Amazon sellers taxes: A beginner’s guide to FBA sales tax

Fulfillment by Amazon (FBA) opens powerful opportunities for entrepreneurs to tap into Amazon’s logistics network for storage, packaging and shipping. However, managing Amazon seller taxes as an FBA seller can feel like solving a Rubik’s cube in the dark.

Let’s fix that. Keep reading to understand varying state rates, rules on taxable goods, and sales tax nexus to stay compliant.

Jump ahead to learn:

• Does Amazon collect sales tax for sellers?
• What is sales tax nexus?
• FBA sellers tax: State-specific rules
• How to file Amazon seller taxes in 3 steps
• Who is exempt from Amazon sellers tax?
• How NEXT helps protect your Amazon seller business

Does Amazon collect sales tax for sellers?

In most cases, yes. Amazon handles sales tax collection for Amazon sellers. Still, online retailers must understand when and how sales tax applies. It can be complex, as your Amazon FBA tax obligations may vary depending on what you sell, where your business operates and where your customers are located.

Some items you sell may be subject to Amazon FBA sales tax, while others may be exempt. Additionally, you need to account for district, city, county and state sales tax rates to determine a combined amount of tax.

Louisiana (9.56%), Tennessee (9.55%), Arkansas (9.45%), Washington (9.38%), and Alabama (9.29%) have the highest average combined state and local sales tax rates. In Colorado, Amazon purchases must include a 2.9% sales tax, which is much lower than the 6.25% base rate you’ll pay in Illinois (just remember to add the municipality or city rates when calculating marketplace tax collection).

Fortunately, Amazon makes it easier by automatically pricing sales tax when a customer purchases a product. While this simplifies the process, you’re responsible for proper tax compliance and registration in states where you have nexus.

What is sales tax nexus?

Sales tax nexus is a legal term that refers to a significant business presence in a state, establishing a connection between your business and the state’s taxing jurisdiction. If your company has nexus in a state, you must collect and remit sales tax there.

Here’s the tricky part: FBA sellers can have nexus in multiple states depending on:

• Physical presence of your business
• Employees or contractors working in the state
• Drop-shipping operations
• Selling at craft markets or trade shows
• Inventory stored in Amazon fulfillment centers

FBA sellers tax: State-specific rules

States determine sales tax rates using either destination-based or origin-based sourcing. Here’s what that means:

• Destination-based sourcing: Most states use this model, where the buyer’s location determines the sales tax rate. For example, if a customer in New York buys a product from your business in California, you apply New York’s sales tax rate.
• Origin-based sourcing: In these states, your business location determines the sales tax rate, regardless of where the product is shipped or picked up. Using the previous example, you would apply California’s rate even for sales to New York customers.

As a third-party seller, every FBA warehouse is a potential nexus. To find out where your Amazon inventory is stored and where you might have established a nexus, follow these steps:

1. Sign in to Amazon Seller Central.
2. Select the Reports tab and choose Fulfillment from the drop-down menu.
3. Find the Inventory Ledger report under the Inventory section.
4. Click Download under the type of report. Select Fulfillment Center under location, specify the date and download the file.
5. Open the report in Excel and look for the column labeled “Location.”

The spreadsheet will show the fulfillment centers where your Amazon FBA inventory is stored via a fulfillment center code. You can review the list of Amazon fulfillment centers to discover where you might have sales nexus.

Pro tip: Having inventory spread across Amazon’s fulfillment centers means you might need business insurance. If your hobby turns into a business and gross sales reach $10,000 or more month, you’ll need Amazon insurance. The good news? Those insurance premiums are tax-deductible, meaning they can reduce your taxable income. Here are some common coverages to look at:

• General liability insurance in case a product you sell causes injury or damage to someone’s property.
• Product liability insurance protects you if a customer claims one of your products hurt them.
• Workers’ compensation might be required if you’re an Amazon seller with employees. It covers medical expenses and lost wages if employees are injured on the job.
• Commercial property insurance protects your inventory, equipment, and workspace from things like fire, theft, or other damage.
• Commercial auto insurance covers you for accidents or damage while driving for work.

How to file Amazon seller taxes in 3 steps

You’ll need a sales tax permit to start collecting Amazon business FBA tax. After, you can set up sales tax collection through your Seller Central account.

Here’s how:

Step 1: Get a sales tax permit

Each state has its own rules and application process for getting a sales tax permit. Visit the state’s tax authority or department of revenue website for tax information and get the necessary forms.

Step 2: Turn on tax collection

Your Seller Central account is the hub for setting up Amazon’s tax calculation services. Once you log in:

1. Go to the Settings drop-down menu and select Tax Settings.
2. Enter the state tax registration number for each state where you collect tax.
3. Follow Amazon’s detailed step-by-step process to complete the setup.

Double-check everything to make sure you have the correct registration numbers for each state.

Step 3: Report and file your Amazon FBA sales tax

Amazon does most of the heavy lifting thanks to Marketplace Facilitator rules. If your business is located in a region covered by these tax laws, Amazon will handle sales tax for you, including calculation, collection, reporting, and remittance.

To see the total sales tax Amazon collects before filing small business tax returns:

1. Sign in to your Seller Central account.
2. Go to the Reports tab and select the Tax Document Library.
3. Scroll down and click Generate a Tax Report.

Who is exempt from Amazon sellers tax?

Some online sellers don’t have to worry about Amazon seller taxes. You might be exempt if:

• You don’t have sales tax nexus in a particular state.
• You sell tax-exempt products.
• You operate in a state that doesn’t have a sales tax (Alaska, Delaware, Montana, New Hampshire and Oregon).

If any of those apply, you won’t have to collect and pay Amazon FBA tax. But you may have another worry — if you sell consumable products like groceries or supplements, consider product liability insurance. It helps cover legal costs and damages if a customer has a reaction or gets sick from your product.

How NEXT helps protect your Amazon seller business

As your Amazon FBA business grows, so do your insurance needs. NEXT makes getting Amazon insurance to protect your e-commerce business simple, whether you’re just starting or scaling up your operations.

Our process is 100% online. Get a quote, buy coverage, and get a certificate of insurance in about 10 minutes. Then, you can manage your policy 24/7 on the web or through the mobile app.

Start a free quote with NEXT today.

NEXT does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors for personalized guidance.