This blog comes to us from our friends at MuseMinded. Read on for a superb primer on Sales Tax.
Business in today’s world is rapidly evolving. It was only 27 years ago that the internet was opened up to the public, and it has since gone on to change the way that we shop, thanks to the emergence of eCommerce.
A tremendous amount of business is now conducted online - largely via marketplaces such as Amazon, Ebay, Etsy, and AliExpress. Statistics show that eCommerce sales now account for 10% of total retail sales in the United States. It is projected that this figure will increase to around 14% by 2021.
To support this fast paced and often complex route to market, we have seen the emergence of specialist support companies and software apps to assist with business growth, managing time, simplifying taxation and improving profitability.
Despite the availability of such software, apps and services, there is often an element of reluctance to embrace change and try out new systems and techniques.
In this article we take a look at some up-to-the-minute technologies, and what you need to know in order to remain compliant with sales tax laws in the US. These systems are designed to make the administration and analysis of sales information, and in particular ‘sales tax’ accounting simple and timesaving. Best of all, they won’t break the bank.
First, we need the right tools to do the job. By working with a cloud-based accounting system, it is possible to use third party apps and plugins such as A2X to automate away much of the workload related to compliance. These systems need to integrate well with the likes of ‘Seller Central’, and be able to handle the intricate details that come with managing large numbers of transactions. We also need a manageable system to account for the variables associated with State tax regulations.
Sales tax - what you need to know
Sales tax is a forever changing minefield for Amazon sellers. Recent changes to the law have allowed States to set their own rules regarding who is responsible for collecting and filing sales tax returns. Understanding sales tax, along with your responsibilities as an online trader can be a daunting task for any business owner. So let’s take a look at some of the key points related to sales tax:
- What is sales tax and why does it apply to you?
- Understanding nexus in relation to sales tax.
- Assessing when and how to register for sales tax.
- Methods of assessing and paying sales tax.
What is sales tax and why does it apply to you?
In some countries, ‘sales tax’ is a tax administered by the nation’s government and it is levied on goods and services. In the UK for example, sales tax is called VAT (value added tax), and in Australia it is GST (goods and services tax). However In the States it is administered by each State tax authority. This is where the added complexity comes in.
In America, sales tax rates, due dates and filing frequencies are set by each individual state. As a result, they can vary greatly. The important thing to understand as an Amazon seller, is that you can be liable to pay taxes to individual State tax authorities if you have a business association with that State.
How do you know if you have any such liability? This can be explained by understanding what ‘nexus’ is, in relation to sales tax.
Understanding nexus in relation to sales tax:
‘Nexus’ is a term meaning ‘connection’. In the context of sales tax, you can have a connection and therefore tax obligations in one or more States in the following circumstances:
- In your home State (where you live and operate from). If you incorporate in one State and live in another then it is likely you have nexus in both States.
- If you have business partners and staff located in other States, then you can have nexus with those States too.
- The location of where your inventory is stored and dispatched from also creates nexus.
As an Amazon seller, you may be using or considering FBA (Fulfilment by Amazon) for managing your warehousing and logistics. Given that Amazon currently has facilities in over 30 States, it is possible that you may also have inventory in these locations and in turn have nexus with those States.
If you are an FBA seller you’ll need to find out where your stock is located. To do this you have a couple of options:
- Manually run a detailed inventory report in your Seller Central account.
- To save time you can subscribe to a paid service such as WhereStock, which creates a comprehensive stock location summary.
- If you’re using A2X already, their “Locations” report will help you understand when you first had nexus in a state.
Keeping records of your inventory, and assessing your tax implications is very important. There are a range of ways to manage compliance, which we discuss below. However, if you would like to learn more about automating your accounting, and using the power of modern technologies to make your life easier, check out our free bookkeeping automation tutorial.
Assessing when and how to register for sales tax:
For many online sellers, it is often a judgement call as to whether they need to register for sales tax in a particular State. Three approaches to this question can be considered:
- 100% by the book: This will be the obvious choice as recommended by most accountants, as it ultimately provides ‘peace of mind’ for the business owner. Despite the fact that many States have generous minimum thresholds for sales tax registration (as an example, Kentucky only requires online sellers to register if they do more than $100,000 or 200 transactions in a year), it may be prudent collect and pay the taxes regardless. If your business is turning over more than $100,000 per month, then chances are you’ll be over any minimum thresholds relevant to the States where you have nexus.
- Wait and see strategy: Some Amazon sellers with lower levels of turnover adopt the wait and see approach. They do this on the basis that they are ‘flying under the radar’ of the State tax authority, as they have not registered to pay sales tax in that State. It is a risky approach which weighs the cost of penalties against the savings made by not collecting, administering and paying sales tax.
- The ‘stair-step’ approach: With this option you begin by registering in your home State first and collect and pay taxes as required. As your business grows, you add more states until you become fully compliant. You can set a threshold based on a combination of variables such as turnover, tax liability and tolerable risk level. When the threshold is met, then you register in that State. Keep in mind that State tax laws with regards to minimum thresholds for registering do vary from State to State.
What I see a lot of sellers doing is they monitor their sales tax exposure before they go outside their home state, and what they do is they set a threshold for themselves. They say “when the sales tax I should have collected in any given state crosses $500 or $1,000 or $2,000, that’ll be my alert to go register in that state” and what that helps happen is you don’t start complying in a state that you have just a miniscule amount of sales tax exposure in.
Methods of assessing and paying sales tax:
Assuming that you have decided to register in some or all States where you have nexus, then you’ll need to find and complete the necessary forms for registration. Keep in mind that not all State tax authorities have user friendly online services. A lot of can time be consumed trying to navigate to the right website and section. Take a look at this great resource by TaxJar - here you can click on individual States for a comprehensive breakdown on the local regulations and other important information.
Assessing and paying sales tax manually can be a tedious process involving the analysis of sales data from your ‘seller central’ reports. Although this may be this best approach for smaller businesses starting out on a tight budget, there are automated apps that can help such as TaxJar and Taxify. These apps start at $19/month, and they will collate and present your sales tax information in a user friendly format that is easy for filing. They also provide the option to auto-file returns to States where you are registered.
As your business grows larger, you may decide that it is the time to consider outsourcing your compliance requirements. Costs for this type of service begin at $100 per month. In the event that you have tax queries from the State tax offices, then your outsourced contractor will take care of this and allow you to focus on running the business.
As far as Amazon accounting goes, sales tax compliance is just one part of a bigger picture. MuseMinded is an accounting firm dedicated to embracing the power of automation and outsourcing to make it much easier for Amazon sellers to run their businesses.