Tuesday, May 17, 2016

Turnover Tuesdays - Collecting Sales Tax

For those who are not familiar, I started a series a while back called Turnover Tuesdays. Every Tuesday I like to highlight one item that I have resold. This will include profitable and non profitable sales. I hope that there is always something to learn.

Collecting sales tax is one of those things that we all kind of hear about and think "I should probably do that too, right? But wait, maybe I don't need to and it's so much easier not to".

I want to give over the very, very basics about collecting sales tax and to raise the issue so that you can try to figure out on your own with more research whether you should be collecting sales tax on all (most), some, or almost none of your sales.

I will preface my remarks with the usual disclaimer.  I am not an accountant though I sometimes play one on a blog.  Please speak to your accountant regarding any specific situations.  This is food for thought and research. Do not make decisions based on this post without consulting professional help.

A while back I had to give up the illusion that reselling was merely a hobby.  It's a job/business for me.  I spend too much time on it for it to be a hobby and I do it even when it is inconvenient.  I don't work as many hours in my traditional job because of the income I generate reselling and the potential for that to continue to increase.  Once I saw reselling in that light, it was time to turn legit and do some of the things real businesses do.

Collecting sales tax can be a big deal on Amazon since it gives you a cost advantage to not collect sales tax.  You are relatively cheaper than other sellers and savvy buyers realize this and prefer to purchase without sales tax.

Who Needs to Collect Sales Tax?

Sales tax must be collected when the purchaser comes from a state in which you have a "nexus" to that state.

There are five states that generally do not have sales tax, also known as NOMAD states (New Hampshire, Oregon, Montana, Alaska and Delaware.  You can read more about it here.  If there is no sales tax for the customer to pay. there is no sales tax for you to collect.  If your business is located in one of those states, you still would not need to collect sales tax and you are at a tremendous advantage as a reseller since you can purchase from anywhere in your state without sales tax.  Purchases for resell are tax exempt anyways but that doesn't mean you want to tell every retailer you are a reseller and fill out a reseller certificate.  I digress.

What the Heck is a Nexus?

The definition of Nexus gets rather complicated when you talk to tax professionals and many disagree about what exactly is considered a nexus.  It is generally understood that if you a presence in that state, you have a nexus there.

This can mean that you are located in that state, an employee in the state, inventory in the state, ownership of property and possibly more.

When you sell on FBA you have a Nexus in your home state for sure, but other states are more questionable.  

If my business is in NJ and I sell something to a customer in Pennsylvania do I need to collect sales tax?  Normal online retailers do not charge sales tax in that situation if they have no physical presence in that state.  For example, B&H does not charge sales tax in NJ despite that are just a few miles from the border to NJ.  They don't need to because they have no nexus in NJ, only in NY.  However, Adorama, also based in NY, charges sales tax in NJ because they have a facility in Edison NJ which you would know if you have ever had to return something to Adorama.  

What about FBA?  There is an argument to say that you might have to collect sales tax in every state that your inventory is located as that might be enough for Nexus in that state.  However, it gets complicated.  You ship your inventory to maybe 5-10 states, but then Amazon ships your inventory all over the country to their various fulfillment centers.  If you never sent it there, but Amazon is holding your inventory in Illinois, do you need to collect sales tax?  Maybe, ask a tax professional.  That one is more complicated.

Just know that it can be very difficult to figure out where your inventory even is.  Without paying for a service (You can pay wherestock.com to track it), you would have to run a daily report from Amazon to see where they are sending your items.

Is there a difference between commingled and non commingled inventory?  If you send in an iPad and it gets sent to Illinois and then someone buy it from California and Amazon sends another commingled iPad from within their California fulfillment center instead of the one you sent to Illinois, do you need to collect sales tax in California now?  If you were collecting in Illinois based on inventory, do you no longer need to collect sales tax in Pennsylvania?  Ask a tax professional on that one as well but don't expect most tax professionals to know what you are talking about immediately.  That's tough stuff.

My point is that there are serious questions related to Nexus and if you are serious about your business you need to find out the answers that work for your business.

Here is a few things you can read about Nexus from various sites/blogs I found interesting in my research:

There is tons more out there as well.

States want to collect more sales tax, obviously, so we will probably see more court decisions and/or law changes to require us to collect more sales tax in the future but for now it is still very murky.

Registering to Collect Sales Tax

Ok, you're psyched.  You want to start collecting sales tax immediately.  How do you do that?  Unfortunately you cannot in most states without certain frameworks previously set up.  You will likely need to register your business with your state and separately register your business with your state tax department.  I have a separate EIN, Certificate of Formation and Certificate of Authority for sales tax in NJ.

If you are willing to pay someone, TaxJar will do it for you.  They charge approximately $100 a state.  If you want to try it on your own, here is a good per state resource.

Collecting Tax on Amazon

Once you are registered to collect sales tax in the correct states, it is not terribly difficult to collect sales on Amazon.  I recommend having Amazon collect sales tax for you.  They charge 2.9% of the sales tax amount which is not very much.

Go To Settings>Tax Settings and you will see this:

Click on View/Edit your Tax calculation and it will bring you to a screen where you can choose your tax rates and input your sales tax registration number which allows you to collect tax.

Make sure you are putting in the correct product codes for everything.  Some items are sales tax free in some states and not others (like clothing).  If you mark the product as clothing Amazon will not charge sales tax if sales tax is not supposed to be charged.

Paying Sales Tax

I use Inventory Lab to check how much Sales Tax has been collected for me.  Go to Reports>Sales Tax Reports and you can see easily see how much sales tax has been collected on your behalf.

Check your specific state's rule but most states require you to pay sales tax monthly and file a quarterly return of all your sales that require sales tax and how much you have paid.

I've only paid in NJ but it was extremely easy.  I set myself a monthly reminder to pay sales tax, log in to my sales tax payment account and pay with a credit card (2%ish convenience fee so no free points there!)

Once I have paid sales tax, I add that as an expense in Inventory Lab.  Otherwise it will look like profit which it most certainly is not and then you will get taxed on it again for income tax!  For another week ;)