Amazon Sales Tax & Accounting For Amazon Sellers
Today I’m going to address one of everybody’s favorite subjects: TAXES. It’s often hard to find guidance around taxes, Amazon sales tax, and reporting, and if you’re just starting your business, these are things you need to know!
I worked as an account executive at a financial management company for four years before my start-up on Amazon. I’ve managed the accounts of various professionals in the entertainment industry and have worked directly with CPAs and tax advisors. However, because I’m not an accountant, CPA, or tax attorney, you will still want to refer to your accounting professionals. I’m hoping this post will give you some familiarity with the subject, and guidance on which questions to ask and what to look for as a business owner.
It is essential for all business owners to understand taxes, as well as the legal aspects of business, in order to knowledgeably converse with the professionals who are in charge and to have an understanding of what’s happening in their business.
I love championing the idea that it’s vital to understand all things about your business, especially the things that scare you. I used to be terrified of taxes because of what I didn’t know about them. This fear crippled me from excelling the way I wanted to and became a blocker to my success. I was so afraid that I would make a mistake that would cause me to owe a ton of money and be worse off than if I had never started a business at all.
As I began at the financial management firm, I dealt with tax agencies, back taxes, accounting, and finances, learning how to navigate the system and becoming more confident and less fearful. Shortly after that, I was then able to shake off my fear of success and launch and grow a successful Amazon business. Attacking the things that scare you and are keeping you from succeeding is the best way to approach those fears!
The same thing happened with Amazon inventory management. I knew that it was a blocker in my business and kept me from growing and that I needed to understand it better. And that’s how SoStocked, our Amazon inventory management software was born!
So, ready to get after your Amazon taxes? Lets go! 💪
In this Amazon Sale Tax Q&A, we’ll be answering:
- Should I hire a CPA or use software to complete my Amazon business taxes?
- What expenses do Amazon sellers typically deduct to reduce their taxable income?
- Does Amazon collect and remit sales tax on behalf of Amazon sellers?
- How do I deal with the sales tax that Amazon does not handle for me?
- Are sales tax included in FBA sales in the “Sales Summary Data Report,” or is there a different report I should be using?
- Action Items For Amazon Taxes
1. Should I hire a CPA or use software to complete my Amazon business taxes?
I am in full agreement with the idea that you should be using a CPA, especially in the beginning stages of your business. A CPA will know things that you don’t and will save you money. You need something more than TurboTax. You want to have access to open conversation and communication with a good CPA. The right CPA should pay for his/her fee many times over and limit the likelihood of an audit.
If your CPA isn’t helping you save money, then get a referral to someone who will. Ask a lot of questions. If you are nervous about the subject of taxes, ask more questions! Ask them all of those things you have heard about, aren’t sure about, or are worried over. The more questions that you ask, the more you will grow in understanding and confidence. A conversation like this is also an investment in your education to better understand how business works. This knowledge will help you to make good, sound financial decisions moving forward. Unfortunately, software like TurboTax won’t give you that opportunity and can’t explain how to strategically save on taxes by taking advantage of current tax incentives.
Hiring a CPA is probably the best approach for most businesses, especially inventory-based businesses or new business owners as there is a lot to know that can be learned from a good CPA.
2. What expenses do Amazon sellers typically deduct to reduce their taxable income?
Great question. Some of the specific things that sellers use to reduce their taxable income include:
- Advertising costs
- Office supplies
- Office expenses
- Professional services (lawyers, accountants, consultants)
- Business training courses and paid webinars
- Business-related events
- Business-related travel
A CPA will also give you tips to start thinking about your daily life and expenses in a new light. You may just need a paradigm shift to re-categorizing everyday things as business-related and learn to ask questions such as:
- Can this travel be considered as a business expense?
- Is it possible to write off this (task, event, expense, etc.)?
- What other expenses that are a part of my everyday life can write off?
When it comes to travel, you want to make sure that the travel is business-related.
You can’t go on a family vacation and call it a business expense just because your wife is your business partner. It’s challenging to get away with that. But there are ways that you may be able to write certain trips off. Again, these are questions you can ask your CPA.
You can also usually deduct a portion of your rent and utilities if you have a home office. However, your home office must be solely for work. You don’t want to deduct a space if it is your bedroom and your home office.
To calculate this, take the total square footage of your house, and then measure out the space you are using as the home office. Next, determine what percentage your office space is of the entire house. This is the percentage that you can deduct from your rent and from your utilities as an office expense. For example, if your office space is 20% of your house, then 20% of your rent and 20% of your utilities should be deductible as your home office.
Finally, you can also deduct inventory costs. As an owner of an inventory-based business, tracking inventory costs is vital. Rules do change in this area, so keep yourself current on knowing the latest.
Previous to December 31st, 2017, inventory costs were calculated when you sold that inventory. It was called the “cost of goods sold.” This meant that you could not deduct the expense of that inventory until the product actually sold. If you had a lot of inventory left at the end of the year, even if you had paid thousands of dollars for it, you wouldn’t be able to deduct it until you sold it.
Be sure to keep this in mind because there are different ways to handle inventory now that have changed in the last few years. Some businesses still handle their inventory accounting this way, but a tax law that passed recently made allowances for some changes that might benefit you.
Some CPAs still advise that you continue to handle your inventory this old way, especially if you’ve been managing your inventory this way up to now. They don’t always like to change the way that you’re handling or taxing your inventory. A CPA will help you determine what’s best for you.
The second way you could handle your inventory is to deduct it all when you make the purchase. This way, even if you haven’t sold through that entire inventory by year end, you can potentially take that tax deduction in the year you made the purchase. This rule specifically applies to small businesses (any company with 25 million or less in revenue over the past three years). You can find this information and specifics about deductions on the IRS website. Google “IRS and inventory small businesses.”
If you’ve been handling your accounting with the “cost of goods sold,” and you want to start running it to take deductions at the time of purchase, you will have to change your accounting process. You will want to discuss this with your accountant and decide what is best for you.
Next, I want to answer questions about sales tax reporting. A lot has changed since I first started paying sales tax in 2014, and some of the changes make it a lot easier for Amazon businesses.
3. Does Amazon collect and remit sales tax on behalf of Amazon sellers?
The answer to this is yes and no. In recent years, Amazon has been required to collect and remit sales tax for almost all states. Only two states seem not to have that agreement with Amazon, but I’m sure that they will soon follow suit. When I started my business in 2014, I was paying sales tax in 14 different states. Now I only have to pay in Florida and Kansas because Amazon is collecting and remitting in all other states.
To handle these two states that do not have an agreement with Amazon, you have to set up a sales tax account for them and file and remit taxes. This takes us right into our next question.
4. How do I deal with the sales tax that Amazon does not handle for me?
To handle the sales tax that Amazon doesn’t, you first want to find out which states you are currently supposed to collect in by checking your Seller Central account. To do this, go to “Settings” and then “Tax Settings,” and there you will see all of the states. The states currently not having Amazon collect and remit (as of this post) are Florida and Kansas.
Next, you’ll need to visit the Florida.gov website and the Kansas.gov website to set up a sales tax license. Once you get a license, you’ll have to go back into that same settings area within Seller Central and turn each state on for collection.
You can now enter the “sales tax number” for each of these states and turn on “Sales Tax Collection,” and then Amazon will start collecting that money for you, and it will become a part of your payout.
It’s crucial that you file and remit once you activate those tax payments and those states start collecting for you. You need to remit that money to those governments. It’s worse to collect and not remit that tax money than it is to not collect at all because it can be considered a form of stealing.
Usually, you will file this monthly, but it could also be a quarterly or annual filing. I believe FL and KS to be straightforward returns to file; in fact, Florida has just one line item. You don’t have to track all of the counties. It’s very easy to do this on your own.
5. Are sales tax included in FBA sales in the “Sales Summary Data Report,” or is there a different report I should be using?
You will want to use the “Sales Tax Report.” If you go to “Reports” and then go to the “Tax Document Library,” you will see your “Sales Tax Reports.” Next, you will enter the time period you would like based on what the different states ask you to report on (quarterly or monthly), and then you can “Export” that report. You will be able to download a spreadsheet file and will then have to sort that data to extract the state and county information that each state needs for its sales tax return.
It will take some time to sort that data, so if you are more interested in saving time than saving money, you can hire a service that will gather that data, condense it and sort it for you. I currently use a company called Taxify.co to do this.
There is another software called TaxJar.com that you can also use. Both of these services will plug into your Amazon API and take that data and condense it. You can select the date range and the state that you want to know your tax liabilities in, and it will produce a report containing that information for you. Next, you can log into the government website, fill out the report, file it and remit payment. Be sure to save a copy of the sales tax report in case you have to reference it again or someone asks for it.
Action Items For Amazon Taxes
In conclusion, here are a few things to keep in mind:
- Attacking the things that scare you is the best way to succeed!
- Hiring a CPA is often the best approach, especially an inventory-based business.
- Become familiar with everyday expenses that you can deduct from your business.
- Learn about the different ways to deduct inventory costs and figure out what is best for you.
- Set up a sales tax license for any states you need to pay sales tax for, such as FL and KS.
- Use Taxify.co to organize and condense data for the Sales Tax Report, if needed.
- If you have an Amazon inventory or tax question, ask in the comment box below.
Stay tuned for more relevant tips as you grow your business in 2021. Be sure to check out SoStocked.com for more valuable information on our software and how we can help make managing your Amazon inventory easier!