Business Licenses and Taxes for The Amazon Seller
What you need to know about business licenses and taxes if you sell online from home
by Skip McGrath
Before we get into taxes and business licenses, it’s important to consider the various type of business you can set up.
The most common way to start a business is called aSole 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 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).
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 aswww.myflorida.com for Florida).
The Supreme Court Changes Everything
In its June 21st ruling in the case of South Dakota v. Wayfair, the Supreme Court decided that online buyers will have to pay sales tax on everything they buy online. This means that all online sellers (eBay, Amazon, Sears, Wal-Mart, Big Commerce, Shopify, etc.) may have to potentially collect and pay sales tax in all 46 states that have sales tax. However, South Dakota has a $100,000 in sales exemption. If your sales to South Dakota residents are below $100,000, you don’t have to pay sales tax. Check with the other state agencies as some of them have similar exemptions.
The Commerce Clause of the constitution’s original purpose was to limit the power of government to interfere with commerce. This has now been turned on its head. Not only can the Federal government interfere with everything, but they extended the power of the individual states to do that as well.
Before this decision, small sellers were only required to collect and pay sales tax on sales made and shipped to someone in a state where you had a presence. For example, I live and work in Washington State, but I also have a warehouse in Tennessee. Therefore, before the decision, I would have to collect and pay sales tax on any sales I made to buyers in Washington or Tennessee.
Several states used the Nexus argument. They claimed that because companies such as Amazon, Wal-Mart or Sears had operations (stores, offices, warehouses, etc.) in those states, sellers on their platforms were required to collect and pay sales tax on sales made to buyers in those states state. That position was clearly unconstitutional -but with this decision, it no longer is.
In fact, this decision ignores the concept of Nexus altogether. It no longer matters whether a company or individual seller has a presence in the state, the decision says that all states that charge sales tax, can now force sellers to register, collect and pay sales tax on all sales made to anyone residing in that state.
It will also affect buyers who purchase a gift and have it shipped to someone in a different state. This is a real problem for sellers, because both states -the buyers’ and the gift recipients’, will want their tax. But how do you collect tax from someone who receives a gift?
So what do small sellers do now?
Most importantly, don’t panic. This is not going to happen this week. It could take up to two years for all the state legislators to pass new laws.
Since it’s going to take some time for each state -not to mention platforms like eBay and Amazon to act. I suspect, eBay and Amazon and other large online sellers, will quickly realize that several thousand sellers will just give up and leave the platforms and stop selling altogether. Large online venues (eBay, Amazon, Wal-Mart and others) have thousands of employees including accountants and tax lawyers.
These companies are already registered with most of the states, and they already collect & pay sales taxes. I think they will realize the only solution is to assume the burden of sales tax collection and payment. It is already starting. Based on new Oklahoma Sales tax rules, Amazon will start, collecting, and remitting sales tax on all orders shipped to customers in Oklahoma starting July 1st. Oklahoma joins Washington State, New Jersy and Massachusetts where Amazon is already doing this.
This fine if you sell on a platform such as eBay, Amazon, Etsy. etc., but what about small website sellers? This decision could drive thousands of those sellers out of business.
If you want help with this issue, or just want to learn more, visitTax Jar. Besides sales tax payment services, they also have webinars and other educational info about sales tax.
Be patient. This will take some time to work out. Stay on top of announcements by the sites you sell on.
- 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.
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 leading training product for Amazon sellers is:
1 These vary by state with large population states such as California, New York and New Jersey being the most expensive.