Tips for Avoiding Amazon Seller Central Sales Tax Mistakes
Selling your company’s products on Amazon has many advantages, such as reaching a broader customer base than you may have access to otherwise. As you expand your base, you will likely be selling to customers in many states. This creates a new challenge: Do you know whether or not you should be charging sales tax in those states?
There are many options for automating the sales tax collection process within the Amazon Seller Central tax settings. The large number of options — not the mention Amazon’s limited guidance — can potentially cause you to commit simple errors. Here are some of the common mistakes we see businesses make:
Collecting Tax in All Jurisdictions
Figure 1: We do not recommend that you collect tax in all jurisdictions unless you know for a fact you have a sales tax obligation everywhere in the United States.
This is an easy mistake to make. In “tax settings,” there is a box labeled “Check to calculate tax in all Tax Jurisdictions.” Checking this box enables Amazon to collect tax on your behalf in all jurisdictions — state and local — which in turn means you will need to register, file returns and remit tax in every jurisdiction. This can be a heavy burden on your business, as you are most likely collecting in many more jurisdictions than required and potentially not remitting all tax that has been collected. So, how do you fix this mistake?
- Start by unchecking the “Check to calculate in all Tax Jurisdictions” box. Then select only the individual states and localities where you have nexus or physical presence.
- Analyze the historical tax collected and reconcile to the amounts remitted on tax returns.
- If all tax has not been remitted, you may want to speak with a tax professional, as collecting and not remitting tax is illegal and can put both you and your business at serious risk.
- If all tax has been remitted appropriately, look into de-registering in states where no collection obligation exists.
Collecting but Not Remitting Tax
Amazon will send you a report detailing sales tax they have collected on your behalf. It is extremely important that you remit all tax you have collected. In many states it is criminal to collect and not remit sales tax. You need to develop a monthly process to review the tax collected and ensure it is remitted in full to the proper jurisdiction. You can use a tool like Taxify to remit Amazon sales tax collected to states automatically.
Collecting Tax in All Localities Within a State but Not Remitting to All Localities
States vary on how sellers should remit local taxes. Some states require local taxes to be remitted on the state tax return, while others mandate local taxes must be remitted on a separate return directly to the local jurisdiction. This is common in states like Colorado, Alabama and Louisiana, but there are many others. How do you determine if you are properly remitting?
- Review where you are currently registered and filing returns. Research or call the state to verify how local taxes are remitted.
- If you are incorrectly remitting local taxes you will need to register in the proper jurisdictions and begin remitting the tax correctly going forward. You will also need to analyze the amount of tax remitted in error to determine whether action is needed to correct historical filings. This may require assistance from a tax professional.
Figure 2: If you are collecting tax at the county level in a particular state, it is important that you remit tax to *every* county in the state. Amazon does not let you “pick and choose” which counties to collect tax in.
Not Setting Up Product Tax Codes
For Amazon to properly collect tax on your sales, you must choose the appropriate product tax code(s). States tax certain types of products (e.g. clothing, food, software) differently, so Amazon must know which items you are selling to accurately calculate tax.
Figure 3: Be sure to set up the correct default tax code, which will be used in the event you do not have a tax code listed for your inventory.
- Decide whether or not you want a default tax code, and select the right one: In tax settings, confirm whether you have checked the box “Use default product tax code” and review the product tax code you have selected. The default tax code you select will be used in the event that you have not set a tax code for the specific product you’re selling. For example, if you primarily sell general clothing you should select the “A_CLTH_GEN”. This will ensure any inventory you upload into Amazon that does not have a tax code will fall under the default tax code instead. If you sell a wide variety of products it might make the most sense to not select a default tax code. If you do not select a default tax code and you also don’t have a tax code listed when you upload inventory, Amazon will default to using the Always Nontaxable code (A_GEN_NOTAX).
- Upload inventory with the correct tax code: Most Amazon FBA sellers will upload inventory using the Inventory Loader File, but often forget to select the tax code. You can place your inventory’s product tax codes in column ‘O’ of the default template. If you do not use the inventory loader, you can also set the default tax code within the Seller Central website.
Figure 4: You can set your inventory’s product tax code when you import inventory using the default template.
This Article Brought to You By SimekScott
Drew Simek is a Principal CPA with SimekScott who has over 11 years of experience consulting with business on state sales and use tax issues. Drew has experience working with all size businesses, from Fortune 500 to small operations. If you need help getting your sales tax in order you can contact Drew by clicking here.