Taxes and The Amazon Seller
by: Skip McGrath
I often get email from readers asking if they have to pay tax on their Amazon sales. And, many of the emails often confuse sales tax with income tax and sales tax with business licenses. So let’s try and clear up some of the confusion.
There are two types of taxes that most affect Amazon and eBay sellers:
- State Sales Tax
- Federal (and State) income taxes
State Sales Tax – The Supreme Court changed everything
Let’s look at sales tax first. A recent Supreme Court Decision just changed the whole issue of sales tax. Everything is still in a state of flux but here are the basics:
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.
Before this decision, several states used the Nexus argument. This claimed that because companies such as Amazon, Wal-Mart or Sears had operations (stores, offices, warehouses, etc.) in those states, that sellers on those platforms are 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 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.
Other Factors related to sales tax
You can sometimes purchase items without paying sales tax on them . When you buy something that you plan to resell, you can purchase it without paying sales tax. But it must be for resale. For example, you can not buy a new computer to use in your office and not legally pay sales tax. But if you go on Liquidation.com and buy a computer that you plan to sell on eBay, then you can buy it without paying sales tax.
Many wholesale companies require a sales tax certificate. Almost all legitimate wholesale companies will ask for a copy of your resale certificate before they will sell to you at wholesale prices. Besides wholesale companies, in most states you need a sales tax certificate to open a commercial checking account. Every wholesale trade show and merchandise mart I have ever been to require a copy of your sales tax certificate before letting you in.
In many States, registering for a sales tax certificate also registers you as a business in that state.
Here is an example: I live in Washington State. We have what is called a Unified Business License (UBL). When a new business fills out a UBL application, if approved, they are granted a business license that includes a sales tax number and a unified business license that covers the State and all cities, counties, townships, etc.
Many states are moving to a similar system. So you will see this more and more.
Getting a sales tax certificate is easy. In most states you can do it online. Just Google the words: GA Sales tax. (Replace the GA with the two letter abbreviation of your state.
Federal (and State) Income Tax
There is no income tax on your sales – you only pay income tax on your profits. If you make more than $600 in any one year, then the IRS (and your state if you have state income tax) requires you to file a Schedule C – Statement of Profit and Loss.
You start by listing your gross sales (including any amounts the buyer paid for shipping on your Schedule C. Now subtract your costs including the cost of the goods you bought to resell, Amazon, eBay and PayPal fees, bank fees, cost of shipping and materials and what you paid out to ship the goods to the customer.
You can also take deductions for things like Office in the home expense, mileage to take your shipments to the post office, ISP fees, travel to trade shows, and many more things.
Look on Amazon or eBay for a book called The Complete Tax Guide for E-commerce Retailers including Amazon and eBay Sellers by Martha Madea. This book will list all the deductions you can take for expenses and show you how to keep track of them.
Once you total up your expenses, you subtract them from your income. The amount left over is profit. That is the amount you will add to your personal income tax statement.
If it’s a loss you can also take that against any other income you have. For example, if your W2 income from your full time job is $36,000 and you lost $2000 on your business, you would subtract that from the $36,000 and only pay tax on $34,000.
Some folks take the risk of ignoring their online income. That can really get you in trouble. Both PayPal and Amazon will issue 1099K forms (with a copy to the IRS) to all sellers who sell over $10,000 a year on Amazon or $20,000 via PayPal. Now, you don’t owe taxes on the amount of the 1099K, but the IRS will know you had some online income and be looking for your Schedule C business tax income statement.
Regarding State income taxes, most states base them on a percentage of the taxes you paid to the IRS. But, there are some differences, so make sure to get some professional help at tax time.
So there you have it. Oh, one more thing. Once your business becomes substantial (over $2500 month), I strongly recommend hiring a CPA to do your taxes instead of a local tax preparer. CPAs are much better at finding deductions and if a CPA signs your return, you are far less likely to be audited.
Author – The Complete Amazon Marketing System
Publisher –The Amazon Sellers Blog – The oldest and largest FREE blog for Amazon sellers.