The Big T: Taxes on Amazon – Income Tax & Sales Tax

The Hardest thing in the world to understand is the income tax.

Albert Einstein

Now if even Einstein found it hard to understand tax, you can stop beating yourself trying to understand it!

Taxation is probably one of the most common issues that Amazon sellers bring up. Rightfully so, as it can be confusing with the big words like NEXUS, Multi-state Tax Commission (MTC) and AMNESTY! (say what?!)

2 Types of Tax you need to know

As a seller on Amazon.com selling in the US, the 2 main type of taxes you need to know are:

  • Income Tax
  • Sales Tax

Income Tax

If you are a US citizen, you pay what you earn to your state through income tax. This is pretty straightforward as the taxable income are usually your profits as an individual.

For non-US citizen, you pay income tax to your home country. No state in the USA will be able to claim that portion from you.

Hence, introducing the sneaky T, Sales Tax…

Sales Tax

Ah… sales tax. This applies whenever you sell something in the US on a Business-to- Consumer basis. It does not apply with Business-to-Business.

Before we go down the rabbit hole that keeps getting deeper by the day, I want you to know that I am not an accountant. So, while you may find useful information here, do not take it as your Modus Operandi (or habit of working). Seek professional accountant to advice you further.

Ready to take the slide? Here we go.

Courtesy of Tax Foundation. Showing sales tax of different states as of Jan 2019

I’ll do you a favor, do not even remotely try to memorize that. FYI: It changes yearly and some states, quarterly.

You can imagine how complex it can get as you scale your US Amazon FBA business. So many different rates and some states have special requirements. Like for some states if you are below US$1,000, you are not taxable. (This would have changed by the time you read this)

So now is a pretty good time to bring in NEXUS.

WHat does nexus means?

Nexus is the essentially having a “sufficient physical presence” in a State to require collecting and paying Sales Tax.

So as Amazon sellers who do FBA, do we have Nexus in the state which our goods are in, let’s say Taxes, Dallas where the fulfillment center for your goods are in?

As you can guess it, no one have an answer for that!

Nexus is a highly contentious issue with many American CPAs and even State tax departments disagreeing on whether 3rd party sellers have Nexus and are required to file in all necessary States. Some say yes, others no, and some say it’s Amazon who is responsible for all sales tax.

There are many sources that claim you have Nexus in a State if Amazon stores your inventory there. However, the sources that say this are all tax service providers who make money by having you engage them…

Let’s hear what a us tax attorney has to say (Paul Rafelson)

A quick 17 minute explanation on FBA sales tax. Take it with a pitch of salt as he has a rather unconventional view. I intentionally display his case to demonstrate how diverse a view this can get.

Once again, get an accountant to advice you. Ask them if they also agree with Paul Rafelson. I would love to hear what they think about this.

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