By Lindsey Raker.
Are your clients considering becoming an Amazon seller? Bringing a business to one of the biggest marketplaces can have its advantages — according to Amazon, there are more than 200 million Amazon Prime members worldwide, and Amazon customers buy roughly 7,400 products per minute from U.S. sellers on the Amazon marketplace. That’s a huge number of Amazon customers their businesses can reach.
But as a business grows and sales volume ticks up, all that activity can trigger new tax obligations. In this blog post, we’ll dive into five things businesses should know if they plan to use Fulfillment by Amazon (FBA).
- How does Fulfillment by Amazon work?
- What are fulfillment centers?
- Does FBA cost money?
- Should you become an Amazon FBA seller?
- What do FBA sellers need to know about tax?
It’s important to have a good understanding of how Amazon sales can impact tax obligations and how FBA works. Let’s begin.
How does Fulfillment by Amazon work?
FBA stands for Fulfillment by Amazon, which is part of an automated set of services called Supply Chain by Amazon. FBA is a popular choice for ecommerce entrepreneurs.
When you choose to become an Amazon seller, your small business can pay FBA fees to outsource order fulfillment to Amazon’s own fulfillment centers and network. Your business will send products to one of Amazon’s fulfillment centers and offer free same-day, one-day, and two-day shipping through Amazon Prime. Amazon packs and ships orders when your customers make purchases, handles customer service issues, and processes returns.
You’ll manage your product listings and sales history through your Amazon and Seller Central account.
Customers can also get regular orders of your product at a discount with FBA Subscribe and Save. For example, if your business sells goods like diapers, protein powder, or vitamins, customers can get monthly shipments from your storefront with very little work on your end.
FBA might be the right choice for your business if you have a high volume of sales, have large or heavy items that take a lot of effort to store and ship, want to offer premium delivery speeds (at a discount to you), don’t have customer service resources or logistics in place, or want to access additional FBA tools and Amazon services like Subscribe and Save and Multi-Channel Fulfillment all through a centralized account.
But you don’t have to participate in the FBA program to sell through Amazon.
Another option for selling through Amazon is using Fulfilled by Merchant (FBM) shipping, also known as seller-fulfilled shipping. With FBM shipping, you’re responsible for packing, prepping, and shipping your orders. You’re also responsible for handling customer service, including returns and refunds. Sellers who use FBM are required to offer standard shipping to the lower 48 states, and can also offer free and expedited shipping options. After meeting set metrics and gaining experience as an Amazon seller, you’ll be able to offer your customers one-day and two-day delivery.
Are you considering FBM for your business? It could be the right choice for you if you have a lower sales volume, a smaller amount of inventory, temperature-sensitive goods, plenty of space to store your products, or the ability to handle customer service and returns in-house., If you do go with this option, however, it’s important that you keep track of your sales volume and transaction numbers for every state you sell into, which will impact economic nexus (which we’ll define below).
What are fulfillment centers?
Fulfillment centers are warehouses that store, pack, and ship orders for Amazon customers. These centers can have both Amazon inventory and merchandise from businesses like yours.
Sellers who use FBA are also eligible for Amazon Multi-Channel Fulfillment — you can use your Amazon fulfillment center inventory to fulfill orders from your other sales channels, like your website or other ecommerce apps. Multi-Channel Fulfillment can be a great resource for sellers who want to maximize their reach without adding product packaging costs, shipping costs, order packing, and customer service tasks to their plate.
Amazon has warehouses all over the world, enabling fast fulfillment and reliable shipping wherever your customers are located. FBA sellers with international customers can also sell with Pan-European FBA, a solution that helps you place FBA inventory in warehouses closer to your customers, and will fulfill and deliver orders more quickly and affordably than shipping them from a U.S. warehouse. This can save you on fulfillment fees, too, since an item shipped from an Amazon European marketplace only requires the seller to pay the local FBA fees.
If you were to sell through the European Fulfillment Network (EFN), you’d be responsible for a cross-border fee for each order shipped. If you’ve ever sent a package to a customer in another country, you know how expensive and onerous it can be to use international shipping methods.
Does FBA cost money?
Yes, Amazon FBA costs money, but the cost to use Amazon FBA services depends on the type of products you sell and other factors like shipping weight. Amazon will also charge FBA fees each month to store your inventory in their warehouses. Additionally, depending on the plan you choose, you’ll pay Amazon $0.99 per item sold or $39.99 monthly. There are other FBA fees to be aware of, but the total cost will vary depending on your business.
You’ll want to consider how much Amazon FBA fees will cost your business compared to maintaining your own storage fees and fulfillment costs.
Should you become an Amazon FBA seller?
The FBA program can be a great choice for sellers who don’t have the time and capacity to store, pack, ship, and manage customer service for their inventory. How much inventory do you need to have on hand to operate your business, and how much space do you need to store it? Do you have the time to print off shipping labels and assemble orders when you’re also answering customer inquiries and folding boxes?
Chances are, you didn’t start your business from a place of passion for packing peanuts or warehouse rental. When you outsource fulfillment to a marketplace, you free yourself up to do more of what you actually want to do, like design new products and innovate solutions.
Many successful Amazon sellers also sell on eBay, Etsy, and other marketplaces. If you plan to sell on platforms other than Amazon, you can outsource fulfillment to other third-party services too. Sellers can also list products on Amazon in addition to their own ecommerce website, and just outsource some of the fulfillment. The more places a business and product listings appear, the more opportunities for customers to find them.
The downside of having customers across the country, or even the world? The potential for pitfalls when it comes to tax.
The decision of whether to become an Amazon FBA seller is entirely dependent on what works best for you and your business. There are advantages (it could free up time for you and shorten delivery time for your customers) and disadvantages (it costs money and could establish nexus in jurisdictions you weren’t expecting) to the program, and it’s up to you to weigh them against each other.
What do FBA sellers need to know about tax?
1. Depending on where, what, and how much you sell, you could have sales tax obligations in new places.
Nexus is the connection your business has to a state that creates an obligation to collect and remit sales tax in that state. You can establish nexus in a number of ways, like meeting a sales or transaction threshold, having employees, or storing inventory in another state.
Before 2018, your business generally only had to collect and remit sales tax in the state your business was located. But the 2018 United States Supreme Court case South Dakota v. Wayfair, Inc. made it possible for states to require out-of-state sellers to collect and remit sales tax. Every state with sales tax has some sort of nexus laws on the books. There are a few types of nexus that business owners like you should note:
- Physical presence nexus is based on where your office, employees, or inventory is located. Every state that has sales tax enforces physical presence nexus.
- Economic nexus occurs when you meet a sales or transaction threshold in a state. Each state has different laws and thresholds, so it’s important to track your sales carefully and know the various laws across the states you sell into.
It’s up to Amazon sellers to know the nexus thresholds in the states they sell into and to monitor sales. When you do meet those thresholds, the next step is registering your business in those states where you’re required to.
Online marketplaces are responsible for collecting and remitting applicable sales taxes in states where they have nexus. Many states don’t require individual sellers to register and file returns if you only sell through a marketplace as a remote seller, but some states do. Either way, it’s imperative that you know where your inventory is being held (more on this below) so you can register to pay tax there if necessary.
As an Amazon seller, you’re reaching customers across the globe. Each state (and country) has its own rules and regulations when it comes to what’s taxable, what the tax rates are, and what your responsibilities as a business owner are, which can get complicated quickly if you’re tracking all of this information manually. One of the benefits of selling with Amazon is that Amazon is responsible for collecting and remitting tax on your behalf, so you won’t have to monitor all this information on your own.
2. Even where Amazon stores your items can impact your sales tax obligations.
A perk of the FBA program is that you don’t have to worry about inventory storage — you just send inventory of your products to Amazon and they’ll keep it in one of their Amazon warehouses until a customer places an order. There are over 100 Amazon fulfillment centers in the U.S. and over 185 fulfillment centers worldwide, which means your inventory could be stored in a lot of places.
As we mentioned above, you should be aware of the tax obligations that physical presence nexus can create for you. Understanding where Amazon keeps your inventory is important to understanding your physical presence nexus footprint. If your inventory is stored in a state and you also make direct sales into that state, or if you sell through a marketplace that doesn’t handle sales tax for you, you may be required to register to collect and remit tax in that state. Under marketplace facilitator laws (more on these below), Amazon is required to collect and remit tax on your behalf, though you may still have to register and file returns.
3. Amazon is required to automatically collect and remit sales tax for you.
All states have marketplace facilitator laws in place that require a marketplace facilitator like Amazon or Etsy to collect and remit sales tax on behalf of the marketplace seller. This can take a huge amount of work off your shoulders.
But a few states may require you to register and file a zero return if you only sell through a marketplace that collects sales tax on your behalf. These laws vary by state, so it’s important to know what the rules and requirements are in the states your business sells to.
Registration and business licenses
Your business is also generally responsible for registering in any new tax jurisdictions. Businesses are required to obtain a sales tax permit in states where they have nexus and make direct sales, and depending on where your business is located, what you sell, and the nature of your business activities, you may be required to obtain a business license.
If you only sell through Amazon or another marketplace that collects and remits tax for you, you aren’t required to register in many states. However, if you sell directly to customers, or with a marketplace that doesn’t handle tax for you, you’ll need to do it yourself.
Requirements vary by state, and it can be a hassle to register for and maintain licenses for multiple states. An automated solution like Avalara License Management can help you apply for business licenses and maintain your license portfolio.
4. Ignoring sales tax might save you some frustration today, but create even bigger hassles tomorrow.
We get it — sales tax can be complicated, and managing it can seem like a daunting task, especially if you don’t have a dedicated team to track changing sales tax rules and monitor your sales across tax jurisdictions. But ignoring it or getting it wrong can lead to an even bigger mess, like penalties and bills for back taxes. In some cases, it can even lead to jail time.
One of the main benefits of selling through an established marketplace like Amazon is that it will handle most aspects of sales tax for you.Through the Amazon Tax Exemption Program (ATEP), Amazon can even handle exempt transactions and certificates for you and generate transaction-specific exemption certificates.
If you sell through other channels, you might want to consider an automated solution that can calculate, collect, and remit tax for you. Managing sales tax compliance manually for multiple jurisdictions can open you up to miscalculations and human error, not to mention headaches and frustration.
5. There are resources available to help you manage all of this.
The good news is that you’re not alone. Customers are turning to sales tax compliance automation to help them manage sales and use tax for their businesses. This can help save time and money, reduce the risk of human error, and alleviate the burden of sales tax management.
If you sell through multiple channels like in person, your own ecommerce store, a social media app with ecommerce capabilities, or another marketplace, automation may be worth considering. Otherwise you’re manually tracking sales and sales tax through a number of avenues and increasing complexity of what can already be a pretty complicated business task.
New to this topic? Here are some terms you’ll want to know:
- FBA (Fulfillment by Amazon): a program that lets you outsource order fulfillment, including FBA inventory management and storage, packing, and shipping to Amazon
- fulfillment center: a warehouse that stores, packs, and ships orders to customers
- ecommerce business: any business that sells products or services online
- economic nexus: a connection between a business and a state that establishes a tax obligation, such as having a certain amount or number of sales in that state
- physical presence nexus: a physical connection between a business and a state that establishes a tax obligation, such as having employees or storing inventory in that state
- marketplace facilitator laws: laws that require marketplaces like Amazon and Etsy to collect and remit sales tax on behalf of their sellers
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Lindsey Raker is a writer for Avalara.
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Tags: Sales Tax, Small Business
