Online sales have grown considerably in the last two years. Amazon is the world’s leading e-commerce company. Leaving it in the eye of some states’ tax laws, does Amazon charge tax? Yes, it does.
One of the things that keeps Amazon in the top spot is the simplicity of inventory and order fulfillment steps for retailers, especially when it comes to the sales tax laws, which are subject to changes that apply to its sellers.
The amount or types of taxes a seller on Amazon must collect will depend on different factors. In states where no tax is implemented; therefore, sellers must be aware of the sales policies in all regions where their products arrive.
How does Amazon charge taxes?
As e-commerce rises, sales tax laws have also reflected a considerable high. Amazon charges tax since 2017 in all states with a sales tax.
Amazon’s collection of taxes has not affected third-party sellers. Amazon does not collect tax on behalf of third-party vendors, which account for more than 100,000. The tax only applies to direct sales by Amazon.com LLC or its subsidiaries.
Previously, Amazon was the preferred platform for many to purchase goods without paying income tax. But things have changed, and against it’s will, this company now must collect taxes.
Amazon does not collect sales tax directly, as only the government has that authority. To comply with local laws, Amazon is responsible for setting up systems and processes from which taxes are levied on online transactions.
Because there is no federal sales tax in the United States, Amazon must comply with the laws of the various state taxing jurisdictions. Third-party sellers on Amazon assume responsibility for the payment of taxes in states where it has a significant nexus or presence.
Amazon’s Sales Tax Variations
Amazon’s collection of sales tax varies by state and locality. Regional governments gradually defined how they would handle online retail. Thus, progress has been made with the issue still under debate and continues to present some changes.
The states where Amazon charges tax have differences, and the company must comply with each to avoid penalties. Although Amazon does not directly impose the collection, it is the one who manages the process and must be attentive to ensure that the laws are respected.
There are clear examples of what state sales taxes are. But there are also regions where they do not have problems because they do not impose this type of tax; they are:
- New Hampshire
Now, to get an idea of how taxes vary in the regions, know how it works in some states:
- Colorado includes Amazon.com purchases with a 2.9 % tax.
- In Illinois, the sales tax is higher at 6.25 %; we must add this percentage to each city or municipality, usually 1 %.
- Louisiana has a state tax rate of 5 % but also has local sales taxes.
- Tennessee and Nevada and Minnesota have more than 6% taxes, plus the additional locality tax.
- Alaska imposes municipal sales taxes, but not at the state level.
Most states allow local sales taxes. In California, the tax rate is among the highest; in Pasadena, it is 10.25% combined as it is broken down into a 6% state sales tax, in Los Angeles County, it is 0.25%, in Pasadena, it is 0.75% plus a special sales tax rate of 3.25%.
When does Amazon charge tax?
Since 2017 things have changed in e-shopping through Amazon. All sellers must pay sales tax, even external ones, and if they forget it, they will be penalized.
It is still a new responsibility that sellers often forget or ignore. To avoid being penalized and facing serious tax obligations, it is necessary to identify the variables that comprise the sales tax on Amazon.
The taxability of the product means that it is eligible for tax collection; generally, every tangible product is subject to sales tax. In some states, yields are taxed according to their categories, such as clothing, books, or groceries. Some regions do not include tax products in the categories mentioned above.
In the case of clothing, most states consider that it should be taxed; some have decided that it is taxed depending on a certain price, while others do not subject clothing to sales tax.
Only sportswear, recreational clothing, leather goods, and accessories are taxed in Minnesota. New York clothing valued at $110 or less is exempt from sales tax.
2. Tax nexus or commercial presence
The nexus will depend on where the seller makes sales, not just where the buyer or customer is or how the product moves between them. The seller must know the jurisdiction’s tax laws where the physical stores, retail stores, or offices are located.
This variable is complicated because the laws are different in all states, so it will take time to learn. Some states have enacted “Amazon Laws,” which require all sellers to collect sales tax. This includes sellers without a physical store in the region.
The commercial presence in which Amazon charges tax is determined in many ways. A third-party seller has a presence in the state where it resides. If it is an Amazon logistics seller, it has nexus in the state where its inventory is stored.
Nexus can exist even if you don’t own property in the state. That means that tax nexus is established based on the activities of the seller, an employee, or a third party involved in the business.
3. Tax collection
Sellers themselves can handle tax collection directly, or through Amazon, which has an automated program its sellers can opt into. But the seller is still responsible for collecting and adding the numbers for tax identification of their nexus.
As for the remittance is time-consuming and one of the most challenging aspects because the seller can easily get it wrong. One solution to avoid inconveniences is to opt for third-party software that ensures that the taxes are done in full and in time to be sent to the government.
For years I have studied American finance regulations. All the information in this blog is sourced from official or contrasted sources from reliable sites.
Salesforce Certified SALES & SERVICE Cloud Consultant in February 2020, Salesforce Certified Administrator (ADM-201), and Master degree in “Business Analytics & Big Data Strategy” with more than 13 years of experience in IT consulting.