Amazon Marketplace Facilitator Tax: Best Practices for Sellers

In the past 2.5 years since the Wayfair Supreme Court case decision, the landscape for sales tax has changed dramatically for eCommerce sellers.

Amazon's introduction of a Marketplace Facilitator program almost takes the responsibility of remitting sales tax out of your hands as an Amazon seller, but there are a few considerations to keep in mind. Here's what you need to know about the Amazon Marketplace Facilitator Tax.

Sales from Certain States and Your Own Site

Currently, there are three states that are not participating in the Amazon Marketplace Facilitator Tax program: Florida, Kansas, and Missouri. In addition, you may also sell on other channels that have their own Marketplace Facilitator programs. Our partners at Sales Tax and More have developed a comprehensive chart that helps guide you on the most recent developments for these programs in each state.

Another area that may be a factor for some eCommerce businesses is the sales they receive from selling on their own website. Sales on sites such as Shopify and BigCommerce, for example, are not covered under the Amazon Marketplace Facilitator programs.

In that situation, you need to understand where you have both physical and economic nexus to ensure you are compliant with the laws of that state. Nexus simply means the relationship between you as a seller and the state’s criteria developed for filing, collecting, and remitting sales tax. There are thresholds that relate to the physical location of your employees and/or inventory, and economic criteria such as the number of transactions or dollars sold.

Accounting and Amazon Marketplace Facilitator Tax

For sales tax in states that are part of the Amazon Marketplace Facilitator, the funds are collected from the purchaser at the time of checkout. These funds are then submitted to the state directly from Amazon. If you are collecting funds from your website to be submitted to a state where you have nexus, you will be required to file either monthly, quarterly, or annually depending on each state's requirements based on your sales revenue levels.

From an accounting perspective, it's important to understand that Amazon records this information in the sales section of your settlement report, and the funds collected from the purchaser and paid to the state typically net to zero. If you are using the settlement report to record your revenues, this activity will never hit your books. However, you should monitor the activity in your settlement statement because occasionally an event occurs that will require your attention.

Sales Tax Nexus

If you have Amazon sales and meet any of the nexus criteria for Florida, Missouri, and Kansas, or if you have nexus for any state from your direct website sales, make sure you record the sales tax in a Sales Tax Payable liability account on your balance sheet at the time you record the sale.

The amount of the sales tax will be included in your deposit from the website merchant processor, and you want to be sure it is not included as revenue on your Profit and Loss report. If you record it as revenue, then it could be counted as taxable from an income tax perspective. The correct accounting entry for sales tax collected is an increase in the Sales Tax Liability account (Credit to Sales Tax). Then, when you pay the state for the Sales Tax, you will reduce this liability account (Debit to Sales Tax).

Set Up a Sales Tax Account

From a Profit First perspective, we also encourage our clients to set up a Sales Tax bank account to set these funds aside for this purpose. This bank account will grow as your liability grows and ensure these funds are available to pay the state when they are due.

Remember that states have different payment requirements; some monthly, quarterly, and annually based on dollars sold. You want to avoid a big surprise at the time you make an annual or quarterly payment.

It can be a struggle to come up with these funds if you have spent the money for other purposes. Having the funds waiting for you to write the check is an awesome feeling of relief for a business owner.

Plan Ahead

Sales tax is a challenging issue for any eCommerce business. The Amazon Marketplace Facilitator Tax rules can be confusing, so take the time to understand how your sales channels are working with these laws and when you have direct responsibility. Regarding the parts you are responsible for, ensure your accounting reports and cash management are setting you up to successfully manage your sales tax obligations.

If you'd like to learn more about how Profit First accounting can help you improve profitability, check out my book Profit First for Ecommerce Sellers or my online course.