Amazon is being forced by some states to start charging sellers sales tax. This only affects certain services and only if you or your inventory are located in certain states.
Amazon’s initial email created unnecessary confusion but they’ve clarified the response quite a bit. Below is my take on the new Seller Fee tax policy.
Do I need to worry about Seller Fee Taxability?
It depends on where you are and where your FBA inventory is.
2 Very Different Scenarios.
1) Sales tax on Amazon fees such as commissions. 2) Sales tax on FBA charges directly related to packaging (tape, bubble wrap, etc…).
Let’s unpack each.
- Seller Fees Like Commissions – If your BUSINESS is located in Connecticut, DC, Hawaii, South Dakota or West Virginia then Amazon is going to start collecting sales tax on its commission (normally 15%). This isn’t catastrophic but it means that sellers located in those states will have their profit margins decrease by roughly 1%. If you sell $1m on Amazon in a year and live in one of the states listed above your expenses will go up by about $10k per year. This hurts but isn’t going to crush most sellers. More importantly, this impacts you ZERO if you are located (your physical business) outside of the listed states.
- FBA Aux Charges for Supplies – If your FBA inventory (not your physical business) resides within Arizona, Connecticut, DC, Hawaii, South Dakota or West Virginia then services added to those units (only the ones in those states) will now be subject to sales tax. This means if you have product in an Arizona FC and Amazon charges you $0.80 to bubblewrap the product you will now have to pay sales tax in the amount of about 7 cents. So instead of bubble wrap costing you $0.80 it will cost you $0.87. I estimate that this will have such a small impact on sellers that you won’t even notice it.
In other words, this new policy won’t have a huge impact but if you live in the states listed in #1 above you may need to gear up to raise your prices by 1% to maintain margins. If you don’t live in one of those states then congrats because you now have a 1% advantage over your competitors who are physically located in those 5 states. I believe the FBA side of things will impact almost all sellers but by such a tiny percentage that you won’t notice it.
Amazon’s Original Post
Here is Amazon’s post “Important changes to Seller Fee Taxability on Amazon.com“.
Does this create a compliance burden for sellers?
To be clear, Sellers are not going to be required to collect or remit any additional sales tax but some Amazon fees will become more expensive in certain states.
Is This An Example of Double-Taxation?
Some are already arguing that the states are overstepping by requiring sales tax collection on units that are still “in production”. Normally, only the end consumer of a product has to pay sales tax on products and the various players in the supply chain do not. But does this new Seller Fee Tax qualify as double-taxation?
The answer is maybe but I don’t believe there is a strong enough constitutional argument for the legislature to change this anytime soon. I also doubt that sellers will be harmed enough to push a case to the Supreme Court meaning this new ruling is likely here to stay.
It would literally take a billion-dollar company located in one of the target states suing that state for damages and the courts siding with the corporation in order to change this ruling. I believe this is unlikely at least for several years.
Does Amazon Like This?
Not at all! Amazon has just inherited an additional compliance burden, new reporting needs for Merchants AND this slows the Amazon Flywheel by making increasing the costs to Sellers and ultimately buyers.
Don’t get me wrong. Amazon loves charging fees when they get to keep those fees but a law that potentially will require sellers like us to raise our prices by 1% without Amazon getting a cut: Nope Amazon hates that!
Bottom Line: What Impact will new seller fee taxability have on average sellers?
Most Sellers will be impacted by the FBA portion of this. But the impact will be relatively small. I provide outsourced CFO services for sellers and the idea of losing even one profit percentage point makes me nauseous but I believe the initial fears were outsized.
However, just to reiterate, if your entity is located in Connecticut, DC, Hawaii, South Dakota or West Virginia then make sure your profit calculations include an Amazon commision of 16% instead of 15% (or just add a point to whatever the commission is in you category).
As I learn more from Amazon I’ll continue to post. Help me out if you have links to articles especially from Amazon that give us more clarity on this new Sales Tax for Seller Fees.
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