Fulfillment by Amazon (FBA) is a service that outsources storage, order fulfillment, and shipping services to Amazon. Sellers send their products to Amazon’s fulfillment centers and Amazon picks, packs, and ships orders directly to customers. It’s a popular service, with 86% of Amazon sellers using FBA.

However, FBA can create some confusion around whether these Amazon sellers need to collect sales tax. Below, we’ll explain which sellers are responsible for what kind of sales tax with Amazon FBA and how to figure out whether you have a sales tax obligation.

What’s in this article:

• What to know about sales tax in the US
  
• Nexus requirements in the US
  
• How does sales tax nexus work for online marketplace sellers?
  
• How do Amazon FBA sellers collect sales tax?
  
• How does sales tax work in Canada?
  
• What are the steps in handling sales tax?
  
• How to report and submit Amazon FBA sales tax
  

What to know about sales tax in the US

Sales tax in the US is a consumption tax imposed by the government on the sale of goods and services. When a customer purchases a product or service, a percentage of the price is added as sales tax, which the seller collects and remits to the appropriate tax authority. Here’s what sellers need to know about US sales tax:

• State-level taxation: Unlike many countries that have a national sales tax or value-added tax (VAT), sales tax in the US is primarily governed at the state level. Each state sets its own rates and rules for what is taxable.

• Local taxes: In addition to state tax, local jurisdictions (i.e., counties and cities) impose their own sales taxes. The total tax a customer pays is the sum of state and any local taxes.

• Tax nexus: A business must collect sales tax in a state only if it has a nexus there, which means either having a physical presence or passing an economic threshold such as sales volume or transaction count. Physical presence could include having a store, office, warehouse, or employee in the location.

• Taxable items: Most tangible goods are taxable in most states, but the taxation of services varies by state. Some states tax a substantial number of services, while others tax very few.

• Exemptions and holidays: Certain products such as food for home consumption, prescription medications, and some agricultural supplies are often exempt from sales tax. Some states also have periodic sales tax holidays, where specific items can be purchased tax-free.

• Filing and compliance: Businesses must file regular sales tax returns with each state and local jurisdiction where they have a nexus and collect tax. Differing rates and rules across jurisdictions can complicate this process.

Nexus requirements in the US

In the US, nexus determines whether a business must collect and remit sales tax in a particular state. The criteria for establishing a nexus can vary from state to state, but these are some common rules:

• Physical nexus: This is the most traditional form of nexus, created when a business maintains a physical presence in a state. This presence can include offices, stores, warehouses, employees, or representatives.

• Economic nexus: Recent laws now require businesses to collect sales tax based on economic activity within a state, regardless of physical presence. Economic activity is often measured by sales revenue (e.g., more than $100,000 in annual sales), transaction volume (e.g., more than 200 transactions in a year), or a combination of both within a state. Each state sets its own thresholds.

• Click-through nexus: Some states have laws that create a sales tax nexus when businesses work with in-state affiliates who refer customers to the business through a web link (click-through) and the resulting sales from these referrals exceed a certain threshold.

• Affiliate nexus: Affiliate nexus occurs when a business has ties to another company or affiliate within the state that helps it establish or maintain a market there. For example, if a parent company has a subsidiary in a state, both might have nexus.

• Marketplace nexus: Many states have marketplace facilitator laws that require marketplace facilitators such as Amazon, eBay, and Etsy to collect and remit sales tax on behalf of sellers using their platform. These laws simplify tax compliance for small sellers, but they expand collection duties for large marketplaces.

• Inventory nexus: Holding inventory in a state can create nexus, even if that inventory is stored in a third-party warehouse. This is particularly relevant for businesses that use fulfillment services such as Amazon FBA.

How does sales tax nexus work for online marketplace sellers?

Sales tax nexus for online marketplace sellers works in one of two ways: marketplace facilitator nexus or seller nexus. Let’s take a closer look at both.

Marketplace facilitator nexus

Several states have marketplace facilitator laws that require online marketplaces (such as Amazon, Etsy, or eBay) to collect and remit sales tax on behalf of their sellers. Here’s what this means:

• Sellers: If you sell through a marketplace facilitator, you generally don’t need to worry about collecting sales tax yourself—even if you have nexus in a state. The marketplace will handle it for you.

• Nexus thresholds: Each state has its own economic nexus threshold that triggers the marketplace’s obligation to collect. If your sales through the marketplace exceed that threshold, the marketplace will start collecting sales tax for you in that state.

• Exemptions: There might be some cases where the marketplace doesn’t cover all sales, such as specific product categories or sales made outside the marketplace platform. In those cases, you might need to collect sales tax yourself.

Seller nexus

Even with marketplace facilitator laws, you could still have sales tax nexus in some states. This can be due to:

• Direct sales: If you sell products directly to customers through your own website or other channels, you might trigger economic nexus in a state based on your sales volume or transaction count.

• Inventory storage: If you store inventory in a state—even in a third-party fulfillment center—you might create physical nexus in that state.

• Other activities: Certain activities, such as having employees or attending trade shows in a state, can also create nexus.

If you have nexus in a state and are not selling through a marketplace facilitator, you are responsible for collecting and remitting sales tax on your sales in that state.

How do Amazon FBA sellers collect sales tax?

If you’re an Amazon FBA seller, and you determine that you have nexus in a state, you need to register for a sales tax permit in that state. Although Amazon handles sales tax collection for transactions through FBA, you need to set up and manage how taxes are collected in your Amazon seller settings to ensure you’re complying with state law.

Even if Amazon collects the tax, the seller is typically responsible for filing sales tax returns and remitting any sales tax due to each state. Amazon issues 1099-K forms with annual and monthly gross sales information if your business meets the gross sales threshold.

How does sales tax work in Canada?

In Canada, sales tax involves a combination of federal and provincial sales taxes. Here’s how this applies to sellers in Canada, including those using Amazon FBA.

Types of sales taxes in Canada

• Goods and services tax (GST): This is a federal tax of 5% applied across all of Canada.

• Provincial sales tax (PST): Some provinces apply their own sales tax in addition to the GST. Rates vary by province.

• Harmonized sales tax (HST): In some provinces, the GST and PST are combined into a single tax called HST. The rate varies by province, but it includes the 5% GST.

Nexus and tax collection

Sellers need to be aware of the specific tax rules in each province where they have nexus. For example, British Columbia, Saskatchewan, Manitoba, and Québec collect their own PST, which requires separate registration and remittance processes.

• Physical presence: Similar to the US, having a physical presence in a province can create a requirement to collect and remit the appropriate taxes. For Amazon FBA sellers, storing inventory in Canadian Amazon fulfillment centers constitutes a physical presence.

• Economic nexus: Canada does not typically determine economic nexus based on sales volume alone. But nonresident sellers who conduct business in Canada are generally required to register for GST and HST if they make taxable supplies in Canada.

Responsibilities of Amazon FBA sellers

• Sales tax registration: Amazon FBA sellers must register for GST and HST (and PST where applicable) if they meet the criteria for doing business in Canada. This involves obtaining a business number (BN) from the Canada Revenue Agency (CRA).

• Sales tax filing and payment: Sellers need to set up tax collection in their Amazon seller account and specify rates according to where their goods are shipped. Sellers are also responsible for regularly filing GST and HST (and PST, if applicable) returns. This cadence could be monthly, quarterly, or annually—depending on the seller’s sales volume and the relevant tax authorities.

• Importing goods: When importing goods into Canada, GST and potentially other duties apply at the point of entry. Sellers with Amazon FBA need to make sure these are handled correctly, which often involves using a customs broker.

What are the steps in handling sales tax?

The main consideration in determining if you’re subject to sales tax is whether you have nexus in the regions where your inventory is stored and where your customers are located. Here’s how you can evaluate this.

Identify nexus

To determine whether you have physical nexus, check where Amazon stores your inventory. You can locate this information in your Amazon seller account under inventory reports.

To confirm whether you have economic nexus, check if your sales exceed the economic thresholds in the appropriate states. Many US states have specific thresholds (e.g., $100,000 in sales or 200 transactions annually) that, once you exceed them, create an obligation to collect and remit sales tax in that state. In Canada, nonresident sellers are generally required to register for GST and HST.

Register for sales tax permits

Once you establish that you have nexus in a state or province, you need to register for a sales tax permit with the state’s department of revenue. This process typically involves obtaining a seller’s permit or sales tax license.

Set up sales tax collection on Amazon

In your Amazon seller account, configure your tax settings to collect sales tax in the states and provinces where you have registered. Amazon has detailed settings that allow you to specify rates at a state, county, and city level if necessary.

Collect sales tax

Confirm the tax rates you’ve configured on Amazon match the current rates in the jurisdictions where you’re required to collect sales tax. Sales tax rates can change, so update these rates regularly.

Report and remit sales tax

File sales tax returns with each jurisdiction for the periods required. Even if you don’t collect any sales tax during a period, you might still need to file a “zero return.” Pay the collected sales tax to each state or province and adhere to local deadlines to avoid penalties and interest.

How to report and submit Amazon FBA sales tax

Amazon FBA sellers have a few different available methods for reporting and submitting sales tax. The best way to handle Amazon FBA sales tax depends on several factors. You might want to use automated software or a tax professional if:

• You have nexus in multiple jurisdictions, which can make manual filing more difficult

• You have a high volume of sales, which can be time-consuming to report

• You have complex sales tax situations, such as selling exempt products or dealing with multiple sales channels

Here’s how each of these methods works.

Manual filing

• Collect sales tax reports from Amazon Seller Central, which details the amount of sales tax collected in each jurisdiction.

• Manually prepare sales tax returns for each jurisdiction where you have nexus and owe tax.

• File returns online or by mail.

• Make the necessary sales tax payments.

Sales tax software

• Integrate your sales tax software solutions with Amazon Seller Central to automatically calculate and collect sales tax during checkout.

• Generate sales tax returns based on the data collected.

• Automate sales tax remittance to the state.

Tax professionals

• Hire a tax professional to help you determine nexus, register for permits, file returns, and comply with all regulations.