I can’t believe I’m writing about sales tax again but it is such an important issue for the community, I feel compelled to talk about it, especially given recent events (see below). I created a detailed Sales Tax Step-by-Step for this blog post to help sellers understand the new report offered by Amazon to its FBA sellers who collect sales tax.
As many of you know, when Amazon started conceding to the states and collecting sales tax, I felt like I needed to comply. While most online businesses have not paid sales tax traditionally, this was simply a matter of it being too hard and too expensive for the states to track us down and because no one else was paying, either. How could they go after little fish like us and leave the big boys like Amazon, Wal-Mart, Target, and TRU alone? Each state that collects sales taxes has laws on the books that online sellers owe them money for sales they make in their states if we have a presence in their state. What you may not realize is that some of those states also have requirements for the recipients of online goods to pay tax. Very few consumers do. Some states are getting militant with their residents about paying so those customers would actually be relieved for us to collect the sales tax.
So what’s happening now? Amazon has buckled under. There are currently nine states where it collects sales tax and more are lined up to start over the next two years depending on the dates it has negotiated with the state(s). Wikipedia has a lot of great information on Amazon and sales tax if you want to read more. The company has stated unequivocally that it will comply with state law in those states. What does that mean for us? It is unclear. Will a state request Amazon turn over its sales records for third-party sellers over a certain level of sales? It might. The federal government already does which is why Amazon fills out a 1099-K for each seller who grosses over a certain amount.
I figure we have about a year or so to comply. What is most likely to happen (in my humble opinion) is Amazon will send out a notice that it will be providing a 1099-K equivalent to individual states. At that point sellers over a certain amount will have to be on board. I am currently signed up with or nearly done signing up with 13 states. There are 15 states where Amazon has a warehouse which, technically, creates a “nexus” for us in that state. Two of those states, Delaware and New Hampshire, don’t collect sales taxes so we don’t need to do anything with them. Click HERE for the latest warehouse list.
In case you are wondering about the other 13 states where I’m signed up: Arizona; California; Indiana; Kansas; Kentucky; Massachusetts; Nevada; Pennsylvania; South Carolina; Tennessee; Texas; Virginia; and Washington. Amazon is building a warehouse in New Jersey that is scheduled to open in 2014 as well. Kat Simpson and Michael Rice wrote a book called Introduction to Sales Tax for Amazon FBA Sellers that you might find helpful. It includes links to set up in those states and explains the legality of everything. Michael is a tax attorney.
OK, enough history. Why am I writing about this today? Well, for those of you who are already paying Amazon to charge sales tax and give you reports for one or more states, you need to check your reports carefully. I just learned the hard way that Amazon has not been taking out sufficient taxes for certain states like Arizona and Pennsylvania where there are higher rates for certain cities and counties. This is a problem with the new report that started on March 1. It not only looks different and is impossible to sort by state; it shows that Amazon is also not charging our customers enough tax for some transactions. This means you get to make up the difference out of your pocket.
Consider this the “FURY” part of this blog. It has been very frustrating and sellers all over social media are complaining.
I talked with TaxJar.com and Outright.com representatives and they take their data from Amazon, too. Thus, you can’t rely on their reports to be accurate if Amazon isn’t accurate. You may owe more money than you think. There are three main reasons why Amazon may not be collecting correctly; two you can correct yourself and one only Amazon can fix.
So how do you know if Amazon is collecting your taxes correctly? You look at the new report and see if they’ve collected for counties and cities where applicable. When you got your sales tax certificate you most likely got a paper tax form with this information on it so you as a new seller would know what you are supposed to collect. Arizona sent me one every month until I switched to online filing. In states like Arizona, you need to record sales in specific counties (Maricopa) and cities (like Peoria) where they have extra taxes.
This link will take you to a Sales Tax Step-by-Step PDF that will show you how to download the new report and check it for accuracy. In addition, I will show you how to check your sales tax settings on Seller Central to make sure you are telling Amazon to collect county and city taxes. Sometimes the problem is your items are incorrectly marked as “exempt” or “A_GEN_NOTAX.” I’ll show you how to fix that problem, too. Go pull your report and come back.
Now that you are looking at your report, there are two possible reasons why Amazon is not collecting taxes properly for you. One possible reason is that the item that was sold is exempt. It may be exempt because that item is always exempt. In New Jersey, for example, there is no sales tax on food and clothing.
But what if the item is clearly not exempt like a book? This can happen when you’ve not set up your tax collection properly on Amazon (see the Sales Tax Step-by-Step™ to learn how to correct your settings) or you use a listing service to list your products. The default for some listing services is “A_GEN_NOTAX” and all your listings go to Amazon with that embedded in the listing. This tells Amazon not to charge sales tax for that item. If you have your sales tax certificate and wish for all your listings to be eligible for taxes there are two things you need to do:
- Tell your listing company that you want all your listings to default to taxable [A_GEN_TAX] – a simple email to email@example.com takes care of all future listings for Scan Power. If you use a different service, check with them to see how to fix that problem.
- Fix your listings that are already up at Amazon so they all say A_GEN_TAX. – Go to the Sales Tax Step-by-Stepif you want to know how to do that. It is pretty simple as long as you have basic Excel skills.
What if all your sales tax settings are correct but tax is still not being collected properly? Be sure to complain. You will be one of many voices which help them hear us loud and clear, plus they will follow up with you when they have fixed the problem – which I am confident they will. In the 3+ years I’ve worked with Amazon, they’ve been pretty great about solving problems and helping their sellers be successful.
As of this writing, the problem with Pennsylvania tax collection is not fixed. I will follow up to let you know the solution.
One of the reasons I don’t like to write about taxes too much is that I don’t want to scare off newcomers. Sales tax is an issue for established sellers. Many people start their Amazon businesses not sure if it is right for them. They want to give it a few months before wading in and getting a sales tax certificate. While I am not a tax lawyer and this in no way constitutes legal advice, my approach was to take it Step-by-Step. Frankly, you need to have income in order to pay taxes. Get those sales up and see that it is going to work for you. Learn the basics of the business like sending boxes to Amazon and how Seller Central works, then take on something new. You may want to start with your state first as I did. Then when you are comfortable using your sales tax certificate and having Amazon collect taxes for you, move on to the other states in a methodical way that doesn’t drive you crazy. Amazon is rolling out its compliance over time, you can too (within reason).
I am often asked “Do I have to get a sales tax certificate?” Life is certainly simpler if you don’t have to collect sales tax. This depends on the state where you live. In Texas, if you pay sales tax at the point of sale and keep your receipts, they won’t come after you. I’ve been told this by the State of Texas more than once (my CPA did not believe me when I told her) but I suggest my Texas readers call for themselves. I also suggest people get settled in the business first. You are paying sales tax when you buy merchandise. The fact that it is not enough (you are usually obligated to pay sales tax on the difference between the purchase price and sale price as well) may or may not be an issue for your state but if you are ever forced to pay up down the road, you’ve already paid some tax and can prove it. I decided to get a sales tax certificate because I wanted to save 8.25% on everything I bought. Texas has one of the highest sales tax rates in the country. This way, my customers pay the tax when they buy from me. Now that Amazon has capitulated on paying sales tax, I ultimately need one for every state where I am liable.
The definitive and correct answer to this question will come from your state. Contact them and ask as I did what their policy is about online sellers. Tell them what you believe you are currently selling in Texas per month. Be sure to write down with whom you spoke and their employee number as well as the date and notes on what they said. That way if you are ever audited you can prove that you relied on information from the state and are, thus, not a criminal…even if you end up owing more taxes. Also, you may want to ask more than once and/or in more than one way to be clear. Just like the IRS, state sales tax people make mistakes, too. In Dallas we had a local office so I could go in. This was very helpful because they helped me get set up, answered my questions and showed me how to fill out my sales tax form. I felt confident when I left the building that I could handle this and that I was properly set up.