Using Amazon FBA? Here’s What You Need to Know About Sales Tax

Using Amazon FBA? Here’s What You Need to Know About Sales Tax

amazon fba sales tax

In this world nothing can be said to be certain, except death and taxes.

- Benjamin Franklin

As an online store owner, tax laws can be messy, complicated, and impact your business operations unexpectedly.

Case in point: If you’re using Amazon’s Fulfillment By Amazon (FBA) service for your online store, without realizing it you might be required to collect and remit sales tax in a state where your inventory is located, but your business physically isn’t.

Amazon FBA was established in 2012 to facilitate the fulfillment component for businesses of all sizes. Sourcing warehouse space, receiving orders, packing product and shipping to consumers can be very time-consuming for companies looking to expand their business and establish their brand.

With Amazon FBA, they take care of these tasks by leveraging their established network of warehouses around North America. By shipping your inventory to one of the FBA warehouses, Amazon will store, pick, package, and ship every order you receive to consumers, whether it be through Amazon or another sales channel. To learn more about adding Fulfillment By Amazon to your Shopify store, check out this helpful support article.

But as with most things, for every benefit there tends to be a drawback that needs to be considered.

In Amazon FBA’s case, for all the pros it provides to merchants, using the service may cause you to trigger sales tax nexus in more than one state, which creates potential tax collection and remittance headaches for your business.

Download our FBA Sales Tax Cheat Sheet

Save this sales tax cheat sheet for quick and easy reference to see how you should treat sales tax in every state with an FBA fulfillment center. 

Click here to download

What is “Nexus” And How Is It Triggered?

With more states having difficulty balancing their budgets, state governments are increasingly taxing out-of-state sellers by updating their existing sales and use tax legislation to expand the concept of “nexus”.

The nexus concept has always been around, but it wasn’t until recently that the definitions have been expanded to capture out-of-state sellers.

Nexus is the minimum connection between your business and a state that is required before a state can force your business to collect and remit their sales and use tax. A state can't tax you without some kind of link to your business. Traditionally, this connection is established when your business has a physical presence in a state.

For example, if you buy, store and sell all your products in California, the only state that can tax you is California.

However, what is considered a “physical presence” varies from state to state.

Depending on the state, nexus definitions may include:

  • Registration: Registered to do business in a state.
  • Solicitation: Meeting customers in a state.
  • Incorporation: Having an entity incorporated or organized in a state.
  • Location: Living in a state.
  • Inventory: Having your merchandise/stock in a state.
  • Warehouse Use: Maintaining, occupying, using warehouse space.
  • Fulfillment services: Storage and warehousing, order processing, picking and packing inventory, shipping, customer service and returns management.

The result is that if your inventory is being held outside your home state in an FBA warehouse located in a state that includes one of the above terms in their definition of nexus, you may have to collect and remit sales tax in more than just the state where your business is headquartered.

I’ve Triggered Nexus. Now What?

Once you’ve determined that you’ve triggered nexus in a state, the next step is to determine if the product you’re selling is considered taxable in that state, which if you’re using Amazon’s FBA service is likely a ‘Yes’.

States consider tangible personal property (TPP) to be taxable items. The definition of TPP varies by state, but is usually very general so that almost all physical products that you can see, touch, and smell fall into the definition.

Destination vs. Origin Based States

So you’ve figured out that you should be collecting and remitting sales tax in more than your home state, but how much tax should you be charging your customers in this new state(s)?

Depending on the state, sales tax may be charged on an origin basis or destination basis.

Origin basis requires that you charge your customer sales tax based on your business location’s combined state/county/city sales tax rate. Very few states use origin basis for taxing out-of-state sellers. It’s typically only used when both the merchant and customer are located in the same state.

Destination basis requires you to charge sales tax at the rate in the state where your product is being delivered. This is the most commonly used method, and is the main reason merchants are required to register and begin collecting out-of-state sales tax.

If That Sounds Confusing, Here’s an Example

Let’s say that you’re the owner of Colouring Comics Inc. (“CCI”) and you sell adult colouring books through your brick and mortar store located in Phoenix, Arizona.

All your inventory is located at this store. In fact, this is your only physical location in the United States. You charge sales tax on all sales from your brick and mortar store based on the rates for Phoenix, Arizona.

Looking to grow your business after a successful holiday season when adult colouring books were flying off the shelves, you opened an online store to expand your sales outside the Phoenix area.

In order to fulfill orders faster on the east coast, you enrolled CCI in the FBA service and sent a portion of your inventory to Amazon’s FBA warehouse in Ohio.

Over the year, sales increased substantially across the northeastern US corridor, with Ohio representing the state with the largest growth.

Since you’ve sent inventory to Amazon’s FBA warehouse in Ohio, from a technical position CCI has triggered sales tax nexus in that state. Given CCI’s success in growing sales in Ohio, your tax liability may be significant if CCI is audited by tax authorities and you don’t register to collect sales tax from customers.

In this case, you should register for sales tax in Ohio. And, as a destination-based seller (selling from Arizona to Ohio), when a sale is made to an Ohio customer, you should charge sales tax based on the customer’s shipping address in Ohio. You will continue to charge sales tax to Arizona customers based on the sales tax rate that applies to their Phoenix location.

Since CCI has no connection with any other state (besides selling their product to customers there), you are not responsible for collecting sales tax from any other state.

If you continued to expand your operations with CCI, and began using additional FBA warehouses, there may be further sales tax implications to consider.

Below is a list of all states where an Amazon FBA warehouse is currently located and how they deal with sales tax.

FBA Sales Tax (By State) 

Click here to get these Amazon FBA sales tax guidelines as a downloadable PDF.

 

Note: Whether origin or destination based, county/city taxes are applicable on all sales. The State’s Sales Tax Rate does not reflect the county/city rates, given the number of counties/cities in each state.

Arizona

  • Basis for Sales Tax (in-state sales): Origin Based
  • Basis for Sales Tax (remote sales): Origin Based
  • State Sales Tax Rate (excludes County/City): 5.6%
  • Nexus Trigger: Inventory, Fulfillment

California

  • Basis of Sales Tax (in-state sales): Origin Based*
  • Basis of Sales Tax (remote sales): Destination Based
  • State Sales Tax Rate (excludes County/City): 6.5%
  • Nexus Trigger: Inventory, Warehouse, and Fulfillment

*Modified Origin state - State/County/City taxes are based on origin, District taxes are based on destination. If you sell to a customer in the same district as the FBA warehouse, you’ll charge the district rate to buyers located in that district. If you sell to a customer outside the district, you will charge the California state rate, no district rate is applicable.

Connecticut

  • Basis of Sales Tax (in-state sales): Destination Based
  • Basis of Sales Tax (remote sales): Destination Based
  • State Sales Tax Rate (excludes County/City): 6.35%
  • Nexus Trigger: Inventory

Delaware

No sales tax, no issues!

Florida

  • Basis of Sales Tax (in-state sales): Destination Based
  • Basis of Sales Tax (remote sales): Destination Based
  • State Sales Tax Rate (excludes County/City): 6.0%
  • Nexus Trigger: Inventory, Warehouse, and Fulfillment

Georgia

  • Basis of Sales Tax (in-state sales): Destination Based
  • Basis of Sales Tax (remote sales): Destination Based
  • State Sales Tax Rate (excludes County/City): 4.0%
  • Nexus Trigger: Inventory, Warehouse, and Fulfillment

Illinois

  • Basis of Sales Tax (in-state sales): Origin Based (out of state buyers don’t pay)
  • Basis of Sales Tax (remote sales): Origin Based
  • State Sales Tax Rate (excludes County/City): 6.25%
  • Nexus Trigger: Inventory, Warehouse, and Fulfillment

Indiana

  • Basis of Sales Tax (in-state sales): Destination Based
  • Basis of Sales Tax (remote sales): Destination Based
  • State Sales Tax Rate (excludes County/City): 7.0%
  • Nexus Trigger: Inventory, Warehouse, and Fulfillment

Kansas

  • Basis of Sales Tax (in-state sales): Destination Based
  • Basis of Sales Tax (remote sales): Destination Based
  • State Sales Tax Rate (excludes County/City): 6.5%
  • Nexus Trigger: Inventory, Warehouse, and Fulfillment

Kentucky

  • Basis of Sales Tax (in-state sales): Destination Based
  • Basis of Sales Tax (remote sales): Destination Based
  • State Sales Tax Rate (excludes County/City): 6.0%
  • Nexus Trigger: Inventory, Warehouse, and Fulfillment

Maryland

  • Basis of Sales Tax (in-state sales): Destination Based
  • Basis of Sales Tax (remote sales): Destination Based
  • State Sales Tax Rate (excludes County/City): 6.0%
  • Nexus Trigger: Inventory

Massachusetts

  • Basis of Sales Tax (in-state sales): Destination Based
  • Basis of Sales Tax (remote sales): Destination Based
  • State Sales Tax Rate (excludes County/City): 6.25%
  • Nexus Trigger: Inventory, Warehouse

Minnesota

  • Basis of Sales Tax (in-state sales): Destination Based
  • Basis of Sales Tax (remote sales): Destination Based
  • State Sales Tax Rate (excludes County/City): 6.875%
  • Nexus Trigger: Inventory, Warehouse, Fulfillment

Michigan

  • Basis of Sales Tax (in-state sales): Destination Based
  • Basis of Sales Tax (remote sales): Destination Based
  • State Sales Tax Rate (excludes County/City): 6.0%
  • Nexus Trigger: Inventory, Warehouse, Fulfillment

Nevada

  • Basis of Sales Tax (in-state sales): Destination Based
  • Basis of Sales Tax (remote sales): Destination Based
  • State Sales Tax Rate (excludes County/City): 4.6%
  • Nexus Trigger: Inventory

New Hampshire

No sales tax, no issues!

New Jersey

  • Basis of Sales Tax (in-state sales): Destination Based
  • Basis of Sales Tax (remote sales): Destination Based
  • State Sales Tax Rate (excludes County/City): 7.0%
  • Nexus Trigger: Inventory, Warehouse, and Fulfillment

New York

  • Basis of Sales Tax (in-state sales): Destination Based
  • Basis of Sales Tax (remote sales): Destination Based
  • State Sales Tax Rate (excludes County/City): 4.0%
  • Nexus Trigger: Inventory

North Carolina

  • Basis of Sales Tax (in-state sales): Destination Based
  • Basis of Sales Tax (remote sales): Destination Based
  • State Sales Tax Rate (excludes County/City): 4.75%
  • Nexus Trigger: Inventory, Warehouse, and Fulfillment

Ohio

  • Basis of Sales Tax (in-state sales): Origin Based
  • Basis of Sales Tax (remote sales): Destination Based
  • State Sales Tax Rate (excludes County/City): 5.75%
  • Nexus Trigger: Inventory

Oregon

No sales tax, no issues!

Pennsylvania

  • Basis of Sales Tax (in-state sales): Origin Based
  • Basis of Sales Tax (remote sales): Destination Based
  • State Sales Tax Rate (excludes County/City): 6.0%
  • Nexus Trigger: Inventory, Warehouse, and Fulfillment

South Carolina

  • Basis of Sales Tax (in-state sales): Destination Based
  • Basis of Sales Tax (remote sales): Destination Based
  • State Sales Tax Rate (excludes County/City): 6.0%
  • Nexus Trigger: Inventory, Warehouse, and Fulfillment

Tennessee

  • Basis of Sales Tax (in-state sales): Origin Based
  • Basis of Sales Tax (remote sales): Destination Based
  • State Sales Tax Rate (excludes County/City): 7.0%
  • Nexus Trigger: Inventory, Fulfillment

Texas

  • Basis of Sales Tax (in-state sales): Origin Based
  • Basis of Sales Tax (remote sales): Destination Based
  • State Sales Tax Rate (excludes County/City): 6.25%
  • Nexus Trigger: Inventory, Warehouse, and Fulfillment

Virginia

  • Basis of Sales Tax (in-state sales): Origin Based
  • Basis of Sales Tax (remote sales): Destination Based
  • State Sales Tax Rate (excludes County/City): 4.3%
  • Nexus Trigger: Inventory, Warehouse

Washington

  • Basis of Sales Tax (in-state sales): Destination Based
  • Basis of Sales Tax (remote sales): Destination Based
  • State Sales Tax Rate (excludes County/City): 6.5%
  • Nexus Trigger: Inventory, Warehouse, and Fulfillment

Wisconsin

  • Basis of Sales Tax (in-state sales): Destination Based
  • Basis of Sales Tax (remote sales): Destination Based
  • State Sales Tax Rate (excludes County/City): 5.0%
  • Nexus Trigger: Inventory

How to Manage State Taxes Within Shopify

As intimidating as this all seems, your business’s exposure to additional sales tax may be limited!

From a non-technical standpoint, it is likely not worthwhile to register in a state where you have only made a handful of sales. From a state’s perspective, this is unlikely to trigger an audit given the low dollar amounts being considered.

Disclaimer: This is not formal tax advice. It is best to speak with your business tax advisor.

One approach would be to set a state-by-state threshold based on your total sales for your fiscal year, and if you cross that threshold for a given state, only at that time would you register for sales tax and begin collecting and remitting to the state tax authorities.

If you do find yourself exposed to several states and don’t have a great understanding of sales tax, don’t have the time to crunch the numbers and file the returns, or simply don’t care about taxes (who can blame you?), there are Tax Apps that integrate with Shopify, such as: 

Keep in mind, the Tax Function within the Shopify dashboard will need to be set up properly in order to trigger tax to be charged on all sales made in states where you’re deemed to have nexus (check it out on your Dashboard, under Settings → Taxes → Tax Rates or learn how to change your tax settings here).

shopify tax settings

Next Steps

If you’re looking to use or expand your use of Amazon’s FBA program, remember to ask these questions:

  1. If I send inventory to an FBA warehouse outside my principal state, have I triggered nexus in this state?
  2. Am I selling a taxable product?
  3. Does this state tax on a destination basis or origin basis?
  4. How much in sales am I making from this state, specifically over a 12 month period (or quarterly in some cases)?
  5. Can I track and remit sales tax on my own, or should I use an App?

Okay. Deep breath. There’s lots of information in this article, which can be intimidating.

Fear not, consider this a resource that you can bookmark and come back to from time to time to refresh your knowledge!


 About The Author

Will Hillock is Shopify’s Tax Manager. When he’s not handling all things Tax related for the company, you can find him putting his soothing “Barack Obama” voice to good use, MC’ing weddings and Christmas parties.

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