We get a lot of questions from Amazon FBA sellers living outside the U.S. asking how to handle sales tax. We interviewed Michael Fleming of sales tax firm Michael J. Fleming and Associates, who laid out all the steps that international sellers need to become sales tax complaint in the United States.
How to Get Sales Tax Compliant in the U.S. (as a Non-U.S. Resident)
#1 – Find out in which states you are required to collect sales tax
Before you can become sales tax compliant, it’s important to know where to start. In the United States, you are required to collect sales tax from buyers in any state where you have sales tax nexus. Here are the factors that generally create nexus:
- A location – an office, warehouse, store, or other physical place of business
- Personnel – an employee, contractor, salesperson, installer or other person doing work for your business
- Inventory – Most states consider storing inventory in the state to cause nexus even if you have no other place of business or personnel
- Economic nexus – Your sales or transactions into the state mean you are subject to the state’s economic nexus rule
- Affiliates – Someone who advertises your products in exchange for a cut of the profits creates nexus in many states
- A drop shipping relationship – If you have a 3rd party ship to your buyers, you may create nexus
- Selling products at a tradeshow or other event – Some states consider you to have nexus even if you only sell there temporarily
- Using the Amazon Flex Program – in some cases, making deliveries into a state via Amazon rather than via common carrier (The United States Postal Service, UPS, FedEx, etc.) may create nexus
The most common cause of sales tax nexus in the U.S. for international sellers who sell via Amazon FBA is having inventory stored in one of Amazon’s fulfillment centers. However, if you think you may have nexus for some other reason, you can read what every state’s sales tax laws say about nexus here.
Even though you have sales tax nexus in a state, the amount of sales you make into that state may not be “material.” For example, you may have inventory stored in a fulfillment center in Kansas, but only make a handful of sales into the state per year. If you only owe a few dollars in sales tax in a state, you may make the decision not to register for a sales tax permit. After all, if you are caught by the state and audited, you can easily cover the amount of sales tax you could have collected and paid.
On the other hand, you may have a low risk tolerance. Perhaps you are operating on slim profit margin and one sales tax audit can wipe out your profits for the entire year. This concept can be tricky, so you can read a lot more about sales tax registration and materiality here.
A note on state income tax
Many online sellers assume that because your country has a tax treaty with the U.S. that you are not required to collect sales tax or pay state income tax. Unfortunately, this is not the case. Tax treaties with the U.S. federal government do not extend to individual U.S. states. In other words, you may be on the hook to pay state income tax due to your online selling activities in a certain state. Because of the complexities of selling into the U.S., Fleming recommends a consultation with a company like Peisner Johnson that specializes in helping online sellers conquer all tax liability.
#2 – Obtain an Employer Identification Number (EIN)
An employer identification number (EIN) is a unique number assigned to businesses in the U.S. in order to identify them. Non-U.S. sellers are required to obtain an EIN for purposes of identification by the U.S. government.
As an international seller, you must do two things to obtain an EIN:
- Call the IRS – Fleming advises that non-U.S. sellers are required to call the U.S. Internal Revenue Service (IRS) and, while on the phone, provide the info found on form SS-4. You will also be asked to email this form to the person you are speaking with.
- Fill out IRS form SS-4 – Provide all information required by this form.
Fleming notes that hold times may vary from 8 minutes to two hours, so be prepared to wait, and to take steps to avoid international calling fees. Further, inaccurately filling out form SS-4 or providing incorrect information to the IRS could result in problems filing your taxes down the road, so if you are uncomfortable with this step, it’s wise to take the advice of tax advisor.
#3 – Set up a U.S. bank account or other payment method
While setting up a U.S. bank account is not entirely necessary, it does make your life easier when it comes to remitting the sales tax you’ve collected to each state’s department of revenue.
Three companies can help international online sellers set up bank accounts in the U.S. Do your due diligence before signing up. Most states require an Automated Clearing House (ACH) transfer from your bank account to their online system, so ensure that the vendor you choose can assist with this.
Another option is to visit the U.S. and open a bank account. However, many banks will not allow international business entities to open U.S. business bank accounts. A bank may allow you to open a personal U.S. bank account, however there is often a limit on how much can be run through a personal bank account in a month, so this may not be a viable option depending on the size and volume of your business.
Other payment options
If the bank account option does not work for you, you can also hire a firm like Peisner Johnson to remit your sales tax for you. In this case, you’d wire them the money you owe to a state, and they would remit the money to the state from their own U.S. bank account.
We spoke to another online seller who was asked by the state of Nevada to send a money order. While this is also an option, keep in mind that international mailing times may lead to late payments, fines and penalties.
#4 – Register for sales tax permits with individual states
At this point, you know where you need to register for a sales tax permit, and you have your EIN and payment method squared away. The next step is to register for your sales tax permit (sometimes called sales tax license, seller’s permit, etc.) with each individual state.
Keep in mind that some states will make this process more difficult than others. If you have trouble getting registered, a sales tax firm like Peisner Johnson is there to help.
#5 – Set up sales tax collection on Amazon
Once you are registered to collect sales tax in a state, your next step is to set up sales tax collection on Amazon. This requires two basic steps:
- Tell Amazon in which states you want to collect sales tax – This includes in which states you want to collect sales tax on shipping and in which states you want to collect sales tax on gift wrapping charges
- Set your product tax codes – Some items like clothing and groceries are non-taxable in some U.S. states. If you sell any items with a “product tax code,” tag your items with that tax code so that Amazon knows when (and when not) to collect sales tax
Our Sales Tax Guide for Amazon FBA Sellers walks you step-by-step through setting up your Amazon sales tax settings. You can also check out these video instructions:
If you’d rather have someone set this up for you, Peisner Johnson provides that service for a fee.
#6 – File and Pay Sales Tax
When you registered for your sales tax permit, the state will have assigned you a sales tax filing due date. You will generally be asked to file sales tax every month, every quarter, or once per year.
You can file on your own – either via paper or through the state’s online system. (TaxJar has video instructions on how to file sales tax in many states here.)
Another option is to have an advisor file your sales tax returns for you. If you had trouble obtaining a U.S. bank account or using another payment method, this is often your best option for timely filing and payment.
What You DON’T Need to Do
#1 – Set up a U.S. business entity
International sellers selling into the U.S. are not required to set up a U.S. business entity. While your individual situation may vary, setting up a U.S. S-Corp, C-Corp or other business entity is often not necessary and will result in more paperwork and potentially more tax liability.
#2 – Obtain a registered agent
According to Fleming, the typical Amazon FBA seller does not need a registered agent when it comes to sales tax. If you run into a situation where you are asked to obtain a registered agent (such as when trying to register online for a New Jersey sales tax permit), there is likely a workaround. The most common workaround is to avoid a state’s online sales tax registration system and instead send in a paper registration form.
As an international seller, dealing with state sales tax can be one of the trickiest parts of breaking into the U.S. market. It is possible to register and handle sales tax yourself, but if you have any questions or concerns at all, we recommend hiring a tax advisor like Michael J Fleming and Associates to save you time, money and headache on this task.