Do I Have To Pay Taxes On Amazon Sales? A Helpful Seller’s Guide

Do I Have To Pay Taxes On Amazon Sales? A Helpful Seller’s Guide
New york, USA – march 15, 2019: Amazon seller application on smartphone screen close up view

Yes, online sellers on Amazon have to pay taxes. By itself, Amazon doesn’t have the authority to impose taxation on sales made through its platform. Only federal and state governments can. In the past, anyone could sell on Amazon, and no taxes were imposed on the buyer, sale, or seller. But a growing number of laws have been passed that require Amazon to collect taxes on behalf of state governments from sales made on its platforms.  

Amazon included a few paragraphs in its terms and conditions to open a seller account. By clicking the, ‘I agree’ button, sellers give content for Amazon to impose and collect taxes from the sales they made. As an incentive, Amazon offers Sellers Funding on their online sellers. There’s no federal sales tax in the U.S., but most states have passed sales taxes for online transactions.   

Amazon Sellers Have To Pay Taxes

Selling on Amazon is one of the most lucrative online businesses. When you sign up as an Amazon Seller, you’re required to give information that would be used to collect taxes from you. Sellers are required to give their geographical location, tax collector, payment method, and method to use for the money transfer from their Amazon account. 

Sellers who have a physical presence in multiple states would have to deal with different tax regulations in each state. There are states which have already passed tax measures specifically designed to impose and collect taxes on Amazon sellers. There are tax laws that ensure Amazon sellers are taxed even though not physically present in their state.   

How They Compute Sales Tax

The online sales tax differs from one state to another. In Illinois, the base rate is 6.25%. Usually, an extra 1% is charged by the cities and municipalities. Moreover, if you sell to people living in Colorado, a 2.9% sales tax is imposed on everything you sell on Amazon. The buyer is paying for the sales tax because it’s included in the price, and it’s Amazon that does the tedious work of computing, imposing, and collecting the sales tax.  

In computing the sales tax, Amazon sellers have to figure out three variables: The first variable is to know where the seller has a business presence (called tax nexus). Second, they need to know who collects the tax in that place and how collection is done. Third, they also need to understand how the tax collection process works in that specific state or location.  

Tax nexus is one of the four important concepts on sales tax under U.S. law. It refers to the tie or connection between the state or location where the seller is doing business. Tax nexus is determined by the location where the seller sold the item to the buyer. For instance, if the buyer clicked the item from Colorado, the sales tax of Colorado applies. But if the seller also has a physical store in Nevada where the product will come from, the sales taxes of Nevada will also apply.  

It doesn’t matter if the delivery truck will pass thru Arkansas or Utah on the way from Nevada to Colorado. Tax nexus becomes a complex thing if the item will come from Nevada and has to be placed in Amazon distribution hub in Utah before being delivered to Colorado. Each state applies a different tax law on those doing business within their jurisdiction.  

Some states have even passed laws tailored for online sellers to meet the need to tax the massive online operations of sellers like Amazon. These pieces of legislation are called ‘Amazon Laws.’ They require all online sellers to collect sales taxes from sales made online. Such is the scope and reach of these Amazon Laws that even online sellers who don’t have a physical presence in their state are required to collect online sales taxes.   

How Amazon Collects Taxes

In all the states where Amazon is required to collect taxes on their sellers, the tax collection mechanism is done thru Amazon’s fulfillment center, which goes by its more popular name Fulfillment By Amazon (FBA). As of 2017, there are only four states which don’t impose taxes on Amazon shopping. Hawaii, Idaho, Maine, and New Mexico don’t impose taxes on Amazon online sales throughout their respective state jurisdictions.  

Four other states don’t impose sales taxes at all whether online or on brick-and-mortar stores: Delaware, Montana, New Hampshire, and Oregon. Alaska does not impose state-wide taxes, but municipalities impose their own sales taxes.

Given its sophisticated computing network, Amazon is able to compute and collect precise taxes on its sellers. When an order is placed by a buyer, the algorithm gives an instruction to collect the applicable taxes. To come up with the taxes due, the system would then get the information of the taxes based on the origin of the product or item, and the destination of the order or delivery. The system will take the applicable tax from both places. Their system also allows you to add the tax code for the tax rate that has to be charged on specific items.  

A number of Amazon sellers find all these tax mechanisms a bit confusing. Some of them have turned to tax advisors who provide consulting services and help them make sure that their operations comply with the tax laws of the various states. This way they’re able to avoid incurring penalties from the Internal Revenue Service (IRS) for not paying their taxes on time or not paying the correct amount of taxes.  

Catching Up And Taxing Online Sales

People used to buy and sell on Amazon, and nobody imposed or collected taxes from them. But state authorities have caught up with the financial transactions being done online, specifically on Amazon. In the year 2011, only five states-imposed taxes on Amazon sales. By 2013, this number had gone up to 23 and then to 28 by 2016. There are still states such as Alaska and Hawaii where online sales are tax-exempt, but the trend has been to impose sales taxes.  

About Carson Derrow

My name is Carson Derrow I'm an entrepreneur, professional blogger, and marketer from Arkansas. I've been writing for startups and small businesses since 2012. I share the latest business news, tools, resources, and marketing tips to help startups and small businesses to grow their business.