Understanding Amazon’s FBA sales tax guidelines can be confusing, to say the least. Between navigating the varying tax rates across 50 different states to understanding terms like nexus--a word used to describe the connection between a business and a state--the complexities are enough to give anyone a serious headache!
To help break it all down, we created a guide defining and taking you through these tricky sales tax terms and processes in a way that we can all understand.
Without further ado, let’s get started. 🤓
Starting the guide by defining what is sales tax, is a pretty solid way to go in our opinion. That is, sales tax is a tax customers pay when they buy a product or service. We all pay sales tax every time we grab a (overpriced) coffee from Starbucks or renew our monthly Netflix subscription.
When your hard-earned cash goes into the till, the business owner deducts the sales tax from the fee and pays it to the state. The state and local governments then use the tax to make roads smoother and better, fund schools, build public parks, and provide citizens with all kinds of facilities. And fyi, the federal government plays no part in this. It’s all local.
Income tax and sales tax are not one in the same. Your Amazon FBA income tax is what you pay against your net earnings as a seller. It’s not a “pass-through” tax like sales tax. It comes straight from your pocket. When it comes to income tax, there are different tax brackets, and you won’t have to pay it unless you make above a certain amount per year.
This leads us to another important question:
Yes, you will need to pay sales tax when selling on Amazon. If you’re collecting sales tax from your customers on Amazon, you must remit that tax to the government to stay legally within the glorious U.S. tax laws.
Yes, there are more than one instances where Amazon FBA sales tax does not apply. If you don’t have sales nexus in the selling state (more on that later), sell tax-exempted products, or operate within a state that doesn’t impose sales tax to begin with. That way, you won’t have to collect and pay the tax on the items you sell on Amazon.
There are five states in the U.S that don’t demand sales tax. These are New Hampshire, Oregon, Montana, Alaska, and Delaware—or NOMAD for short.
Generally, you can sell items like groceries, supplements, clothing, and books on Amazon without worrying about paying sales tax. However, a few states ask for tax on these products too. For example, Mississippi, Oklahoma, Alabama, Kansas, and South Dakota all collect sales tax on groceries and clothes. So make sure to do your own research on local state tax laws depending on the state you reside in.
Something to keep in mind: Sales tax is charged in the U.S. on almost all physical products. For more information on your local state
💡 Pro Tip: If you’re sourcing items to resell on Amazon, you can submit a resale certificate to your supplier and get a sales tax exemption. Most states accept an Amazon FBA sales tax permit as a resale certificate -- It’s a smart way of saving money!
Amazon’s FBA sales tax rate is determined at the district, city, county, and state levels. Add the sales tax rates for each level and get a combined tax rate. This rate serves as the basis of Amazon sales tax calculation and is expressed as a percentage of the product’s selling price.
The combined tax rate also varies depending on the jurisdiction. For example, the combined sales tax rate for Garland, TX is 8.25% and includes Texas state sales tax (6.25%), Garland sales tax (1%), and Special sales tax (1%). Similarly, the combined sales tax for Dayton, OH, is calculated at a rate of 7.50% and includes Ohio state sales tax (5.75%) and Montgomery County sales tax (1.75%).
You can use this sales tax calculator below to calculate the combined sales tax for any state or city of your choice.
Yes, Amazon automatically charges sales tax to all customers at the checkout. You don’t have to do anything; Amazon’s system does all the work for you and issues an automated invoice to your customers with the sales tax included.
Note: Some states also collect shipping tax. These include Arkansas, Georgia, Connecticut, Hawaii, District of Columbia, Michigan, Minnesota, New Jersey, New York, and Ohio, among others.
Every FBA seller that sells a taxable product and has nexus in the selling states is eligible to collect sales tax on Amazon. You also need an Amazon sales tax permit issued by the relevant states to legally conduct tax collection activities. Finally, all sales tax collected must be reported and remitted to the state and local taxing authorities at the end of each filing period.
We’ve already touched on the subject of product taxability and how an item may or may not be taxable depending on the state you’re selling in. Now, let’s try to understand what a nexus is in a little more detail, and what’s needed to have nexus in a state.
Sales tax nexus is, more or less, a fancy word to describe the connection a business has with its state. This connection can either be physical, economic, or both.
If you’re physically present in the state you do business in, you have physical sales tax nexus within that state. Having an office, contractor, employee, warehouse, stock, third-party retailers, or a temporary sales channel is regarded as having physical nexus.
Sellers can have multiple physical nexuses for their business. For example, if your office is located in Los Angeles (where our HQ is located!), and your FBA inventory is in New York, then you have physical nexus in both Los Angeles and New York.
Here are the steps to take to find out where your Amazon inventory is located:
✍🏼Note: Having your business registered in a state doesn’t give you nexus within that state. You need to meet at least one of the conditions for physical nexus, as we briefly mentioned above.
Economic nexus is established when your sales activity reaches a minimum value in revenue or transactions as defined by the state. In most cases, this threshold value is set at $100,000 (in revenue) and 200 units (in transactions) per year.
The economic sales nexus is more common for out-of-state sellers. In any event, this isn’t of much concern for new sellers since they are unlikely to generate such high sales. Still, it’s worth knowing about it.
Yes, you need a sales permit in your nexus state, and then you can start collecting tax from customers. But there is one caveat to this: Finding the right combined rate to calculate tax on Amazon sales requires a closer look at the states’ tax policies you are shipping your products to.
States are primarily defined as either origin or destination-based under the local U.S. tax policies. 🌎 Here’s an outline of which states fall into which categories:
Let’s assume your business is registered in Dallas, TX, and you receive an order on Amazon from a customer who also lives in Texas but in a different city. In this case, you’ll collect sales tax at the rate of Dallas because Texas is an origin-based state.
Now, let’s move your business all the way over to Trenton, NJ. You receive an order from a customer who lives across in Newark. In this case, you’ll collect sales tax at the rate of Newark because New Jersey is a destination-based state.
But what if you’re a remote seller? How do things work in that case?
When you’re a remote seller on Amazon, you usually charge sales tax at the destination rate, even if the shipped-to-state has an origin-based tax policy. However, there are exceptions to this when you are selling your product in California, New Mexico, or Arizona, where sales tax must be collected at the origin of the fulfillment center.
So, if you’re in Ohio and Amazon ships your product from an FBA center in Los Angeles to a customer in San Diego, CA, you’ll charge Amazon FBA sales tax at the rate of LA and not SD.
Amazon, by default, collects sales tax on your behalf in states where marketplace facilitator laws exist. This is, of course, assuming that you already have sales nexus in the selling states.
Amazon collects sales tax for third-party sellers in the following states:
Note: Effective 1st July 2021, Amazon has started collecting sales tax on behalf of sellers in Florida and Kansas as well.
Amazon does not collect sales tax on behalf of sellers in Missouri. You’ll need to set up tax collection manually from inside of Seller Central.
Here are the steps to take to set up your Amazon FBA sales tax collection for Florida, Kansas, and Missouri:
🧠Bear in mind: Amazon charges a 2.9% fee on each transaction when collecting sales tax from your customers. Unfortunately, this fee is simply utterly and sheerly unavoidable. 🤷♀️
Amazon is responsible for calculating, collecting, reporting, and refunding sales tax in states where the Marketplace Facilitator legislation is authorized. So, Amazon reports sales tax to states, but we recommend doing it yourself to avoid getting caught off-guard all the same. 😉
As you see, every state has its own version of the marketplace facilitator law. What may be standard practice in one state may not be fully observed in the other. Also, quite a few states ask sellers to state what their marketplace has reported on their behalf. Therefore, it’s not actually possible to completely leave your tax reporting duties to Amazon.
All-in-all, if you aren’t confident about reporting sales tax on your own, we recommend hiring a professional accountant to help you out.
You can find your total sales tax collection by visiting the Amazon tax center. Follow the steps below to do this.
✍🏼 Note: The Combined Sales Tax report is for informational purposes only. It is not recommended to submit it as a draft to report your taxes to the state.
An Amazon FBA sales tax report must give a complete breakdown of the sales tax collected in each county, city, and district for the nexus state. But this can take a lot of time out of your day. 🕑 You need to sift through the entire Combined Sales Tax report and determine your tax collection for each jurisdiction individually. However, states that only have a single statewide tax rate can be much easier to deal with.
💡 Pro Tip: Use filters inside the Combined Sales Tax report to target specific data points and make data compilation hassle-free. For example, the Tax Collection Model filter allows you to switch between sales tax transactions to be handled by Amazon and those supposed to be handled by you.
As we approach the end of our blog, let’s take a look at how to file Amazon FBA sales tax. You can do this either manually or by using a tax automation software.
If you decide to go with the manual filing option, you’ll need to visit the relevant state’s website but make sure to clear any pending payments first. ☝️ File taxes in all states where you have the permit and physical nexus. Even if you didn’t collect any sales tax in a nexus state during the taxable period, you are still required to submit your returns.
Using an Amazon FBA sales tax software does make this process a whole lot easier--You'll be able to file your taxes faster and more accurately.
Below are three of the best sales tax tools for Amazon FBA: TaxJar, Avalara, and Taxify. Let’s go through them in a little more detail.
We really like the way TaxJar functions. You can sync it with your Amazon Seller Central and automate your entire tax reporting and filing process. The tool breaks down everything for you.
Want to find out how much sales tax you owe to the Florida Department of Revenue? TaxJar does it for you. Confused about which tax code you should use for your product? Let TaxJar’s smart product classification fire up some suggestions for you. It also offers multiple payment methods, so you can remit taxes oh so easily and conveniently. 💁♂️
Avalara is another popular sales tax tool in the Amazon community. Although it lacks some of the perks of TaxJar offers, it still proves itself to be quite useful. It offers the standard tax calculation and reporting features.
If you aren’t sure about your Amazon FBA sales tax data, you can reach out to their team who will check everything and even file the returns on your behalf. Avalara can be integrated with other marketplaces as well. Also, there’s no need to buy a separate tool for your Etsy, eBay, or Walmart store.
Last on our list is award-winning software, Sovos Taxify. It handles all types of taxes, not just FBA sales tax. Access ready-to-use forms for Amazon and coverage for all 50 states with real-time, up-to-date tax rates. It even offers a supporting plugin that you can use to generate transactional data which greatly simplifies the tax filing process.
Of course, there are other great tools out there as well. In fact, we encourage you to carry out your own research before investing in any Amazon FBA sales tax tool. This list is just to help you get started.
💡 Pro Tip: Always file your taxes at least a few days before the deadline. That way, you’ll have enough time to address any kinks, should you face them.
The Amazon FBA sales tax filing frequency varies from state to state. Some states require sellers to submit their returns every month. For other states, it might be quarterly, bi-annually, or at the end of the year.
Yes, Amazon transfers the sales tax to your account that it does not remit. This tax can then be paid when you file your returns.
To finish, below are four steps to summarize how to establish sales tax compliance when selling on Amazon.
Find out where your FBA inventory is located and get an Amazon sales tax permit in those states. We have already explained the process earlier in this blog.
Activate sales tax collection for states not part of the marketplace facilitator agreement from inside the Seller Central.
Make sure to detail complete tax collections, sorted by state, county, city, and district. Prepare a separate report for the taxes already cleared by Amazon in case your state department asks for it.
Submit all the records to the taxing authorities; don’t even leave out the zero returns. This can also be done online. Alternatively, you can use tax automation software. Make it a point to clear any outstanding payments.
Many people don’t know this, but if you file your Amazon FBA sales tax returns on time, the states refund you a small amount (typically 1-2%) of your total sales collection. That’s literally free money that you can use to buy new inventory, sponsor ad campaigns, or run promotions outside of Amazon.
Believe us, building a successful Amazon business is not as complex as it seems. But it does take a level of ambition, determination and help from the right people and resources.
To help you sail through unavoidable issues like Amazon taxes, and more, sign up for our next live training session now. Here, our Amazon experts will share their best insights, tips, and resources to make sure you dominate Amazon and take your FBA business to the next level.
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