How Amazon FBA Creates Sales Tax Obligations for Sellers

By November 7, 2019 Ecommerce Accounting

Fulfillment by Amazon (FBA) sellers need to collect and remit sales tax in states and localities where they (1) have nexus (significant presence) and (2) have products that are taxable in that state. Nexus, or a significant presence, can be determined in a variety of ways: 

  • Economic nexus – You may have nexus in states where you have a significant number of sales (in terms of revenue and/or transactions). 
  • Click-through nexus – You may have nexus in states where another company or person advertises your product and receives a cut of sales. 
  • Physical nexus – You will have nexus in states where you have a physical presence. This commonly includes office buildings, employees, salespersons, inventory, etc. 

Although there are other nexus laws, these are the main ways that a typical ecommerce business will have nexus.  

Determining nexus may seem simple, but it gets complicated in a hurry. For example, states have differing laws. What creates nexus in one state, may not create nexus in the neighboring state. Sellers must also consider laws that require the marketplace (such as Amazon) to collect and remit sales tax for sellers. (Is Amazon Collecting Sales Tax for Me?) 

Amazon FBA sellers have an additional aspect of sales tax nexus to consider that is often missed – inventory nexus (already mentioned in “physical nexus” above). Let’s dive into this a little more. 

(For help on determining where your business has nexus, consider getting a nexus analysis completed) 

Amazon FBA Inventory and Sales Tax Nexus 

Wherever your inventory is stored, your business has nexus in those locations. For FBA sellers, this means you have sales tax nexus in all states where Amazon holds your inventory. Therefore, requiring you to collect and remit sales tax for all sales in those states (if the product is taxable and the state doesn’t have marketplace facilitator laws that would shift the burden to Amazon). Many FBA sellers forget to consider inventory when determining sales tax nexus, because Amazon is handling all the logistics around the seller’s inventory. 

So, now is the time to make sure you as an FBA seller are registered, collecting sales tax, and remitting sales tax in states where Amazon holds your inventory. And remember you need to collect and remit for all sales in those states. Including sales on other sales channels. 

Finding Where Amazon is Holding Your Inventory 

To find out where Amazon has held your inventory, you will want to find the “Inventory Event Detail” report in Seller Central. This link will take you directly there, after logging in. As of this blog, you can also follow these steps after signing into Seller Central: 

  1. “Reports” 
  2. “Fulfillment” 
  3. “Inventory Event Detail” 
  4. Download the report for easier navigation. Choose a date range as far back as you would like to consider. 
  5. Once downloaded, find the column titled “fulfillment-center-id”. 
  6. Click the drop-down on the filter for this column. These are all the warehouse locations your inventory is stored in! 
  7. The first 3 letters of each “id” are associated with an airport. For example, “PHX3” would be a warehouse close to Phoenix, AZ. You would therefore have nexus in Arizona. Find a complete list of warehouse id’s and locations here 

Sales tax tools such as TaxJar or Avalara will also help identify where you have nexus due to Amazon FBA. 

How Long Does Sales Tax Nexus Last? 

Some states require you to continue collecting and remitting sales tax for a period of time, even when you no longer have nexus in their state. This is called trailing nexus. Therefore, you will want to look for where Amazon stored your inventory in previous years. States could still come after your business years later for unpaid sales tax liabilities. You will want to evaluate the risks involved when deciding how to move forward. 

Our recommendation is to work with sales tax experts when your company has big risks involved with compliance. This is no joke. We have seen businesses owe hundreds of thousands in back-taxes and penalties. Reach out to us if you have pressing sales tax needs or questions. 

Moving Forward with Sales tax Compliance as an Amazon FBA Seller 

This blog focuses on the unique aspect of inventory sales tax nexus, which we see Amazon FBA sellers often miss. Don’t forget this is only one way in which your business will have nexus. FBA sellers will also need to consider economic nexus, other ways in which they have physical nexus, and other nexus types. Please see our full nexus and liabilities analysis that we offer companies. This analysis will help you see where you have nexus, where you could be approaching nexus, and the liabilities and potential penalties associated with those states. 

Determining nexus is just the first step in becoming sales tax compliant. Once you understand where you have nexus, consider the following steps: 

  1. Register in the necessary states. (Collecting sales tax in states where you don’t have a sales tax permit is considered illegal!) 
  2. Configure sales channels to collect the correct rates in states where you have nexus 
  3. Accurately handle and record sales tax 
  4. File and remit sales tax to states where you have collected sales tax from customers 

For an in-depth step-by-step process for sales tax compliance, download our “10 Steps to Ensure Sales Tax Doesn’t Burn Down Your Ecommerce Business” 

Please reach out if you have any remaining questions or sales tax needs. You can also view our sales tax services. Best of luck in your sales tax compliance journey!