It’s easy to get bogged down in Amazon’s inventory management, product listings, and all the marketing strategies involved in selling on Amazon via the FBA program. There is, however, one extremely important area which you need to pay attention when scaling your business: taxes and legal considerations. Navigating the tax landscape and understanding how the legal framework applies to your Amazon FBA business will save you from making costly mistakes.
Here are the major tax and legal considerations that each Amazon FBA seller should be aware of:
Know Your Sales Tax
Sales tax is a significant consideration for an FBA seller because it depends on where your customers live. In the United States, sales tax is administered at the state level and every state has its own rule regarding whether or not sales tax applies to online goods sold.
Nexus and Sales Tax:
“Nexus” is what one needs to understand first, in terms of grasping the concept of a sales tax requirement. In basic terms, nexus simply means an association between a business and a state that is significant enough to require the business to collect sales tax for all sales made within that state.
As a FBA seller, you might be warehousing your inventory in some state that can have nexus to Amazon. Though you may not be residing in that particular state, Amazon may be holding your products in fulfillment centers within that state, which would mean that they need to collect sales tax from you.
Economic Nexus
Most states have passed their own “economic nexus” statutes. Therefore, in most states now, you have economic nexus, which means you are supposed to collect sales tax; though Amazon stores no inventory. That would require it for you to collect the sales tax in a specific volume of sales that you’ve achieved.
What to do
Register for sales tax permits-You will have to register for the sales tax permit in states to which you may have nexus. Some states trigger the need for you to begin collecting sales taxes once you surpass a certain level, while some others require prior registration before initiating collection.
Sales Tax Automation: Use the automation tools for sales tax, TaxJar or Avalara, as they can work out and even file your taxes for you. These services sync with Amazon, saving a ton of time and effort.
Income Tax for Amazon FBA Sellers
As an Amazon FBA seller, you will still have to report income and pay taxes on profits, just like any other business owner. Rules vary by country and location, but generally, you can expect the following:
Reporting Business Income:
US-based Sellers If you are selling from within the United States, you will report your business income on a personal tax return if you filed as a sole proprietor. If you have set your business up as an LLC, S Corp, or corporation, then you would do so. You will then be required to report any income generated from your sales on Amazon. All income from your FBA sales.
International Sellers:
Based on the tax regulation of your home country as well as the tax treaties in existence between the U.S. and your home country, rules of income tax vary for the sellers. And if you fulfill all the requirements of that country, you might have to pay taxes in both the countries.
Deductions
As a business owner, there are several expenses that can be deducted from running your FBA business. Some of the common deductions include:
Cost of Goods Sold (COGS)
These include
- Amazon fees (referral fees, FBA fees, etc.)
- Marketing and advertising costs
- Shipping costs
- Business travel if you venture out that way
- Software or tools used for your business
- Seek a tax professional who can lead you through all of these and ensure you minimize your tax liability.
Business Structure and Legal Requirements
Your business structure is what will help determine how you are going to be taxed and how you will manage your legal risks. Most Amazon FBA sellers operate under the following common business structures:
Sole Proprietorship:
There exists the most simplest and most basic form of the business structure. This is termed as a sole proprietorship that is most famous among new business entrepreneurs. This type of a structure means that you will become personally liable with business debts, and other liability issues which make it quite unsafe in the times of lawsuits cases.
Limited Liability Company (LLC):
An LLC provides more legal protection as compared to a sole proprietorship. It only separates your personal and business assets, hence saving you from personal liability in case of a lawsuit. Most sellers opt for an LLC because of limited liability and flexible tax treatment options.
S-Corporation (S-Corp):
Another name for tax savings for self-employment taxes is an S-Corp. It passes through profits to the shareholders, but that structure has disadvantages and involves much more in compliance. That again is only good for a far larger business.
Corporation (C-Corp):
While not so much for smaller business ventures in Amazon FBA, a C-Corp provides the greatest liability shield, though it is also double tax on profits at the company level and on dividends at the individual level. It’s typically applied for use by bigger businesses.
Action Required:
You will register your business and get any other licenses that are needed to be registered in your country and state.
Obtain an Employer Identification Number: This is another unique number that will be used to identify your business, and it’s a very important number you’ll need in order to open business bank accounts, to deal with taxes, and so forth. Most business structures except a sole proprietorship require obtaining an EIN.
International Selling and Taxes
For exports, there are a number of considerations when selling abroad:
VAT in Europe:
If you sell to customers inside the European Union, then it is highly likely that you will be paying a consumption tax called VAT, applied on top of the selling price of your products. Rates of VAT and whether you need to register vary from country to country, so you should check what applies to each country that you sell into.
Customs Duties:
Selling to a multinational market will also necessitate you to pay customs taxes and import duties. These are quite high most of the time, depending on the product and the destination country. Importation should generally be taken care of by Amazon for FBA sellers, but it’s good that you have a grasp of how it impacts your bottom line.
Other Legal Issues
Other than tax and business structure, there are other legal concerns when selling in Amazon:
Intellectual Property:
Your products should not violate trademarks, patents, and copyrights. Trademarks are used to protect your brand as well as all your products by registration. Keep yourself updated in compliance with all the policies put in place at Amazon.
This policy further limits what a product can and cannot be sold on Amazon. Any infraction of these policies is liable to have your account suspended. Also, get well-versed with the Product Listing Guidelines, the Seller Code of Conduct, and the Product Safety rules of Amazon.
Contractual Obligations:
If you source products from suppliers, ensure you have your contract settled to both your advantage and the supplier’s. This often caters to disputes over quality of the item, delivery timeliness, and other aspects.
Conclusion
ConclusionAmazon FBA is a great opportunity for entrepreneurs, but with the opportunities come particular tax and legal obligations. Knowing your sales tax responsibilities, how to report income taxes, business structure options, and international selling regulations will ensure that your Amazon FBA business is compliant and profitable. It would be best to seek professional advice from a tax or legal advisor who has experience in e-commerce and Amazon FBA.
Understanding the tax and law will make you keep pace with the changing environment and behave appropriately, and therefore, you will not have much anxiety as you grow your business.