Taxation is one of the most commonly discussed issues among Amazon sellers. This is especially true if you are a non-U.S. Amazon seller.
Unfortunately, taxes can be a little overwhelming and scary with a lot of unfamiliar terms.
If you are already selling on Amazon – or thinking about becoming an Amazon seller – email me at firstname.lastname@example.org to get started.
Three Main Types of Amazon Taxes to Consider
As an Amazon seller there are three main types of taxation to concern yourself with including:
- Federal Income Tax
- State Income Tax
- State Sales Tax
Being an Amazon seller can be a very lucrative business. Especially for someone who doesn’t live in the United States!
That’s why it is crucial that you understand tax issues for Amazon sellers, so you don’t end up in legal hot water.
U.S. Federal Income Taxes For Amazon Sellers
If you’re a non-US human or a non-US legal entity and your only activity in the U.S. is selling products on Amazon FBA, you are NOT subject to U.S. Federal Income Tax.
A non-US person is subject to U.S. tax on business income ONLY if they’re engaging in a trade or business in United States. This means that you have to have some people on the ground in the U.S. who operate your business (these have to be your people and not just someone else’s people).
A non-US person is engaged in a trade or business in the U.S. only if they have 1) at least one dependent agent on the ground in the U.S. and 2) that dependent agent does something substantial to further the business.
An acronym for this is ETBUS (engaged in trade or business in the U.S.)
Third-party fulfillment centers are NOT considered to be “engaged in trade or business in the US,” so that that means is that just by having your products sent to third-party fulfillment centers in the US, you would typically NOT be subject to US taxes.
In other words, if you engage with a distributor who’s independent then that would NOT be considered in “engaged in trade or business” in the U.S.
Third-party fulfillment centers, distributors or wholesalers who you ship your inventory to who then ship out your orders to customers do NOT constitute you to be doing business in the U.S.
If you are a non-U.S. Amazon seller, you must learn how to file U.S. taxes as a non-U.S. resident to protect your business.
State Income Taxes for Amazon Sellers
Each state has different rules in what’s considered “nexus” for a business to be considered doing business in that state.
The analysis of whether you owe State Income Tax is typically the same as the analysis for US Federal Income Tax.
What is the Amazon 1099-K Tax Form
The 1099-K Tax Form is how you report your monthly and annual gross sales to the IRS. Amazon uses this form to report sales information, taxes, and shipping fees.
If you are an individual Amazon seller, you are not necessarily responsible for filling out one of these forms as most individual sellers do not meet the income requirements.
So, Who Does Qualify For Filling Out an Amazon 1099-K Tax Form?
The unfortunate truth is there is a great deal of confusion when it comes to Amazon FBA taxes. Most of this confusion stems from the “$20,000 rule.”
This rule states sellers that earn over $20,000 of unadjusted gross sales or have over 200 transactions automatically have a 1099-K form filed for them.
This means if you meet the income requirements for a 1099-K, the IRS knows your business exists. So, it is crucial to make sure you file the proper paperwork.
Keep in mind, not meeting the criteria does not mean you get to skate on taxation. Any professional seller – with over 50 transactions – still needs to provide their tax information to Amazon.
If you don’t provide your tax information, Amazon may suspend your seller account.
What Exactly Qualifies as Income?
When reporting, the IRS wants to know what your Amazon gross annual income is. The question is – what does that mean?
Your gross annual income includes everything that came in – not just the cost of the product. This just means shipping charges are factored into your income.
Unless you are an experienced accountant, it is vital to have one help with the filing and reporting. Under reporting your income will catch up with you even if it was an honest mistake.
To summarize – you should be reporting every dollar that comes into your business.
Most businesses use an automated accounting software to eliminate the chance of human error.
How Do You Report Income If You Are Selling Outside of the U.S.?
If you are selling products through Amazon to customers outside of the U.S., you are not liable for U.S. taxation. This, however, does not mean you get a free pass on paperwork.
You are required to provide a Form W-8BEN to Amazon to exempt you from U.S. taxation.
Check for Errors On Your 1099-K Before Filing
While accountants and automated solutions are great, you still need to make sure an actual person goes over everything. Even software and experts can make mistakes.
The IRS has a hard time differentiating between an honest mistake and fraud, so double check things to protect yourself.
State Sales Taxes for Amazon Sellers
The analysis for State Sales Tax is pretty much the same as the analysis for State Income Tax — you must have a certain nexus with a state for that state to be allowed to collect sales tax in that state. However, this nexus requirement is a lot lower than State Income Tax.
A lot of states that simply holding your inventory in their state is enough activity in that state to create nexus for State Sales Tax purposes.
When Does an Amazon FBA Seller Need to Collect Sales Tax?
When it comes to sales taxes, Amazon sellers are no different than any online retail salesman.
In order to know when you collect taxes, you must understand what product taxability is and wat sales tax nexus is.
What is a Sales Tax?
A sales tax is taxation on non-essential product. What is considered as non-essential varies from one state to the next.
For example, there are some states that tax clothing while states such as Minnesota, New Jersey, Vermont and Pennsylvania consider clothing an essential product and do not tax them. There are even some states that only tax clothing up to a certain amount (cap).
As an Amazon seller, you have a legal obligation to collect sales taxes for the government depending on the sales tax nexus and the type of product you are selling.
Don’t hesitate to contact me at email@example.com to discuss sales taxation based on the products you are selling on Amazon to make sure you are covering your legal obligations.
What is a Sales Tax Nexus?
Each state has a different definition regarding sales tax nexus. However, most define it as the physical presence of your business.
For U.S. sellers, your sales tax nexus would be the location of your home office and the location of the warehouse storing your business inventory. For a non-U.S. seller, the nexus would be the location of your inventory.
If you house inventory in more than one state – you have more than one sales state nexus. Legally, you need to collect sales taxes from buyers and report those taxes to the IRS.
What is Product Taxability?
After determining your if you have a state nexus, you need to figure out if your product is taxable. This is where things can get a little confusing because product taxability does vary by state.
Clothing and grocery items, for example, are not taxed in the state of Minnesota. They are, however, taxed in other states.
Groceries, clothing, and textbooks tend to be the gray area that is taxed differently depending on the state.
If you are selling something tangible that doesn’t fall into the category of clothing, textbooks, or groceries chances are it is a taxable good in most states. Tangible goods are almost always taxable – with few exceptions.
Do You Collect Taxes at the State You Ship from or the State You Ship To?
This is a huge question for any Amazon seller (U.S. or non-U.S.) that houses inventory inside of the U.S.
Technically, there are two different types of sales tax laws: origin-based and destination-based. Answering this question requires knowing the difference between the two.
If the state you are selling and shipping from is an origin-based state, you would charge sales tax at the state’s taxation rate.
If the state you are selling and shipping from is destination-based, however, you would charge a tax rate of the state you are shipping the product to.
Most states in the U.S. are destination based. There are a few – such as Texas – that are origin based.
How Do You Get Sales Tax Compliant?
If you determine you have a nexus in a state and the product you sell is taxable, you must register to collect sales taxes.
It is crucial for you to register for a permit before you start collecting sales taxes as it is illegal to collect them without one.
Once you file for the permit, it is important for you to keep watch for any letters or forms of communication regarding the permit.
You can reach out to a lawyer – such as myself at firstname.lastname@example.org – if you need help with the paperwork for your sales tax permit.
How Do You Collect Sales Taxes on Amazon?
Part of the reason why becoming an Amazon seller is so appealing is because they offer a lot of seller support.
In fact, Amazon offers sellers a pretty robust sales tax collection engine that makes taxation a smooth process.
Once you set up the taxation for your product, the engine helps keep track of some of the more complicated aspects including origin-based versus destination based. The engine also keeps up with changes in sales tax rates.
Amazon also makes it easy for you to add product tax codes if you are selling an item such as groceries or textbooks. You can even select whether to charge a sales tax for add-ons such as gift wrapping.
Because Amazon charges a fee on each transaction to collect sales taxes, some sellers prefer to pay taxes out of their profits instead of charging customers. As long as you pay your sales taxes, you do have the freedom to choose between the two alternatives.
Will Amazon Collect Sales Taxes for Third Party Sellers?
Unfortunately, Amazon will not collect sales taxes for third party sellers. This is true whether they are merchant-fulfilled or FBA.
Third party sellers, however, are still responsible for filing and paying sales taxes in states they have an established sales tax nexus in.
Taxation is scary – but necessary – regardless of what type of business venture you decide to explore. Don’t let the fear of overcoming tax issues Amazon sellers (both in and outside of the U.S.) face.
Email me an email at email@example.com to get started with your U.S. business.
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