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Business Licenses and Taxes for The eBay & Amazon Seller

by Skip McGrath

Have an online business? Learn what you need to know about business licenses and taxes.Learn what you need to know about business licenses and taxes if you sell online from home

Before we get into taxes and business licenses, it's important to consider the various type of business you can set up.

Business Types

The most common way to start a business is called a Sole Proprietorship. When you start a business, unless you incorporate or form a partnership, the default type of business is a Sole Proprietorship. This is the basic organizational type of business.

Another approach is to actually incorporate which can be done very inexpensively in most states. Once incorporated, you can register an unlimited number of DBA's (Doing Business As), which are company names controlled by the master corporation.

Once your income goes over $10,000 per year (net profit), you may wish to incorporate for tax reasons. Also, small corporations are audited far less frequently than sole proprietors are.

If you want to set up a corporation (or LLC), I recommend Mycorporation.com. They will incorporate your business for as little as $99 plus state filing fees. 1

If you own more than one business, or if you own income-producing real estate, it might be better to spend a little more money and have a CPA help you incorporate. There are several ways to incorporate and each has different tax advantages.

There are two types of corporations: Corporation and Limited Liability Corporation. Both of these work fine for a small business. If you are going to raise money from investors, or give or sell stock to friends or family members, they a basic corporation is best.

If it is just you and/or you and your spouse, then an LLC gives you all the benefits of a corporation and is a lot less paperwork and hassle. (But the costs to set up are about the same).

The third type of business ownership is a Partnership. I personally would avoid this as it leads to more lawsuits than any other type of business.

If you wish to become partners with someone, I suggest you incorporate and decide who gets the controlling (51%) share of stock.

Equal partnerships are usually a disaster waiting to happen when it comes to small business. There is, however, a type of partnership called a limited liability partnership. This has interesting tax advantages and if you will have actual partners or co-investors, ask you CPA about this option (I suggest you never set up a partnership with a family member).

Business Licenses

There are two types of business licenses and people are often confused about the difference:

  • Local (or State)Business license
  • State Sales Tax or Resale Number

Let's look at each one

Local Business License

A local business license is issued by the city or town (sometimes a county) you live in.

Business Licenses are typically only required if you have a retail location, or if you have a business where customers are coming and going (such as a beauty shop in the home). I have heard of a few cities or towns that require a local business license for online home-based businesses, but these are rare.

Most cities and towns do not require a local business license if you are operating out of your home, or if you rent office space where you are just working on the computer, storing merchandise -and you have no employees. Check with your local Chamber of Commerce to learn about the requirements for your city (or county).

State Sales Tax Number

Some states refer to a sales tax number (license) as a Resale Certificate. If you go to your state's website and see that - it is just another name for a state sales tax number.

If you are serious about purchasing goods from real wholesale companies, then you will need a sales tax number -or a State Business License number, if your state does not have sales tax.

Most states have a website that allow you to register online for a sales tax number. The state's websites are usually www.WA.gov. (This example is for Washington State. Put the two-letter abbreviation of your state in the URL to access. For example, Virginia would be www.VA.gov). There are some exceptions (such as www.myflorida.com for Florida).

If you want to link directly to your state's website, or learn more about state sales tax, read my free article, How and Why to Get a State Sales Tax Number.

Many states will let you apply over the web or download the forms to apply. All states charge a fee (usually less than $50). Some states require a deposit based on your annual estimated sales. The minimum deposit is usually $200 to $400.

There are a few states that do not charge sales tax. These states will give you a business license number instead that will serve the same purpose.

If you live in a state that charges sales tax, you must charge (or pay) sales tax on all transactions shipped to buyers in your state. Not doing so, can result in fines and eventually loss of your sales tax license.

When you ship to a buyer in another state, generally you do not have to collect or pay sales tax. (However, if you sell on Amazon, there are some exceptions with certain states Amazon has signed sales tax agreements). Another exception to this is certain states have sales tax agreements with other nearby states to share sales tax revenue. For example, the tri-state area of Washington, D.C., Virginia and Maryland have such an agreement. If you live in Maryland and make a sale to a buyer in Washington DC or Virginia, then you would have to collect (and pay) sales tax on sales shipped to those states.

Why do I mention "shipped to those states?" If you live in a state such as Pennsylvania and someone who lives in Pennsylvania, has the product shipped to a gift recipient in another state, then you do not have to pay sales tax on that sale.

When you get a sales tax number, ask your state authority for instructions that specify exactly what products and services are taxable. In most states, food, vitamins, periodicals and books are exempt from sales tax. In some other states low-cost clothing items can also be exempt. If you are selling one of these, you need to know if they are taxable or not.

Sales Tax Nexus is a controversial issue. A nexus usually occurs when a company has a storefront, office or warehouse in a different state than the one they are in. It is established precedent that companies are subject to collecting and paying sales tax in such a situation.

Now, here is the controversial part: In an effort to collect sales tax from online sellers (eBay, Amazon, website, etc.), states are taking the position that if you have goods in an Amazon warehouse located in that state, then you have a nexus -and are therefore subject to their sales tax laws.

Now a lot of tax lawyers and sales tax experts object to this on constitutional grounds -and the fact that any state does not have the right to perform audits and collect taxes on companies in another state. I happen to agree with that but once again, let me point out that I am not a tax expert or professional -it is just my considered opinion.

Most wholesale distributors will require a Resale Certificate to purchase from them. These are usually a certificate you can download and print out.

If not, you can create one on your computer. Simply draft a document with the words: " State of _____________ Resale Certificate" at the top. Then put the following information on the page:

  • Your Business name and address
  • Your Sales Tax ID number
  • A description of the type of goods you normally purchase for resale (i.e. gifts, clothing, jewelry, sporting goods, electronics, etc.)
  • A statement that says: "This property is being purchased for resale."
  • A line for your signature and the date.

Most of the wholesale suppliers I deal with just ask for my resale number before selling to me. Other companies may ask you to mail or fax a copy of your Resale Certificate for their files.

If you ever sell to anyone else free of sales tax, then you should ask them for their resale certificate so you can keep it on file.

Taxpayer Identification Number (TIN)

This is not a license, but some people confuse it with one. A Taxpayer Identification Number is nothing more than a number the IRS uses to identify your business. Most people just use their social security number. As a business owner (even if you just started yesterday) you can also get a Taxpayer Identification Number (TIN) to use in place of your social security number.

If you are a sole proprietor, this is not mandatory and you can just use your SS number. However, I strongly recommend getting a TIN. This way you are not sharing your social security number with strangers. (Note: A TIN number is usually referred to as an EIN - Employer Identification Number. It is the same thing -and no, you don't need employees to get one. So if you see the term EIN, it means the same thing as a TIN).

If you are incorporated, or you have any employees, you are required to get a EIN number. EINs are provided by the IRS. Go to the IRS website (www.IRS.gov) to apply for an EIN number online Another way is to call the IRS at 800-829-4933. This is quick and simple because they give it to you immediately while you are on the phone.

Even if you don't need a TIN (or EIN) number, it is a good idea to get one. Besides allowing you to not share your social security number with strangers, most real wholesale suppliers will take you more seriously if you have one. However, remember, you will still need a sales tax or resale number to do business.

Once you have a business license and/or a sales tax number in your name, you can register a DBA (doing business as) business name. You can use almost any name that isn't already taken in your state. Once you have a DBA registered, take this to a bank and open a business checking account in that name. In most states you can register several DBAs (I have four).

When you pick out your checks, select one of the large business-type checkbooks with room for more information than just the name and amount of the check. Your bank can also supply checks printed to use with Quicken or Quick Books, if you use those programs.

Don't forget to use your resale number to avoid paying tax when purchasing shipping supplies. Many eBay sellers add a small shipping and handling surcharge to the amount the shipping costs. Since shipping is technically part of your product cost, in most states you do not have to pay sales tax on shipping supplies (although there are a few states who do).

Once your business starts, you will need to keep good business records for the purpose of paying taxes. Yes, if you make money (more than $600-year profit) then you must claim the income and pay taxes to the IRS. But remember -you only pay income tax on your profit after costs and expenses, not your total sales or income.

Record Keeping

Always keep good records of your costs, expenses, sales and income and your product Expenses include things such as shipping supplies & expenses, office supplies, hosting fees, charges for DSL, telephone, car expense, Office in the Home expense and so on.

All of your costs and expenses can be deducted from your profit. You only pay income tax on the remainder. I advise using a CPA to prepare your taxes. Taxes prepared by a CPA are far less likely to be audited than if you do it yourself, or use one of the many tax preparation firms.

Skip McGrath is an author and long time eBay, Amazon and website seller. His two leading training products for eBay and Amazon sellers are:

Note: Do not buy both of them as there is a lot of duplication. If you want to sell on both sites, please contact us for our recommendations.

[1] These vary by state with large population states such as California, New York and New Jersey being the most expensive.

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