04 May Tax Basics for Online Sellers (including Amazon Sellers)
Whether you are moving thousands of dollars of merchandise every week or selling some vintage fishing flies that have been sitting in the garage for a few decades, you’ve come to a good spot to answer the basic questions about the two kinds of taxes that an online seller needs to understand: income and sales tax.
Income tax is the tax on your profits. The income you earn online is considered income from self-employment. Self-employed income requires you to file a Schedule C (Profit or Loss from Business). If your online selling is a registered corporation, different rules may apply. If your profits are more than approximately $20,000 or if you have more than 200 sales per annum, you will need to file a 1099-K in addition to Schedule C.
However, if you sell items for less than the price you paid to acquire them, your proceeds are not considered income, and you won’t need to file Schedule C. If you earn less than $400, you won’t need to file a Schedule C. The $400, in this case, refers to your profit margin, not the amount for which you sold an item on an online platform.
Sales tax is the tax you are required to charge your customers (and then turn over to the government) for each item purchased. In tax jargon, charging sales tax and then turning it over to the government is called collecting and remitting sales tax.
Sales tax varies from state to state and sometimes even county to county. Amazon provides its sellers with an embedded service that collects and remits sales tax on behalf of sellers. Most states have instituted Marketplace Facilitator Laws which require the online marketplace (such as Amazon, Walmart, eBay, or Etsy) to collect sales tax on behalf of the seller.
The Good News
Marketplace Facilitator Laws make your job as an online seller much less complicated. Because of these laws and the resulting automated tax services embedded in online marketplace platforms, you don’t have to worry about organizing the sales taxes yourself. The automated tax collection and remittance can be a tremendous relief for small operators, especially those who don’t have the internal staff or in-house knowledge to track the various tax rates in all the different states and regions where sales are happening.
Amazon’s tax collection engine is robust and well-maintained. It keeps track of all the variations in-state sales taxes and stays up-to-date in a rapidly-changing field. Amazon’s tax collection engine is relatively easy to activate. A seller needs to set up a tax registration number in each state and then itemize their products according to the codes provided by Amazon.
The Bad News
Amazon charges 2.9% of each transaction to collect sales taxes. In addition, even if you use the Amazon tax collection engine, you are still responsible for 1) holding a valid sales tax permit and 2) filing an annual tax return in each state in which you make sales or have a tax connection (‘nexus’). In other words, if you sell on Amazon, the Amazon marketplace will collect and remit state sales taxes for you, but you will still need to report these taxes on your tax returns, and you will need to file tax returns in all the states where you do business.
Let’s walk through a few scenarios to illustrate:
Q: You are upscaling your living room furniture and tidying up your garage. You sell a used rug for $800, a used leather chair for $500, a used sofa for $400, and a new-but-never-used ping pong table. The ping pong table was still in its box, but you sold it for $100 less than what you paid for it. What taxes do you owe?
A: You don’t owe taxes on these sales because you are selling items for less than you purchased them.
Q: You have made a tidy profit selling tie-dyed tea towels on Amazon and eBay. Now it’s time to file your annual taxes. How do you find out what sales tax Amazon and eBay have been collecting and remitting on your behalf in order to file your taxes correctly?
A: You can use a sales tax automation solution to generate this report for you. A sales tax automation service will connect with all of your shopping carts and marketplaces, not just Amazon. You will receive a comprehensive report of all the sales tax that has been collected on your behalf.
Q: I’ve heard that an online seller can keep some of the sales taxes they generate. Is this true?
A: Approximately half of all US states give discounts to online sellers who are remitting sales taxes. This discount, designed as an incentive, allows the seller to keep 1-3% of the sales tax that is collected on behalf of the state. This free money is similar to many credit card companies’ incentives to customers who move large amounts of money through their service.
Q: I was hoping to sell my product in all 48 states but only ended up completing sales in 35 states. I know I need to file a sales tax return in the 35 states where I collected sales tax. Do I still need to file sales tax returns in the other 13 states?
A: First of all, not all states collect sales tax, so some states won’t need you to file any paperwork concerned with sales taxes, whether or not you’ve made sales in their state boundaries. States that don’t require a sales tax are Alaska, Delaware, Montana, New Hampshire, and Oregon.
In states where you have registered for a sales tax permit, you should always file a sales tax return even if you did not collect any sales tax over the taxable period. Some states will levy a fine if you don’t at least file a “zero return.” If you don’t file for multiple periods in a row, your sales tax permit will be canceled.
Online sellers need to pay both income tax on any profits over $400 and sales tax in every state which requires it. Marketplace Facilitator Laws, which have been enacted in most states, require online selling platforms such as Amazon, Etsy, and eBay to embed sales tax collection engines in their software. If you have questions about your online selling activity, and especially if you have been selling for several years without a full awareness of your tax responsibilities, consult with a tax resolution specialist to resolve your questions about taxes and online sales.