Sales tax implications for sellers in the Amazon Marketplace

It’s reported that some 2 million sellers are using Amazon Marketplace today, which represents a 50 percent increase over the past two years.

Unfortunately, not all who conduct business through the online retailer understand that sellers are legally responsible for collecting and remitting sales tax based on where they have a sales tax nexus. Some assume that because Amazon has a system to automatically calculate and collect sales tax for sellers that there’s nothing else to do. But companies that don’t keep track of their sales tax obligations may miss payments and be subject to fines and penalties.

Smart Business spoke with Jeff Mallory, tax partner at Clarus Partners, about keeping up with tax obligations as a seller on Amazon Marketplace.

Why might collecting and remitting sales tax concern Amazon Marketplace sellers?

Sellers are increasingly being required to house merchandise in one of Amazon’s warehouses as the company pushes its Prime membership program, which is predicated on having an order shipped to the buyer within a day or two. With Amazon recently adding warehouses in Ohio, Massachusetts, Minnesota, North Carolina and Kansas, sellers could have their inventory placed in any of these locations. If their products are located in any of the Amazon warehouses, the seller would be required to collect and remit sales tax to the location from which the goods were sent.

This has become more of an issue for businesses because some sellers might not realize that their inventory is in a state outside their headquarters and that they subsequently need to pay sales tax to the state holding their inventory.

Additionally, states have been losing billions of dollars in sales tax revenue as online retailing has grown. States are crafting legislation that targets online retailers to ensure they collect and remit sales tax on goods sold within their borders.

What should companies know about the sales tax implications of selling through the Amazon Marketplace before they get involved?

The legal burden is on sellers to collect and remit sales tax to the states or localities in which they have a sales tax nexus, which, generally speaking, is a physical presence in a state — typically an office employee or a warehouse — but it also means where company inventory is stored. A feature of the Amazon program is that Amazon collects sales tax where applicable, then passes it to the seller through disbursements where the seller is required under the law to file a sales tax return and remit the tax to the respective states or jurisdictions. But that doesn’t mean Amazon’s automated reporting and collection processes are always accurate.

How can sellers ensure they’re complying with states’ sales tax obligations?

Sellers can track where their products are located and the taxes Amazon has collected through the online retailer’s website. A monthly report can be generated that shows all sales, their destination and the amount of tax collected.

It’s advisable for sellers to periodically review this information so they are clear on where their products are housed and that Amazon is correctly calculating the taxes owed in each state. Maintain a record that’s kept independent of Amazon’s tracking and reporting features. Every seller should have processes and procedures in place to not only review what Amazon has collected, but make sure that if it was not correct, the seller remits the right amount of tax on time with its sales tax filings.

Sellers need to register in all the states in which they have a nexus and file returns on a periodic basis. That could mean submitting monthly or quarterly sales tax returns and payments, depending on the state or jurisdiction.

It’s a good idea for sellers to consult with a tax adviser to make sure it is clear where they have a tax nexus, and that they know the laws and the rules for individual state’s tax collection and remittance procedures.

Insights Accounting is brought to you by Clarus Partners