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Understanding Amazon and Sales Tax

The eBay & Amazon Seller's News ~ April 2017 ~ Volume 18, Issue No. 6

Tips, Tools, News and Resources for eBay, Amazon and Independent Online Sellers
by: Skip McGrath

In This Issue:

Musings from and about eBay, Amazon and The World Wide Web

  1. Understanding Amazon and Sales Tax
  2. Tax Day is Coming - Last Minute Tax Tips
  3. Types of Business, and Which One Should You Choose
  4. Quick Tips for Wholesale Sourcing
  5. The Problem with Dropshipper Websites
  6. New Wholesale Sources for eBay & Amazon Sellers

"A friendship founded on business is a good deal better than a business founded on friendship." ~ John D. Rockefeller


Musings

In the last issue, I mentioned that my friend, John Bullard, who runs the Amazon fulfillment service I use - My Fulfillment Team, has just started an Amazon Refund service called Seller Extensions to compete with Refunds Manager and similar services.

In general Refunds Manager works very well at their main goal -getting refunds for buyers. However, one problem I am having with Refunds Manager is inaccurate reports. The image below shows the sales of one product for a 24-hour period. As you can see, the report says I sold 10 each. But when I checked my actual sales for that 24-hour period, I had only sold 2 units. In fact, (2 each) was my average daily sales of that product for the previous week

Another issue with the daily report is they report sales of products that I sold over two years ago and have since deleted the listings. Here is a screenshot that shows just a few of these:

Click here for a larger image

All of those are products I no longer carry or sell. I have asked them about these several times, but so far no resolution. I do like their refund service which works really well, but I think I will give Seller Extensions a try. I will let you know how it works out.


eBay recently told sellers that they would be removing ads from eBay that will send sellers off of the site to purchase goods that compete with eBay Sellers. Those ads have been a sore point with sellers for years.

Here is an example of what Ebay does now: In my listing for an Arrow Necklace, if you scroll through the listing, you see the following image:

Click here for a larger image

When you click in those items you are taken to the advertiser's website off of eBay. eBay says they plan to stop doing that next month. But I will believe it when I see it. eBay currently earns millions of dollars' worth of advertising profits. I don't see them giving that up.


Also, eBay recently fired the advertising agency that ran their ad program program and hired several dozen employees to staff an inside advertising department. I suspect those employees will soon try and find something to do to justify their salaries.


Also related to ads in eBay listings is the eBay Promoted Listing Program. Ina Steiner had a great post about that in the eCommerceBytes blog. Click here to read the whole article .


eComEngine has several programs I use, including Feedback Five and Restock Pro. They have just made a special offer to my readers. As friends of Skip, they are offering you a 30-day free trial (rather than the standard 14-day free trial) to FeedbackFive and RestockPro, plus 150 free credits to eComSpy. This is an evergreen deal that includes personal, one-on-one training for you - from set-up to ongoing support on each of your accounts. Click here to access the special page for my readers and to learn more about these offers. Note - I have not yet tried eComSpy, but I have heard good things about it.


In the last issue I mentioned an interview with eBay CEO David Winig, where he said the Christmas selling season was a turning point for major retailers -and some of them may not survive 2017.

Since he said that, Macy's has declared bankruptcy and Sears raised doubts about its ability to continue operating in a recent filing with the SEC. Sears said that they may not be able to continue operations through the end of this year. Who could be next - J.C. Penny's, Target, Dillard's, Kohl's, or even the iconic Nordstrom's?

(I don't know if it's true, but I heard the Nordstrom's Rack stores are far more profitable than Nordstrom's department stores. If that is true, then, in my opinion, I don't think it bodes well for the long term survival of Nordstrom's). Again, that is just my opinion.


Regarding how I use Feedback Five, they recently posted comments about Amazon's new policy of allowing buyers to opt out of seller feedback and product review requests.


Are you looking for a past newsletter article -or an article from the previous issue?

The most recent (current) issue of this newsletter is always on the page you are reading now .

Whenever I come out with a new issue, the previous issue is moved to my archives, located here .

If you look in the archives you will see both the current issue, and all of the previous issues, for the last three years.

If you want to subscribe to this newsletter you can do that at this page .

If you wish to cancel (unsubscribe), or change your email address, there is a link near the bottom of the email you receive when this newsletter comes out.

Just click on the link to Change Subscriber Options to update your email address.


If you follow, or are a fan of Silicon Valley – then I suggest you read Chaos Monkeys by Andy Martinez. Here is a link to more info about the book on Amazon:

It is not only informative but it is hilarious as well.



Lets get started with this month’s articles:

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1. Understanding Amazon and Sales Tax

Sales Tax and Amazon

This article is a guest article by: Robert Segall of Amazon Sellers Lawyer. When it comes to understanding sales tax -there is a lot of information out there. And some of that information is incomplete and at worst it is just plain wrong. My friends at Amazon Seller's Lawyers are the real deal. If you want some real expertise - reach out to them at Amazon Sellers Lawyers.

Amazon has expanded sales tax collection to over 10 new States for 2017, and has plans to add more later this Spring. As noted in one of our previous articles, the trend is due to pressure from local legislators who are looking to capitalize on Amazon's large corporate presence in their jurisdictions. Regardless of the reason, 39 states are now collecting sales tax from Amazon transactions and sellers need to remain educated. Five US States do not have sales tax laws, and the remaining 6 are not subject to sales tax. The remainder of this article will teach Amazon Sellers what they need to know and what this policy shift means for them.

Creating the Nexus:

Amazon is literally revolutionizing the way the entire World does business. There was a time where consumers could shop online shielded from sales tax, but the millions of dollars in potential tax revenue apparently are catching the attention of many local lawmakers throughout the country. Since Amazon has expanded so much over the past several years, their local presence throughout the country has exposed the platform to State Nexus. This concept is a criterion for the legal responsibility of a state to require tax collection, filing and remittance.

Nexus can be defined as a connection to, or a presence within, a state and is the primary consideration when an Amazon seller determines how their business will manage its sales tax exposure. This starts with where your business is located; you have a nexus to your home state, for example, and must collect sales tax there. This is true whether your business is brick and mortar or operating on an eCommerce platform. (This includes having your products in an Amazon warehouse in another state. - Ed.)

State Registration:

After a business has decided they have nexus in a state, they must register within the state to begin collecting sales tax. An application is filed and once it is processed the business will receive a sales tax permit. The business is now required to collect sales tax from customers respective of the rates determined by the local taxing authority.

Collecting Sales Tax:

Sales tax is typically collected at the point of sale. There is a legal requirement that businesses must separately display the sales tax amount such that consumers can easily distinguish the amount they are taxed. For Amazon sellers, the shopping cart page will do this for you. However, Amazon Sellers are responsible for holding any sales tax revenue collected until the established time for remission to local taxing authorities. Sellers must remember that this money is to be held separately from their own revenue until it is submitted to the local governments. If you have not done so already, Seller Central provides tools for setting tax collection practices for your Amazon Seller account. You have the ability to collect tax on all items, not collect tax at all, or to collect tax strictly on certain categories of products.

Sales Tax Returns:

The filing schedule for sales tax revenue from your Amazon business will vary depending on how much your annual revenue your account generates. Typically, the return must be filed annually for businesses during their first year of existence. However, as you might assume, when corporations are driving huge profit numbers, local governments are anxious to take a piece of the action. If your business rapidly grows, don't be surprised if you are required to file sales tax returns on a quarterly or even monthly basis.

Takeaways for Amazon Sellers:

Collecting and filing sales tax returns is not a simple process and should be addressed with the utmost care. As a business owner who is required to collect state sales tax, you are liable to be audited at any time by your State's Department of Revenue. It is therefore imperative to keep your books in order, track all sales, and separate your tax revenue from regular revenue. The only correspondence an Amazon seller should dread more than a Suspension notification is a letter from the IRS or your state sales taxing authority.

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2. Tax Day is Coming - Last Minute Tax Tips

As you read this, Tax Day, April 15th, is just a few days away.

Every time I write about taxes I have to point out that I am an experienced businessperson, but I am NOT a tax professional or tax expert. You should always consult a tax professional to double-check any of the information I write here.

I am just going to list a few tips as bullet points. I am keeping it simple -but as I said: before you take any of my advice, speak with your tax professional.

  • Do not file your taxes on April 15th. You can request an extension of your personal taxes until October 15th and your Corporate or LLC returns until September 15th. Why do I say this?

    My tax guy (A CPA) is a former State Director of the IRS. He told me that audit assignments are given out starting in late April -and by June or July, all of the auditors already have a full schedule for the rest of the year. Therefore -if you wait until late summer to file -while your chances of being audited are not zero -they are much lower. (Note: If you want to avoid any penalty and interest, you should include a check in the amount of the taxes you think you will owe. Your tax preparer can help you with this).

  • Watch out for audit triggers. Every year, when the IRS receives tax returns they are first run through an algorithm to detect common excess tax deductions. When the IRS computer sees one of these, it kicks the return out for a human to look at. If that person (who is usually not a tax expert) sees something they don't like, they send the return to the audit team. Here are some of the common expense triggers to watch out for:

    • high entertainment and meal deductions (My rule of thumb is to keep my total meal and entertainment deductions to under 3.5% of my gross income before expenses.
    • excessive travel costs for a business your size
    • Large office-in-the-home deduction related to the size of your business

    These are known as the "Big Three," but any expense that is very high related to the size of your business can trigger an audit

  • When in doubt -always take the deduction. There are two ways to run afoul of the IRS: Criminal and civil. If you take entirely made up deductions that you never had (such as deducting home mortgage interest -but you don't own a home), or earned income you did not claim, then you come under the Criminal code. If you are found guilty, you may pay large fines and most-likely do some time in Federal Prison.

    If you actually had an expense that you actually paid, and have a money trail for, and you take a deduction the IRS disagrees with, you could be subject to interest and penalties on the disallowed deduction - but you won't go to prison.

    Having read this, why should you always take the deduction? Because, if you return is not audited or reviewed (which is over 90% of all returns), then the deduction will stick.

  • Do not prepare your own tax returns. Tax returns prepared by a taxpayer are 5 times more likely to be audited than one prepared by professionals.

  • Hire a CPA (Certified Public Accountant) to do your taxes. Tax Returns signed by a registered CPA are much less likely to trigger an audit than one prepared by a tax preparation service.

I could go on -but these are the big ones. Remember don't rush to get everything done by April 15th. If you file an extension, you still have several months to work with your CPA to minimize your income and maximize your expenses and deductions.

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3. Types of Business, and Which One Should You Choose

If you are going to sell on eBay and/or Amazon (or any other form of online business) then the way you organize your business, and the type of structure you select, can affect how much money you make, how much you pay in taxes and how much legal liability you are exposed to.

Let's look at the different types of business structure and we will discuss each:

  • Sole Proprietor
  • Corporation
  • Limited Liability Corporation (LLC)
  • Partnership

Sole Proprietor

Let's start with Sole Proprietor. If you are an individual person (or a married couple in most states), when you start selling something as a business (as opposed to a hobby or garage sale), the default type of business in most states and the Federal Government puts you in is a Sole Proprietorship. Unless you incorporate, form a partnership, or LLC, then you will always be a Sole Proprietor.

As a Sole Proprietor you file your business income on your personal tax return using a form called a Schedule C, Business Profit and Loss. This is a form where you list your income, cost of goods sold, and expenses. Then you subtract all your costs and expenses to get to your profit -or loss.

If you make a profit, that amount is added to any other income you have, such as you or your spouse's W2 income. Then you pay income taxes on the total amount. If you had a loss, you subtract that amount from your other income, and pay taxes on that amount. Note: To be a "business," the IRS requires you to make money at least 3 out of every 5 years.

The advantages to being a sole proprietor are that it's very simple -and you only have to file one tax return.

Corporations and LLCs

Corporations and Limited Liability Corporations (LLCs) are very similar and have many advantages over a sole proprietorship. These advantages include several tax advantages (speak with your accountant about those), and Liability protection. If you do all your business (and don't mingle your money, spending or expenses between personal and business), then the corporation can protect you against lawsuits and claims that may try to go after your personal assets.

You need to speak with your accountant or lawyer about the details, but if you keep your personal business separate from your corporation or LLC, then if someone successfully sues you for something related to your business (such as a product that injures someone), then they can only attach your business assets -not your personal assets.

So why would I form an LLC instead of a corporation? For one thing, the paperwork for an LLC is less complicated and requires less frequent updating. The main reason to decide is the number of persons in your business. If it is just you or you and your wife, then an LLC is fine and can offer you the same advantages and protection as a corporation. However, you should look at a corporation over an LLC if:

  • You plan to sell the business. - Corporations are easier to sell than LLCs
  • You have outside investors or partners -Again, in this situation, a corporation is easier to deal with than an LLC.

You may have heard of a Sub-Chapter S Corporation. So What is an S-Corp?

When you set up a corporation, the default type of corporation is a C-Corp. Technically, Sub-chapter S is a method of filing your corporate tax return that transfers a standard C-Corp into an S-Corp. Once you file, your C-Corp will be transformed into an S-Corp.

A Subchapter S (S Corp) is a type of corporation that gives a corporation with 100 shareholders or less, the benefit of incorporation while being taxed by your percentage of ownership. (But all shareholders still have the liability protection of a corporation).

An S-Corp can pass income directly to shareholders and avoid the double taxation inherent with dividends paid to shareholders (you), while they still enjoy the liability protection of a corporation.

One requirement for filing Sub-Chapter S (Known as Sub-S for short) is: All your shareholders must be US Citizens or legal residents (Green card holders). For example, if one of your shareholders was Canadian (or any other nationality) then you could not take advantage of the tax treatment of Subchapter S.

Another category of non-permitted shareholder is a partnership. (A partnership such as a law firm, CPA firm venture capital firm, cannot be a shareholder in a Sub-S Corp).

Corporations that file under Sub-S pass business income and losses through to shareholders without paying the corporate tax. Shareholders (you) report income and losses on their personal tax returns. Then they pay tax at the individual individual income tax rate. In other words, you are only taxed once. If you were a standard C-Corp, then the corporation would pay taxes and any profits passed on to you would be taxed again.

Partnership

A partnership has several pros and cons.

Pros:

  • Shared business cost. You can share costs between you and the other partners
  • You can share the work and responsibilities.
  • You can share the business risk, taxes and expenses
  • You partner(s) may have knowledge, skills and experience that you do not

Cons:

  • A partnership is a type of business with very little tax and liability protection. If the partnership incurs a liability (such as someone winning a lawsuit), then each partner is liable for their share.
  • If one of the partners bails out or skips town, then the remaining partners are liable for any and all taxes, debts and/or liabilities
  • If one partner does most of the work it could lead to disagreements and stress that will be bad for the business.
  • You have to share the profits (or losses) with all the partners
  • Any one partner (you?) does not have control over the business. Typically, you share all decisions.
  • Differences of opinion can lead to a "falling out," that can destroy your business.
  • If your partner(s) include family or friends -that is a good way to destroy any relationship you have with them

I don't like partnerships - and I would never start one with any family members or friends. I think it's much easier to form a corporation (or LLC) with you keeping control (at least 51% ownership). Read the quote in this issue (above) and you will see that this is what John D. Rockefeller was alluding to.

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4. Quick Tips for Wholesale Sourcing

These are just a few quick tips. I don't want to get bogged down into long discussions -so let's go with a few Bullets.

  • Develop friendly relationships with the people you deal with at your wholesale suppliers. This can pay off in many ways, such as easier-to-get credits on broken or defective goods, alerts when new products come out before your competitors and early notice of upcoming sales and promotions.

    Here is an example: I placed an order with one of my suppliers a few weeks ago. She emailed me back, that the product I ordered was about to go on sale the following week. By waiting a week, it saved me over 40% on that order.

  • When you find a new source, always ask if they have a sales rep you can deal with. Many wholesalers use reps to find them new customers, but they will deal with you directly if you come to them not through their rep. However, my advice is, if they have a rep, always deal with them, as good reps tend to be on your side in dealings with wholesale suppliers. Whenever I find a good sales rep -I treasure them like gold and do everything I can to make them happy.

  • Keep all of your invoices and packing lists filed and in good order. There are a lot of reasons to do this such as the potential for IRS audits and State sales tax audits. But, there are many other reasons as well. They are just too long for this article -but trust me on this one.

  • Once you have placed a couple of orders from a wholesaler, always go back and ask for a better price, or free shipping. I had one product that was a fairly good seller that I reordered in quantities of 24. But the shipping was killing me (The supplier is in Florida and I am in Washington State). After I asked, he came back to me and said if I would buy a standard case of 40 each, he would give me free shipping. This was an item where my delivered cost was about $9 each and the free shipping was worth almost $1.00 off of my delivered cost. He also offered a 15% discount on the price, plus free shipping, if I would order 10 cases at a time (But I passed on that one).

    Remember the old saying: "If you don't ask, you don't get."

  • Some products are exclusive to one supplier -but many are not. When you find a supplier who has what you want -don't stop with one supplier -Keep looking. I have found second and third sources for some products that were a lot cheaper than the first one I uncovered.

  • One of my favorite places to find new products are wholesale trade shows. For some reason only a small percentage of eBay and Amazon Sellers attend trade shows, so you can find products that other sellers don't have. Also, most manufacturers use trade shows to debut their newest products. These will also not be seen by many of your competitors.

So keep these tips in mind when researching or dealing with your wholesale suppliers.

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5. The Problem with Dropshipper Websites

Before I get started, let me point out that this is not just theory or anecdotal stories -I actually signed up for and tried two of these services and tried them. So I am going to tell you some of the things I experienced.

If you type ebay dropshipper into Yahoo or Google, you will get results that look like these:

As you can see, there is no shortage of so-called dropshipper companies -many of whom offer a website pre-loaded with their products. I would love to give you my opinion on some of these companies. But, the one thing I am NOT going to do is review, or comment on any one specific company. That is a sure way to attract a lawsuit.

I am not worried about losing such a suit (it's perfectly legal to give your opinion, as long as you are truthful in any facts you state). However, one thing I have learned from all my years in business is win or lose, it can cost upwards of $50,000 to defend such a suit. (There is insurance you can buy for this, which I have).

There are companies that sue bloggers and newsletter writers because of that cost. Knowing this, they can pressure writers into removing their comments (and a financial settlement that covers their legal fees).

So let's just look at this business strategy in general.

Many of these dropshippers offer the option (or ability) to populate not only a website with their products -but your eBay store as well. I have not run into any that automatically populate their products to Amazon -but many sellers just create their listings by using a UPC code in the Add a product function on Amazon.

Let's take a look at a few issues you may encounter:

  • Most of these companies are "Virtual Dropshippers." In other words, they do not actually stock products, but order them when you place an order and pay.

  • Both eBay and Amazon (and other online shopping sites) are putting policies into place to discourage dropshipping. This means this is not a good long-term business strategy.

  • All the major search engines (Google, Yahoo and Bing) penalize websites that have similar content and are hosted on the same server. If you set up one of these websites, you can expect your website to come up on page 100 or worse. Why would you want a website that was identical to hundreds of other sellers anyway?

  • Most of these companies buy from retail discounters rather than actual wholesalers. This means their prices to you are often higher than what the items are selling for on eBay or Amazon.

    Here is an example: I ran a listing for a name brand Hello Kitty children's watch. My cost from the dropshipper was $32 plus shipping. When I looked on eBay, several sellers were selling the same watch for $36.95 with free shipping, and a few of them were selling in the $25 range. Even if I sold at $36.95, I would not cover my cost once I paid eBay and PayPal fees.

    When I went to the ASD wholesale trade show a few months later, I found a dealer who was selling the identical watch (not a knockoff) for $14 each in cases of 12.

  • Many of these dropshippers sell famous name brand products. The problem is they are not buying from authorized distributors and they use images and descriptions from manufacturer's websites. This can lead to several problems.

    When you list your item on eBay, many of the brand holders will file a VeRO (Intellectual property) complaint. If the brand is registered on Amazon, they will tell Amazon you are not an authorized distributor and block your listings.

    And worst of all, if the brand holder does not recognize your business name as an authorized reseller, they will often file a complaint accusing you of selling fake or knockoff merchandise. This can lead to getting your account cancelled and being permanently banned from eBay and Amazon.

As you can tell from this, Dropship websites are NOT a business strategy I recommend. There is just no substitute for the hard work that goes into finding legitimate wholesale sources.

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6. New Wholesale Sources for eBay & Amazon Sellers

Brabantia is a large wholesale supplier of kitchen and bathroom storage products, kitchen gadgets, tools and cutlery.

Fine Life Products is a wholesale company with five divisions - fine Auto, Fine pets, Fine Audio, fine Tool and Total Vision. Fill out the form on the landing page to create a wholesale account.

New Ray Toys has probably the largest line of die cast models and toys of anyone I have seen.

The John Hanson Company is another large wholesale distributor of toys and games including many of the classic games.

J.R. Palacios is a large wholesale supplier of western products - everything from belt buckles to apparel to spurs and Conchos.

The Gerson Company is a large, year-round and seasonal gift wholesaler. Fill out their online form to get access to the wholesale site.

The Blond Amsterdam Collection includes the popular "Small Talk" pottery line, as well as a complete new pottery line "Blondelicious" inspired by the nifty fifties. They also sell wallets, make-up bags, towels and original gifts.

Eco Candles are pure soy candles that are hand-poured in Wisconsin using organic soybeans. This means that you will light a candle that is clean burning without pollutants, toxins or carcinogens. Made-in-USA

Homespice Decor sells braided rugs and accessories, durable indoor-outdoor rugs, hooked rugs and pillows and rag rugs for Country/Primitive Décor.

CD Products Inc. creates and manufacture high quality, artistic and functional decor for home and business settings.

Frantic Fern Arizona is a wholesaler/importer of decorative accessories, baskets and Christmas decor They offer an eclectic collection in the categories of Containers, Home Accents, Accent Furniture and Holiday décor

Sawyer's Mill offers a line of authentic, hand-made wood signs that are Made in America. They use locally harvested timber and mill the lumber themselves.

Butter Body Bakery sells bath treats made from simple ingredients, along with essential oils for aromatherapy and to soften the skin, lock in moisture, reduce puffiness and remove toxins and grime

Indiri Collection brings you artisan crafted .925 sterling silver jewelry from the island of Bali.

ArtiSands sells sand painting kits for ages 5 and up. This is a great product to keep children occupied while getting their creative juices flowing.

That’s it for now. See you again in two weeks.

Skip McGrath
The eBay & Amazon Seller's News

P.S. If you missed the last issue, click here to read it.


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