If you sell products online, you need to ensure that you are complying with the growing web of online sales tax laws in the United States. It used to be that if you sold a product online, the consumer walked away without paying a sales tax and the seller got to avoid tax collection and remittance. Things are different now, and nobody is impacted more than Amazon.com (NASDAQ: AMZN), the world's largest online retailer and former chief place to buy goods while avoiding local government sales taxes.
Technically speaking, Amazon does not charge sales tax because only governments can levy taxes. What Amazon can do is set up processes and systems through which taxes are applied to online transactions. Since there is no federal sales tax in the United States, this means Amazon has to comply with the myriad of different state tax jurisdictions.
- Tax remittance is the process of sending collected taxes to the government and one of the most challenging aspects of doing business online.
- Amazon is the world's largest online retailer and must comply with state tax codes in many different jurisdictions.
- Third-party sellers on Amazon are responsible for paying state taxes in states where they have a significant presence or "nexus."
- Third-party software can help ensure that all state taxes are paid in full and on time.
How Amazon Sales Tax Is Calculated and Assessed
The laws surrounding online sales taxes vary among states. For example, in Colorado, Amazon.com purchases must include a 2.9% sales tax, which is much lower than in Illinois, which charges a 6.25% base rate plus whatever municipalities or cities charge, often 1% extra. Of course, consumers pay the tax, not Amazon, but the company must devote time and resources to the collection process.
Regional online sales taxes are part of an evolving subject, and the system has seen notable changes as state governments played catch-up to online retail. By Aug. 2016, 28 states charged a sales tax on products sold through Amazon.com, including California, Texas, Illinois, and New York. That number was up from 23 states in 2013. By the end of 2015, approximately 80% of the U.S. population lived in states where Amazon collected sales taxes.
Tax-free shopping on Amazon officially ended on April 2017 when the online retailer began collecting sales taxes on purchases in the last four states—Hawaii, Idaho, Main, and New Mexico—where it wasn't already doing so. Four other states—Delaware, Montana, New Hampshire, and Oregon—do not impose sales tax, and Alaska has municipal sales taxes, but not statewide taxes.
Amazon Sales Tax for Sellers
Amazon is not the only entity that needs to worry about taxes for online purchases. Each Amazon seller has to pay sales taxes, too, and any third-party seller who forgets to do so may face serious tax liabilities. This is still a new and unfamiliar responsibility for sellers, and many get it wrong or ignore it entirely.
Amazon sellers must be able to identify three variables: where the seller has a business presence or tax nexus, who collects the tax and how, and how the tax remittance process works.
Tax nexus, one of the four prongs of U.S. sales tax law, depends on the state or locale in which the seller conducts business, not where the buyer is located or how the product moves between them. If a seller has physical locations in multiple jurisdictions, whether offices or in-store retail shops, the seller must be aware of the different tax laws in each jurisdiction. This can be time consuming and confusing because tax laws vary significantly across the country. Certain states have enacted legislation, or so-called "Amazon Laws," that requires all online sellers to collect sales taxes. These laws even hold true for sellers who do not have a physical presence in the state.
Collecting sales taxes can either be performed by the sellers themselves or through Amazon, which lets its sellers opt into an automated program, which Amazon offers for a 2.9% fee. The seller is still responsible for collecting and adding tax identification numbers from each of its nexuses.
The Bottom Line
Tax remittance, or the process of sending collected taxes to the government, is one of the most challenging aspects of selling a good, especially for small businesses. This is because remitting tax can be time consuming and easy to get wrong. Sellers are encouraged to use third-party software solutions to help ensure taxes are made in full and on time, or even consult a tax advisor to sift through the legalese.