It’s intimidating. It’s overwhelming. And it can be massively confusing.
Our goal is to vanquish all your sales tax fears forever and allow you to focus on growing your business.
Today we're going to answer the 14 most important questions about sales tax.
1) What is sales tax?
Sales tax is when state and local governments charge and collect tax on a sale of a retail product.
The charge is calculated as a percentage of the product's price. If the product is shipped, some states collect tax on the shipping as well.
You’ve already experienced sales tax in a brick and mortar retail store as a customer.
For example, let's say you go to Target and purchase a new cat hammock for your favorite feline. Even though the retail price is $20, you pay an additional amount on that product. The store collects tax from you and then pays it to the government—or “remits” it to the government—who then uses it to fund schools, roads, fire departments, and tons of other things.
If you’re from Europe, you know this as VAT: Value Added Tax. In the USA we call it “sales tax” or “use tax.”
2) How is sales tax different from income tax?
Income tax is when you pay a percentage of your net income to the government. Sales tax is when the buyer pays a percentage of the retail sale to the government.
Another way to look at it: the worker being paid owes income tax on that pay. The person buying a product pays the sales tax for that product's sale.
3) Do I have to pay sales tax when I purchase products to sell?
No, you do not have to when...
Buying products to resell
For example: when buying from WalMart or Target to resell on Amazon
Pro-tip: Register for tax exemption with the vendor. This way, you will not get charged sales tax.
For example, Walmart has a section on their website where you can apply for tax exemption. So does Home Depot.
To get a sales tax exemption, you will first have to file for sales tax in the states where you purchase the products. You then submit that tax registration number in your application.
Not all retail companies will let you do this, so make sure you find out.
Buying products from a manufacturer
The manufacturer knows not to charge you for this. As a general rule: any time you buy a product to sell, i.e. collect inventory, you should not be charged sales tax.
4) How does sales tax work?
Step 1: You register in states where you are required to collect sales tax.
Step 2: You collect sales tax when customers buy your products.
Step 3: You file a report on your sales to the relevant states and remit (pay) sales tax to each state.
And get this—not only does every state have different sales tax rates and laws but local governments do too. It’s a lot to keep up with.
5) How can I possibly keep up on the tax laws for 11,000 tax jurisdictions?
You don’t have to. But if you are dead serious about building and scaling a business that makes you a ton of money, you need to at least understand some basic principles, and then you’ll know exactly what to do in any situation without having to learn over 11,000 tax jurisdictions across the great US of A!
Before we show you exactly how to set yourself and your business up for success, you may be thinking...
6) Why can’t I just ignore sales tax?
It doesn't matter if you consider yourself a "small fry".
State and local governments can and will come after you and fine you big time if you do not collect and remit sales tax.
I know a guy who started his own lawn care product company in Nevada. He grew his business incredibly fast, selling all across the US including tons in California. He was supposed to collect sales tax from customers but didn’t. Even though he operated out of Nevada, California took notice.
Three years in, he got a letter from the California Franchise Tax Board. He opened it, and, to his horror, not only did he owe tens of thousands of dollars in fines and back taxes, but he did not have any collected sales tax to remit. He now had to pay it all himself. He couldn’t exactly go back to his customers and say, “I failed to collect sales tax from you, so pay up now.” His business tanked...
But we're not going to let that happen to you.
7) To protect my business, what do I need to understand about sales tax?
First: Sales tax is determined at the state, county, and city level, not federal.
When you combine all of the sales tax rates for city, county, district, and state, this is called the “combined rate.”
Each of the 50 states and each non-state US territory (like DC) wrote up their own set of sales tax rules independently from one another.
The five states that do not collect sales tax are Alaska, Delaware, Montana, New Hampshire, and Oregon.
Arbitrage Amazon sellers like to buy products from these five sales tax-free states before reselling the products. This saves them a lot of money, increasing their profit margins.
People love to hate on taxes, but we need them in one form or another.
One of my favorite things to do is take my wife on rollerblading dates. Next to our house is a paved trail that goes for miles through this beautiful nature park of creeks, birds, and greenery. Who keeps that trail paved? Who keeps the trash picked up? Who keeps the plants from growing over the trail? Services paid with sales tax!
Second: Sales tax can vary from product to product.
Cities often tax some goods such as restaurant meals at higher rates and other goods, such as clothing, at lower rates. Some cities also collect tax for other things such as special-purpose districts and transit authority tax.
For example, take a look at the combined tax rate for Austin, TX:
El Paso, TX, however, collects sales tax at a combined rate of 7.25%.
All sales tax law was initially set up before the internet and before online entrepreneurialism—like Amazon private label—became the opportunity it is today, increasing the number of remote sellers.
Third: What is a remote seller?
You, the online seller, are classified as a remote seller when your business is located in one state but ship products to customers in another state. (Just like that lawncare seller who was located in Nevada but sold in California.)
Fourth: Remote sellers only have to collect sales tax when they have NEXUS in the state where the customer is located.
Nexus is a fancy word for “presence” in a state. There are two kinds of nexus: physical and economic. You can have a physical presence in a state and you can also have an economic presence in a state.
Fifth: What is physical nexus?
If you have an employee, a contractor, or a warehouse then you have physical nexus in that state. It also counts as physical nexus if your products are stored in an Amazon fulfillment center in that state.
For example, if your business is located in Texas:
You have physical nexus in Texas. So, when you sell products to Texas customers, you must collect and remit sales tax at the Texas combined sales tax rate.
If you have a satellite office in Ohio, then you have physical nexus in the state of Ohio. So, when you ship products to customers in Ohio, you must collect and remit the Ohio combined sales tax.
Let’s say you have an employee in Alabama even though your primary operation is in Texas. When you sell products to customers in Alabama, you must collect sales tax from your Alabama customers because you have physical nexus in the state of Alabama.
Let’s say you have a contractor—not an employee but a contractor—in Rhode Island, and your business is still located in Texas. Then you have physical nexus in Rhode Island.
What if the contractor in Rhode Island worked for you just one week of the year? Even if she worked for you at least two days, you have physical nexus in the state of Rhode Island for that entire year.
Okay, wait. What if my products are stored at an Amazon fulfillment center in California? Then you have physical nexus in the state of California.
Note: Where your business is registered does not by default give you nexus in that state. You need to be have your operations or employees or contractors or fulfillment centers in that state to qualify for physical nexus. For example, if you registered in Delaware and have no operations there, then you do not have nexus in Delaware.
Sixth: When does physical nexus obligate me for sales tax?
If you have physical nexus in a state, when you ship products to customers in that state, you have to collect sales tax from the customer, and remit it to the state where the product was shipped.
Seventh: What is economic nexus?
Economic nexus means you reached a minimum threshold of annual sales in that state. Economic nexus is typically measured by your sales revenue and transactions—whichever threshold you reach first.
As of today, 28 of the 50 states require sales tax when you reach $100,000 or 200 transactions annually in that state.
For example, in the state of Arkansas, if you reach $100,000/year or 200 transactions in that year, you have economic nexus in the state of Arkansas.
But how are you supposed to keep track of all this when you do Amazon FBA sales tax collection?
We created a sales tax cheat sheet for you that you are going to love. It breaks down the physical and economic nexus requirements for every state, as well as whether they are destination or origin-based for online sellers (we'll get to that in a minute) with links to their state revenue sites where you can register for sales tax if needed.
Eighth: What does this looks like practically for your business?
Let’s say you are selling a product for $50 a piece on Amazon. When that product has shipped 200 times within 12 months to customers in Ohio, you have now reached economic nexus for the state of Ohio. Assuming you were shipping an equal number of products to all states every year, your annual revenue would be at $500,000 a year before you owed sales tax to the state of Ohio.
We preach all the time about choosing products with high sales prices. This is just another example of why selling products at higher prices works in your favor.
If you were selling your product for only $15, all things considered equal, as soon as you reach $150,000 in annual sales, you are obligated to collect and remit sales tax for the state of Ohio.
In other words, using our example, when selling a product for $50 instead of $15, you get to make $350,000 more a year before having to collect sales tax in a state where you do not have physical nexus.
8) When are remote sellers required to collect sales tax?
When you have physical or economic nexus in the state to which you are shipping the product. You must collect at the sales tax rate determined by the state to which you shipped the product to.
9) With over 11,000 tax jurisdictions in the US, how do I ensure I am collecting at the correct tax rate for every sale?
First, you don’t have to know every tax jurisdiction. We will not only unpack it for you step-by-step, but refer you to software that can automate that for you. All you need is to understand is how it works.
Every state is either origin or destination-based.
When a state is destination-based, it means you collect sales tax at the tax rate of the location where the product is shipped to and received.
Origin-based means you collect sales tax at the tax rate of the location where you have physical nexus—where you, your employees, or warehouse are located.
For example, Texas is origin-based. So if you ran a coffee shop in Austin Texas, but shipped coffee beans to a customer in El Paso, Texas, you would charge sales tax at the rate of your location in Austin—not at the tax rate of El Paso—because Texas is an origin-based state.
Now let’s say your coffee shop is set up in Akron, Ohio. Ohio is a destination-based state. So if you ship coffee beans to a customer in Columbus, Ohio, you collect sales tax at the rate of the product's destination point in Columbus, not Akron.
It’s important to understand that these rules were created long before there was such a thing as an online seller. Amazon sales tax wasn’t a thing because Amazon FBA wasn’t a thing. In fact, these laws were created for businesses selling to customers within their own state.
Now let’s apply this on a state to state level.
When shipping from one state to another state, you only collect sales tax at the rate of the state your product ships to—if you have nexus in the ship-to state.
10) What if I ship a product from an origin-based to a destination-based state?
Let’s say you are shipping from Arizona (origin-based) to Ohio (destination-based). If you have nexus in Ohio, then you collect tax based on the tax rate of the location in Ohio where your product ships to.
Even though you have nexus in Arizona (because your warehouse or fulfillment center are located in Arizona), you do not have to collect any sales tax for Arizona. You only collect sales tax for the ship-to state.
11) What if I ship a product from a destination-based to an origin-based state?
Now let’s say you are shipping a product from Ohio (destination-based) to Arizona (origin-based). If you have nexus in Arizona, then you must collect tax based on the tax rate of the location in Arizona where your product ships from.
Notice how the home state being destination-based or origin-based does not matter in these two scenarios.
You only collect sales tax based on the tax law of the state where your product is shipped to and received.
12) When does origin-based versus destination-based matter?
When you ship a product to a customer in the same state from which the product was shipped, and that state is origin-based.
For example, if your product ships from a warehouse in Phoenix, Arizona to a customer in Flagstaff, Arizona, do you collect sales tax at the Phoenix rate or the Flagstaff rate?
Because Arizona is origin-based, you collect sales at the Phoenix rate because that is where your product is shipped from. If hypothetically Arizona was destination-based, then you would collect tax at the Flagstaff rate, since Flagstaff is the destination of your product.
Remember: you only have to think about sales tax in a state when your product ships to that state.
Here is another reality to grasp:
13) Some states switch from origin-based to destination-based for remote sellers.
We gave you an earlier example using Texas as an origin-based state but get this:
You run your business from Nashville, TN and sell in a different state. We’ve already established that you do NOT need to consider where your business is located when selling out of state in regards to sales tax.
So, you’re in Nashville, and your product ships from a fulfillment center in Houston, TX to a customer in Mt. Pleasant, TX. Do you collect sales tax at the rate of Houston (where the product is shipping from), or Mt. Pleasant (where the product is shipping to)? Mt. Pleasant! Why?
Texas is one of the 9 states that switch from origin to destination-based for remote sellers. (This United States sales tax cheat sheet gives you a full breakdown of all these details so you can understand it at a glance.)
Because Texas is destination-based for remote sellers, you collect sales tax at the rate of Mt. Pleasant, TX, the destination of the product.
What if hypothetically Texas was origin-based for remote sellers just like it is for in-state sellers? Then you would collect tax at the rate of Houston, TX (8.61%), because that is the location from which the product is shipped.
The nine states that switch from origin to destination-based for remote sellers are Utah, Texas, Illinois, Ohio, Pennsylvania, Tennessee, Missouri, Mississippi, and Virginia. The only three states that do not switch from origin to destination-based for remote sellers are Arizona, California, and New Mexico.
Now imagine having to figure that out not just for 45 states but all 11,000 sales tax jurisdictions in the United States.
The good news: you don’t have to know every single sales tax rate.
Today, we will show you exactly how to conquer this beast.
We will not only teach you what you need to know, but we will then show you how to keep it simple and scalable—so you can focus on growing your business and not lose sleep wondering if you paid the correct sales tax.
Note: I am not a tax attorney or a CPA. For specific advice on any tax law, make sure you consult with a tax attorney.
4 steps to conquering sales tax
Step 1: Determine which states you have physical and/or economic nexus in.
If either of the following are true, you must collect sales tax:
1. When you have physical nexus in the state. In other words, when your business or employees or product warehouses are physically present in that state.
2. When you have economic nexus in the state. In other words, when you reach a minimum amount of annual sales in that state.
Remember: Alaska, Delaware, Montana, New Hampshire, and Oregon do not collect state level sales tax. Even if you have physical or economic nexus in these states, you do not need to collect sales tax for these states.
To keep it simple—whether or not the state is destination-based or origin-based—if you qualify for physical or economic nexus in the state where your customer receives the product, and the state is a sales tax-collecting state, you must collect taxes for the purchase and remit (pay) that tax amount to the state where the product was received.
Physical Nexus: for which states are any of the following true?
- I run my business in the state.
- I have a satellite office in the state.
- I have an employee or contractor who worked a minimum of 2 days of the year in the state.
- I have a warehouse in the state.
- I have products stored in an Amazon fulfillment center in that state.
For any state where one or more of the answers to these questions was “yes,” you have physical nexus in that state.
Important note: If you registered your business in a different state, that alone does not mean you have nexus in that state. For example, let’s say you live in New York where you run your Amazon business from your laptop, but your LLC was registered in Wyoming because they have 0% corporate and income tax. You do not have physical nexus in the state of Wyoming. In other words, you only have to collect sales tax for Wyoming if you reach the economic nexus (sales threshold) for that state which is $100,000/year or 200 transactions.
How to find out which Amazon fulfillment centers your products are stored in
In Seller Central, click on Reports, then Fulfillment.
On the left side under Inventory, click Show more so it shows you all the options.
Then select Inventory Event Detail.
You will see two tabs: View Online and Download. Select Download.
For the Event Date, select a time period that covers the date you shipped your products to Amazon’s fulfillment centers.
Then select Request .csv Download.
Within a couple minutes a Download button will appear on the right side.
Download the file and open it in a spreadsheet software.
Go to the fulfillment-center-id column.
This shows you a list of the Amazon Fulfillment centers where your products are located. Each code is an airport code. For example, CAE is the Columbia Metropolitan Airport. DFW is the Dallas Fort Worth Airport.
Now you know which fulfillment centers your products are located in, which means you know which states you have physical nexus in.
Economic Nexus: what is your sales and transaction volume?
For most states, if you have $100,000 in annual sales or 200 transactions for products shipped to that state annually, you have reached economic status.
This USA Sales Tax Cheat Sheet will show you the economic nexus threshold for every single state.
Step 2: Register as a seller in the states where you have physical nexus.
Only register for sales tax in the states that you have physical nexus in. Do not worry about economic nexus until your sales are high enough to qualify.
Tips for registering as a seller in states:
- Google "register for sales and use tax [Name of state]"
- Set up your sales and use tax by filling out the online form. You will need:
- Your business name
- Business address
- EIN number
- A phone number and email
Step 3: Set up Sales Tax collection in Seller Central.
Amazon says to its customers:
"The tax rate applied to your order will be the combined state and local rates of the address where your order is delivered to or fulfilled from."
Which states do I need to set up for sales tax collection in Seller Central?
In the states where you have nexus and Amazon is not collecting and remitting sales tax for you. Amazon collects and remits (pays) sales tax to almost all of the 45 states that collect sales tax. You do not have to do anything in your Seller Central account for these states.
However, currently there are a few states Amazon does not yet collect and remit sales tax for: Florida, Kansas, Missouri, and Tennessee.
Some states have implemented a law called Marketplace Facilitator or Marketplace Fairness which requires online seller platforms like Amazon, Walmart, eBay, and Etsy to collect and remit sales tax on your behalf. Keep in mind, this may change soon when Amazon collects and remits sales tax for all states that require sales tax.
If you have nexus in any state for which Amazon is not collecting and remitting sales tax, you must not only register with each state for sales tax, but set up sales tax collection in Seller Central for these states.
How to set up sales tax collection in Seller Central
1. Click Settings > Tax Settings from the drop down menu
2. Click Add States
3. Type in the name of the state you want to add, then click the box next to the state and click Add Selected States.
4. Type in your State Tax Registration Number. (Some states may call this by a different name.)
5. County, City, and District are already selected. Do not deselect these.
6. Select Gift Wrap.
7. Select Shipping & Handling if the state collects tax on shipping.
8. Choose a Product Tax Code so Amazon knows how much tax to collect from customers who receive your products in this state.
I do not recommend you pick a custom sales tax rate, because sales tax rates change often.
9. Click the Select a Default PTC Button and select the most appropriate code based on your product type.
For most products, you will select A_GEN_TAX as this is a general tax rate that covers the vast majority of goods.
In fact, If you can’t find a product tax code for one of your products, then select A_GEN_TAX.
If you never want to charge sales tax on a product, select A_GEN_NOTAX.
If you sell general clothing, then select A_CLTH_GEN—but only if that state requires sales tax for clothing (some do not).
Let’s say you sell health cosmetics type products. In that case, you would select A_HLTH_COSMETIC.
Amazon’s PTC’s (Product Tax Codes) are very intuitive.
See if you can find your product type. If you cannot, then select A_GEN_TAX.
As long as you know the main state rules for your product type, you are good to go.
Not sure about the state-specific rules for your product type? That’s why we created the USA Sales Tax Cheat Sheet.
Step 4: File your sales tax report in each state where you registered.
Two options for filing your sales tax
1. Use automation via sales tax software.
2. File online.
- Login to your sales tax account (the same login you already used to register).
- Fill out the form.
- Make your payment through the state’s payment gateway.
Tips for filing your sales tax online
Whether or not Amazon is remitting the sales tax for you, you are still required to file the return. After you do it a couple times, it takes literally a few minutes per state.
Make sure you know how regularly you are required to file. Most states require monthly or quarterly. Even if you have no sales for that period, you still have to file.
For the states where Amazon remits (pays) the sales tax on your behalf, you still have to file but do not have to pay. For the states where Amazon does not remit the tax for you, you must submit your payment when you file.
We're not going to walk you through every single state for how to file as that would use up the rest of your week and ours too. However, there are typically only a handful of states you need to register with, and for those that you do, they provide step by step instructions for how to do this online.
While we've just covered a lot of information, there's plenty more to learn about how to set yourself and your business up for (taxation) success. Get the full scoop on starting and running a successful Amazon store (including more nitty gritty tax info) at JOD.com/freedom.