Amazon Sales Tax 101

The 5 Top Sales Tax Questions from Jim Cockrum’s CES IV

by Jennifer Dunn

I spent the weekend alongside my colleague Lizzy Greenburg at at Jim Cockrum’s CES IV. When we weren’t listening to the great programming, like Andy Slamans’ inspirational story, Diana Ratliff and Marcus Cloud on creating and offline business, or the amazing rise of Death Wish Coffee, we were fielding your sales tax questions. We loved every minute of it!

TaxJar Booth Jim Cockrum CES IV

But you know what they say. “For every person who asks a question, five other people are wondering the same thing.” So I thought I’d compile the questions we heard time and time again at CES IV so you can read the answers, too. And don’t forget to download a copy of our Sales Tax for FBA Sellers Guide. This guide compiles all the info we shared at CES IV, but also includes lots of great links so you can find out more about sales tax and get started yourself.

1. What is this “nexus” you keep talking about?

“Sales tax nexus” is simply a fancy, legalese way of saying “significant connection to a state.” Sales tax is governed at the state level, and 45 U.S. states and D.C. have a sales tax. When you have nexus in a state, you are required by that state to register for a sales tax permit and collect sales tax from your buyers when you ship an item to that state.

Here are the factors that create nexus:

  • A location – your home office, outside office, a store, a warehouse, a factory, etc.
  • Personnel – employees, salespeople, installers, and even some contractors if they make up a material part of your business
  • An affiliate – in some cases, if an affiliate sends sales to your company in exchange for a cut of the profits, they create nexus
  • Drop shipping – if you have a supplier drop ship to your customers, you may be on the hook to collect sales tax for that transactions
  • Temporarily doing business – if you sell at a tradeshow or craft fair, you may create nexus in a state even when selling temporarily
  • Storing inventory in a warehouse – this is a big one for Amazon FBA sellers, because when Amazon stores your products for sale in a state, that creates sales tax nexus in that state. (With big, welcome exceptions in Virginia and New York.)

Why do states get to say this? Especially if you don’t live in that state?  This all stems from a Supreme Court decision from back in 1992 called Quill v. North Dakota. To make a long story short, North Dakota noticed the Quill corporation (famous for their pens) making sales to ND buyers without collecting sales tax. They sued to require Quill to collect sales tax, and the case made its way to the Supreme Court. The final Supreme Court decision held that a seller had to have nexus (significant presence) in a state to be required to collect sales tax from buyers in that state. But the state gets to determine what is significant presence, within the limits of the Constitution.

In the end, it helps if you think of “nexus” from the states’ point of view (because it can seem awfully murky from our point of view.) States use sales tax to pay for state budget items like roads, schools, state parks, and public safety. So they have a claim that you having an employee or storing inventory in a warehouse in their state uses state resources, so they can require you to collect sales tax.

Amazon, too, is always careful to say that while they provide 3rd party fulfillment services, the business is your business and you are the seller of record (i.e. the seller who should collect sales tax.)

2. I’m not collecting sales tax in my home state. What do I do?

We highly recommend that you register for a sales tax permit and collect sales tax from buyers in your home state. From a risk standpoint, it is highly likely that your home state will eventually realize that you have a retail operation within their borders and should be collecting sales tax from buyers in your state.

This leads to a third question:

3. How do I register for a sales tax permit?

The rule of thumb when it comes to sales tax is that every state does things slightly differently. While they all require you to have a sales tax permit (sometimes called a sales tax license, seller’s license, etc.), they’re all slightly different in how you go about obtaining one.

We’ve put together a blog post “How to Register for a Sales Tax Permit in Every State.”

We also work with CPA partners like Windward Tax to provide registration services for you. Registrations through a tax firm start at $85. If you’d like help getting registered, fill out our State Registrations Form.

4. When should I register for a sales tax permit in my other nexus states?

In every state but one, there is no minimum revenue threshold for when you should register for a sales tax permit. This means that states require you to register for a sales tax permit and start collecting sales tax from buyers as soon as you have nexus in that state.

That said, there’s another concept called “materiality” in play here. We’ve written a much more detailed account of when you should register to collect sales tax in a remote state here, so I suggest you check that out after reading this post!

The rule of thumb is to let risk be your guide, and that’s where TaxJar can help!

When you link your Amazon account (and the other shopping carts and marketplaces you sell on) to TaxJar, we’ll show you where your Amazon inventory is currently being stored, and how much sales tax you “should have collected” in each of those states. That way you can determine your risk in those states and decide when to register.

Be sure to check out our “When to Register for a Sales Tax Permit” post and eBook for much more on the subject!

5. I’m an international seller. Should I collect U.S. sales tax?

The short answer is that no matter where you live, if you have sales tax nexus in a state, that state wants you to register for a sales tax permit and collect sales tax from buyers in that state.

It is more complicated for international sellers to get registered for a sales tax permit and remit sales tax. That’s why we recommend a couple of great accounting firms for international FBA sellers:

We also have a more detailed post about collecting sales tax as an international seller here: “Do International Sellers Have to Deal with Sales Tax in the U.S.?

Did we miss any of your questions? Let us know in the comments or in our Facebook Group “Sales Tax for eCommerce Sellers“!

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