The Ultimate Guide to FBA & Taxes

E-commerce businesses, especially those operating through Amazon, have become an increasingly popular business structure over the years. Due to the convenience, many e-commerce business owners use Fulfillment by Amazon (FBA) to run their stores. 

As an e-commerce business owner, are you aware of the tax implications of using FBA? Here, we will cover what FBA is, how sales tax works for FBA sellers, what FBA tax deductions you can take, and how taxes are filed by FBA sellers.

What is FBA?

FBA is a method of selling products offered by Amazon to e-commerce business owners. This method offers packaging, shipping, and storage of goods to e-commerce business owners. Sellers can ship their merchandise to an Amazon fulfillment center or warehouse to store their merchandise until it is sold. An Amazon employee prepares, packages, and ships the product for the seller making the distribution process for a small e-commerce business stress-free. 

This method allows sellers to take advantage of Amazon’s distribution services and their customer base. Once you ship your products to the warehouse, all you have to do is market your product (other than taxes, of course). Amazon also takes care of any customer service related issue.

How does sales tax for FBA sellers work?

Sales tax can get a little tricky for Amazon sellers. If you are storing your merchandise in an Amazon warehouse, then the state considers you as having a sales tax nexus. 

A sales tax nexus is the tie between the state and the seller that requires the seller to register with the state and collect and remit sales tax in that state. Typically, if you’re using the state’s roads for deliveries, the state will require you to charge the buyer a sales tax. 

The FBA tax on the sales price is based on whether you’re selling in a state that is an origin-based state or a destination-based state. This means the tax on sales will either be calculated by the sales tax at the origin state or the tax at the destination state. Typically, remote sellers charge a sales tax based on the destination state.

Business activities, such as reaching a sales threshold or having a physical presence within a state, may establish a sales tax nexus with the state. Therefore, the tie is either economic, physical, or both. Not only does every FBA seller who sells a taxable product and has nexus in the selling state have to collect sales tax on Amazon, but they also need an Amazon sales tax permit issued by the states conducting the tax collection activities.

There are few circumstances when FBA taxes on sales don’t apply. For example, when you’re selling tax-exempt products, operating in a state where the tax on sales doesn’t apply, or if you don’t have a sales tax nexus in the state you’re selling, you don’t have to collect or remit any sales tax. All but five U.S. states impose a sales tax: Alaska, Delaware, Montana and New Hampshire.

Does Amazon collect sales tax for FBA sellers?

If you have a sales nexus in the selling state, in states where marketplace facilitator laws exist, Amazon will collect sales tax on your behalf. Otherwise, you will need to go to Seller Central and set up tax collection manually. 

Even those states that Amazon reports sales tax to, it’s still recommended that you also report it yourself, just to cover all of your bases. Any sales tax that Amazon does not remit, they will transfer to your account, allowing you to remit it when you file the return.

Do I need to know how to file taxes for Amazon FBA?

Yes, you need to file a sales tax return if you’re running your business using FBA. Each Amazon tax report must include certain information, including a breakdown of the tax collected in every city, district, or county in the nexus state.

You can file the report either by using tax software or filing it manually. If you file manually, visit the state’s website and file the tax in states with the nexus and permit. Even in a nexus state, if no tax was owed, you must still file a return.

Do I have to file FBA taxes each month?

The frequency of the sales tax filing varies depending on the state. Some require returns to be submitted every month, some bi-annually, quarterly, or at year end.

In summary: 

1. Register your business where you have a sales nexus;
2. Apply for an Amazon permit for taxes on sales in the states where your FBA inventory is being stored; 
3. Manually activate the collection of sales tax for states from within Seller Central that aren’t included in the agreement known as the marketplace facilitator; 
4. Generate Amazon reports for taxes on sales collected in all jurisdictions, even those reported by Amazon; 
5. Submit all sales tax reports to the appropriate state tax authorities, even the returns with a zero amount, either online or using tax software by their due dates.

What are some of the FBA tax deductions?

Not only do e-commerce business owners have to stay on top of the taxes on their sales, but there are also some deductions that FBA sellers can take advantage of when filing Form 1040. 

These deductions can offset some of the taxable income, which will reduce how much you owe in income taxes. The only requirement for a deductible business expense is that it must be ordinary and necessary.

Here’s a list of deductions that FBA sellers should consider when filing their taxes:

• Cost of goods sold: Cost of goods sold includes production costs, labor, the wholesale cost, and the cost of storage;
• Inventory storage: The storage of your Amazon inventory is deductible when you use FBA. If you’re using FBA, these fees will include storage and handling fees; 
• Home office: If you run your Amazon business from home, your home office must be a designated space and the home office must only be used for business for it to be written off as a tax deduction;
• Equipment: Equipment includes things such as printers, scanners, and shipping scales;
• Insurance premium: You can deduct 100% of your premium for your health insurance from your taxable income;
• Shipping costs: If you use FBA you can deduct the fees Amazon charges for handling the inventory to be shipped. If you ship the products yourself, you can deduct shipping fees such as delivery charges, postage, packaging, and materials used for shipping. This could include envelopes, labels, boxes, and tape;
• Office supplies: Any office supplies you use from home exclusively for your business, even if Amazon handles your inventory storage and shipping, can be used as a deduction;
• Technology:. Software licenses, website hosting, email services, office software, Amazon software, and business software can be considered tax deductions; 
• Subscriptions: Any software or magazine subscriptions related to your business can be deducted from your taxes;
• Communications: Internet access, phone, Zoom or Skype, marketing, and advertising all fall under this deduction;
• Professional services: Professional services such as accountants, lawyers, consultants, and photographers can reduce your tax burden;
• Bank and business fees: This includes bank account fees, processing fees, credit card fees, business insurance, or membership fees;
• Education: Education expenses include any programs or courses that directly impact the operations of your Amazon business;
• Business travel: Any business travel expenses can be deducted. If you use your personal vehicle, you can only deduct the expenses that were business-related. Otherwise, you can deduct expenses for air travel, trains, and rental cars used for business-related travel;
• Business meals: Business meals can also be deducted up to 100% if certain conditions are met.

If you’re going to deduct these expenses, be sure to have documentation to back them up. The documentation should include the amount of the expense, the date of the expense, the location of the expense, the purpose of the expense, and who you were with during the activity. This information can just be noted on the back of the receipt and all receipts should be kept together in a file.

What is the advantage to paying taxes on sales?

There is an advantage to filing a return on your FBA taxes on time: for filing on time, states will refund around 1% to 2% of the sales collection total. It’s hard to beat free money.

Ensure your e-commerce strategy is tax-advantaged. See how Corvee can help!