Q4 is here, and, for online sellers, that means putting all the plans in place for a record breaking sales season. That also means setting up systems and automation so you don’t end up spending your precious time troubleshooting preventable issues, like sales tax problems. Double check these four potential sales tax issues in your Amazon account now, so you can sail into Q4 prepared for anything the season throws at you!
This is a guest post from Jennifer Dunn, Chief of Content with our partner, TaxJar.
Tip 1: Ensure you’re collecting sales tax in your nexus states
In the U.S., online sellers and other retailers are only required to collect sales tax in states where you have sales tax nexus. Nexus is just a fancy way to say a “significant presence” in a state, and there are several ways businesses can create nexus in a state:
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- A Physical Presence – Such as a home office, warehouse, store, or other location
- Affiliates – Someone who sends customers to your online store for a percentage of the profits from a sale
- Personnel – Employees, salespeople, and even some contractors can establish nexus
- Drop Shipping – A situation where you have a relationship with a supplier to ship inventory to your customers
- Selling items at a trade or craft show
- Inventory – If you store goods for sale in a state, sales tax nexus is usually created. If you’re a seller who makes use of third-party fulfillment services like Amazon FBA you’ll generally have sales tax nexus in states where your products are stored for sale.
Click here to view what each state’s tax law says about sales tax nexus.
Amazon recently opened fulfillment centers in two new states – Colorado and Michigan. FBA sellers may find that they now have nexus in those two states. If you do find that you have nexus in a new state, your next step to getting sales tax compliant is to register for a sales tax permit in that state and then set up sales tax collection from buyers in that state through your Amazon Seller Central account. Here’s a video on how to do that:
Tip 2: Ensure you’ve set up your product tax codes
In the U.S., most tangible personal property is taxable, but some items like groceries, clothing, textbooks and others are not taxable in every state. Or, even if they are taxable, they may be taxable at a lower rate. For example, groceries are taxable in Illinois, but they are taxable at a reduced rate of 1%.
Fortunately, Amazon will take this into account for your products as long as you have tagged them with the right product tax code in Seller Central.
Here’s an FAQ all about how to use product tax codes in Amazon. Ensure that you’ve properly tagged your products. Otherwise, you may end up charging a customer too much in sales tax and receiving a complaint. And nobody wants that in Q4!
Tip 3: Double check sales tax on shipping
Each U.S. state governs sales tax a little differently. One thing that differs from state to state is whether shipping is considered taxable.
In most states, shipping charges are considered a taxable part of an online sale. This means that if you charge your customer $50 for a toaster and $5 in shipping, you’d be required to charge sales tax on $55 – the entire amount of the transaction.
However, some states do not consider shipping a taxable part of a transaction. So in that case, if you sold the same toaster for $50 + $5 in shipping charges, you’d only charge sales tax on the $50 item price, and not on the $5 in shipping charges.
Amazon allows you to choose whether to collect sales tax on shipping, and you can see a list of states that require sales tax on shipping here.
Tip 4: Double check sales tax on gift wrapping
Just like with shipping, some states consider gift wrapping to be a taxable service. With Amazon, customers can choose to have items gift wrapped, but it’s up to you to instruct Amazon whether you want to charge sales tax on gift wrapping to your buyers.
If you didn’t set up sales tax on gift wrapping when you first set up sales tax collection on Amazon, it’s a good idea to take a second look before the holiday season gets underway. You can see a list of states that consider gift wrapping taxable here.
Tip 5: Automate sales tax reporting and filing
Last but not least, Q4 is the perfect time to take sales tax completely off your plate by automating sales tax reporting and filing. Automating your sales tax returns means that you don’t have to spend an extra minute on non-profit-generating sales tax, and can instead spend all your time and brainpower on business activities that will boost your holiday sales bottom line.
I hope this post has helped you streamline your Q4 sales tax so you don’t run into any unexpected holiday hassles. Do you have questions about preparing your business’s sales tax for Q4? Start the conversation in the comments!
TaxJar is a service that makes sales tax reporting and filing simple for more than 10,000 online sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!
Jennifer Dunn is TaxJar’s Chief of Content. Her passion is making tough sales tax topics simple so you can get back to doing what you do best – running your business! Connect with Jenn on Twitter @TaxJarJenn.