you must collect sales tax at the Texas combined rate on where the product is received. But now, let's change the scenario. Let's say you have a satellite office in Ohio. So, that means you have a physical nexus in the State of Ohio.

So, when you ship products to customers in Ohio, you must pay the Ohio combined tax. And to be clear, it's technically the customers who produce it. You collect it, and then you remit it. You pay it to the State of Ohio. Now, let's change it up again

What if the contractor in Rhode Island worked for you just one week of the year?

If she worked for you for at least two days in the year, you have a physical nexus in the State of Rhode Island for that entire year. Okay, wait, Seth, what if my products are stored at an Amazon Fulfillment Center in California? Well, then you have a physical nexus in the State of California.

Now, keep in mind, if your company is registered in Delaware, for example, where your business is registered, it does not, by default, give you nexus in that State. It would be best if you had in the operations, or employees, or contractors, or fulfillment centers in that State to qualify for physical nexus.

So, when does physical nexus obligate me then for sales tax?

If you have a physical nexus in a state, when you ship products to customers in that State, you have to collect taxes from the customer and remit it to the State where it was shipped.

Here comes the big question. 

We understand what the physical nexus is, but what is the economic nexus? Economic Nexus means you reached a minimum threshold of annual sales in that State. Economic Nexus is typically measured by your sales revenue and the number of transactions, whichever point you come first.

Today, 28 of the 50 states require sales tax when you reach 100,000 or 200 transactions in that State. For example, in the form of Arkansas, if you earn 100,000 dollars in sales per year of products shipped to Arkansas, or 200 transactions in that year of products shipped to Arkansas, we're not talking about sales in other states just that State, you qualify for economic nexus in the form of Arkansas.

But how are you supposed to keep track of all this when you do Amazon FBA sales tax collection?

Well, we created a tool for you that you were going to love. It breaks down the physical and economic nexus requirements for every single State, as well as whether they are destination or origin-based for online sellers, which I'll get to in a minute, with links to their state revenue sites, where you can register for sales tax if needed.

So, what does this look like in all practicality for your Amazon FBA business?

Well, let's say you're selling a product for $50 apiece on Amazon. When that product has shipped 200 times within 12 months to customers in Ohio, you have now reached the economic nexus for the State of Ohio, which means you have to start collecting and remitting sales tax.

Assuming you were shipping an equal number of products to all states every year, your annual revenue would be at 500,000 a year before you owed sales tax to the State of Ohio.

Now, we preach all the time about choosing products with high sales prices. Just another example of why selling products at a higher price works in your favor. If you were selling your product for only $15, all things considered equal.

As soon as you reach $150,000 in annual sales, you are now obligated to collect and remit sales tax for the State of Ohio. In other words, using our example, when selling a product for $50 instead of 15, you get to make 350,000 more a year before having to collect sales tax in a state where you do not have a physical nexus.

When are remote sellers required to collect sales tax?

When you have physical or economic nexus in the State to which you are shipping your product. You get a Bobby McGee in Rhode Island, but you're sending the product to Arizona.

You're going to collect sales tax at the Arizona state, even though Bobby McGee purchased it. It's where the product is received, is where you collect and remit sales tax. Over 11,000 tax jurisdictions in the US, how do I ensure I am ordering at the correct rate for every sale?

First, you don't have to know every tax jurisdiction. I'll refer you to software that can automate that for you. All you need to do is understand how it works. Now, what I'm about to share is probably the most challenging part of the training. Do not feel overwhelmed.

Every State is either origin or destination-based. Destination-based means you are collecting sales tax at the tax rate of the location, where the product is shipping to, where it is received. But origin-based means you are collecting tax at the tax rate of the site from which the product ships.

Texas

Texas is origin-based. So, if you ran a coffee shop in Austin, Texas, but you shipped coffee beans to a customer in El Paso, Texas, you would charge sales tax at the rate of your location in Austin, not at the tax rate of El Paso, because Texas is an origin-based state.

Other states

Now, let's change it up. Now, let's say the shop is in Akron, Ohio, Ohio is a destination-based state. So, if you ship coffee beans to a customer in Columbus, Ohio, you will collect sales tax at the rate in Columbus, not Akron. It's important to understand that these rules were created long before there was such a thing as online selling.

Amazon sales tax

Amazon sales tax wasn't a thing because Amazon FBA wasn't a thing. They were created for business selling to customers within their State. So, now, let's apply this on a state-to-state level. Then shipping from one State to another state, you only collect sales tax at the rate of the State your product ships to, assuming you have nexus, physical or economic, in that ship-to-state.

But what if I ship a product from an origin-based to a destination-based state?

Let's say you're shipping from Arizona, which is origin-based, to Ohio, which is destination-based. If you have Nexus in Ohio, you collect tax based on the tax rate of the location in Ohio, where your product ships. Even though you have Nexus in Arizona, you do not have to collect any sales tax for Arizona because your business is located in Arizona.

However, what if I ship a product from a destination-based to an origin-based state?

Here's where it gets interesting. Let's say you are shipping a product from Ohio, destination-based to Arizona, origin-based. Well, if you have Nexus in Arizona, then you're only going to collect tax based on the tax rate of the location in Arizona, where your product ships from, in Arizona, such as an Amazon Fulfillment Center. Notice how it does not matter; the State you are located in is destination or origin-based.

You only collect sales tax based on the tax rate and laws of the State where you are shipping your product. 

When does origin-based versus destination-based matter?

When you ship a product to a customer in the same State from which the product ships, that State is origin-based. Let me give you an example. If your product ships from a warehouse in Phoenix, Arizona, to a customer in Flagstaff, Arizona, do you collect sales tax at the Phoenix rate or the Flagstaff rate?

Because Arizona is origin-based, you collect sales at the Phoenix rate because that is where your product ships from. If hypothetically, Arizona was destination-based, then you would collect tax at the Flagstaff rate since Flagstaff is the destination of what your product is shipping. Remember, you only have to think about sales tax in a state where your product ships.

Now, there's another reality it's essential to grasp. where it gets hilarious. Some states switch from origin-based to destination-based for remote sellers.

Origin to destination-based

Because Texas is one of the nine states, who switched from origin to destination-based for remote sellers. I'm going to show you where you can get the United States Sales Tax Cheat Sheet at the end of this video, which gives you a full breakdown of all these details so that you can understand it at a glance. Because Texas is destination-based for remote sellers,

You collect sales tax at the rate of Mount Pleasant, Texas, the destination of the product. Now, what if hypothetically, Texas was origin-based for remote sellers, just like it is for in-state sellers? 

Then, you would collect tax at the rate of Houston, Texas, because that is the location from which the product ships. Now, imagine having to figure that all out, not just for 45 states but all 11,000 sales tax jurisdictions in the entire US.

Good news. You don't have to know every single sales tax rate. Today, I will show you exactly how to conquer this beast. But I will only show you what you need to know and then show you how to keep it simple and scalable, so you can focus on growing your business and not lose sleep wondering if you paid the correct sales tax.

Four steps to conquer sales tax

Step one.

Determine which states you have physical and economic nexus. If either of the following is true, you must collect sales tax. Number one, when you have a physical nexus in the State. In other words, when your business, or employees, or products, are physically present in that State.

Number two,

When you have an economic nexus in that State. In other words, when you reach a minimum amount of annual sales in that State. Remember, Alaska, Delaware, Montana, New Hampshire, Oregon do not collect state sales tax. Even if you have nexus in these states, you do not need to collect sales tax for these states.

In the State where your customer received the product, and the State is a sales tax-collecting state, then you must collect taxes for the purchase and remit, pay that tax amount to the State where you received the product. Physical Nexus. 

For which states are any of the following true?

I run my business in the State. I have a satellite office in the States. I have an employee or a contractor who worked a minimum of two days of the year in that State. I have a warehouse in the States. have products stored in an Amazon Fulfillment Center in that State. For any state where one of the answers to the question was, yes, you have a physical nexus in that State.

Important note.

If you registered your business in a different state, that alone does not mean you have nexus in that State. For example, let's say you live in New York, where you run your Amazon business from your laptop, but your LLC was registered in Wyoming because they have 0% corporate and income tax. You do not have a physical nexus in the State of Wyoming.

In other words, you only have to collect sales tax for Wyoming if you reach the economic nexus sales threshold for that State, which by the year is 100,000 per year and hundred transactions. Here's how to find out which Amazon Fulfillment Centers your products store.

From Seller Central, click on Reports, then Fulfillment. On the left side, under Inventory, click Show

So you can see all the options. Then you're going to select Inventory Event Detail. You will now see two tabs, View Online and Download. Select Download; for the event date, like a period that covers the date you shipped your products to Amazon's Fulfillment Centers, then choose Download Request.csv. 

For example, CAE is the Columbia Metropolitan Airport. DFW is the Dallas Fort Worth Airport. Economic Nexus. What is your sales and transaction volume? For most states, if you have 100,000 annual sales or 200 transactions for products shipped to that State annually, you've reached economic status.

Step two.

Register as a seller in the states where you have a physical nexus. Now, here are a few tips for registering as a seller in the states. Google: "register for sales and use tax and then put in the name of the state." Set up your sales and use tax by filling out the online form. You will need your business name, business address, an EIN, a phone number, and an email.

Now, only register for the states you have a physical nexus. Do not worry about the economic nexus until your sales are high enough to qualify.

Step number three.

Set up sales tax collection in Seller Central. Amazon says this to its customers. "The tax rate applied to your order will be the combined state and local rates of the address where your order is delivered to or fulfilled from." Amazon collects and remits taxes for the vast majority of the 45 states which require sales tax, which is a massive help to us.

Few states Amazon does not  collect and remit sales tax

There was a day where they did not do this. But which states do I need to set up for sales tax collection in Seller Central? In the states where you have Nexus and Amazon is not collecting and remitting sales tax for you.

Amazon collects and sends or pays sales tax to almost all of the 45 sales tax-collecting states. You do not have to do anything in your Seller Central account for these states.

However, currently, there are a few states Amazon does not yet collect and remit sales tax. Florida, Kansas, Missouri, and Tennessee. And by the time you see this video, that may have already been changed, which is good news. Keep in mind and this may change soon when Amazon collects and remit sales tax for all states that require sales tax.

If you have nexus in any state for which Amazon is not collecting and remitting sales tax, you must not only register with each State for sales tax, as well as the ones where they are collecting that you have nexus but set up sales tax collection in Seller Central for these states.

Now, as I said, in the vast majority of states, this is already happening, but you're still going to need to set up the ones where you have nexus in. So, here's what you do. 

First, you're going to go to Settings, and you're going to go down to Tax Settings, which is going to take you to this page right here.

Let's say you have a nexus in the State of Florida. See all these states right here? These are the ones that Amazon is already collecting and remitting tax for you. That's why some states are missing. They are the states that do not currently collect sales tax.

State tax registration number

From here, you need to put in your state tax registration number. Now, keep in mind, for every State, you have to file with the State first. You have to set up sales and use a tax accountant to receive that tax registration number. For each State, it's going to be a unique number.

And they don't all call it a state tax registration number, so do keep that in mind as well. Make sure the county, city, and district are all selected because you do need to have Amazon pay those in axes for you. Always like Gift Wrap to be safe, and you only need to choose Shipping & Handling,

If that state requires sales tax collection for the shipping cost. In other words, if the product sold for $100 and involved a shipping cost of 10, they're only going to collect sales tax on 100 unless you select this. If you choose this, they will collect the sales tax rate for Florida, the cost of the product, and the shipping and handling.

Custom tax rate

Now that you've done that, I do not recommend you assign a custom tax rate. Because this means you're going to have to stick on top of the tax rate at all times and tax rates change a lot every year, sometimes every quarter. So, I would not touch that one. If you made a mistake, you can come over here and remove Florida if you need to add it later.

Now, something to keep it. What if you have clothing? Well, in that case, or even automotive, or a baby car seat. There are a few specific categories here, and they're all incredibly intuitive. You don't have to be a genius to know which one would apply to you.

If you know your product, you're going to see it. For example, goods have some special sales tax rates. Food is another one—health monitors. So, go through here and see if your category is not listed. If it isn't, then just select A_General_Tax.

And then, from here, you're going to hit Save Settings. Once you do that, it is going to add it for you. See up here, setting saved. And now Florida has been added.

All the gray ones, Amazon already does for you automatically, but the white ones are the

ones that you have to add. Again, remember, you only have to do this if two things qualify.

Number one. You have a nexus in that State, whether that's economic or physical nexus.

Number two, it is a state that is not amongst one of these. Well, how do I know?

I can go over here; let's just say California. I searched, boom, there's California. Texas, boom, there's Texas, see. 

But if I search Kansas, aha! There is no Kansas. And so, that's another one I'll have to add once I have Nexus in Kansas. Not sure about the state-specific rules for your product type? That's why we created the US Sales Tax Cheat Sheet, which I'll be sharing at the end of this video.

Step number four.

First

File your sales tax report in each state where you registered. Now, you have two options for this. Two sales tax offers we highly recommend and trust is TaxJar and Avalara.

Second

you can file online. Log into your sales tax account, the same login you already use to register. Fill out the form, make your payment for the State's payment gateway. Now, let me give you some tips for filing your sales tax online. Whether or not Amazon is remitting the sales tax for you, you must still file the return.

Most states require monthly or quarterly. Even if you have no sales for that period, you still have to file. For the states for Amazon remits, 

However, there are typically only a handful of states you need to register with, and for those that do, they provide step-by-step instructions for how to do this online. Now, let me give you a checklist for making sure you are doing sales tax the right way.

Step one.

Determine which states you have physical and economic nexus.

Step two.

Register as a seller in the states where you have a physical nexus. Step three. Set up sales tax collection in Seller Central. And step four, file your sales tax report in each State where you registered and do it at the frequency they require, whether it's monthly, quarterly, sometimes annually.