The US tax system is quite a bit more complex than our domestic model. However, the Amazon market in the US is so attractive that it pays to get your tax affairs in order. This article will help you move forward, as will the YAP team.
Taxation in the US
In Finland, a product or service is subject to VAT, which is the same throughout the country. In the US, the sales tax is determined by the district, city, county and state. The tax is determined as a combination of these and is based on the net price of the product, as in Finland. Another confusing factor is that some states are origin-based and some are destination-based, which affects whether the tax rate used is origin-based or destination-based.
The tax rate is therefore affected by the place where the product is stored and the customer’s delivery address. The tax is calculated on the basis of these two pieces of information. For certain product groups, there are also differences at state level as to whether products are taxed at all (e.g. confectionery).
Any seller who has a ”Nexus” in a particular state is liable to tax. A nexus is effectively a physical and/or economic link to a state. If the seller stores goods in the US, the nexus is determined by this physical link. For example, if the seller uses Amazon’s FBA model (goods are stored in the US in Amazon’s warehouse), the seller is taxable through this nexus.
Calculating taxes on Amazon
If a seller uses FBA to store and deliver its products, i.e. outsources these tasks to Amazon, the products may be stored in several warehouses. After all, Amazon is very good at optimising shipping times. The principle is that Amazon transports the goods within its warehouse network to where the sales take place.
Basically, Amazon can automatically calculate the tax for each product sold. The sales prices shown to customers on Amazon.com are net prices to which Amazon adds tax at the time of ordering. Amazon determines the tax rate based on the category assigned to the listing and the keywords in the listing.
The seller does not have to calculate the tax for each order. Amazon also provides a report where the seller can see the origin and destination address of the shipment and the amount of tax calculated for each order. This allows you to check, for example, that the taxes have been calculated correctly.
Exceptions
By December 2022, all US states will have introduced laws requiring Amazon (and similar platforms) to collect and remit taxes. In Missouri, the law will take effect in January 2023.
However, certain states such as Colorado, Washington and Illinois have special features where Amazon may not automatically collect the tax. Therefore, it is in the seller’s best interest to verify the amount of tax due and manually make any missing reconciliations.
Accounting for taxes on Amazon
An increasing number of states have mandated that Amazon automatically collect and remit sales tax. Under US law, Amazon is the taxpayer responsible for products sold by third parties on its platform. A third party refers, for example, to a company that sells its products on Amazon.com.
Amazon therefore automatically settles the taxes it collects. Here too, of course, the exceptions mentioned above must be taken into account.
Automation
The above describes how Amazon can, in principle, collect and account for taxes. However, the process is not seamless for all states. Many Amazon sellers calculate and manage taxes using third-party software. The most popular of these is probably TaxJar, which retrieves data directly from the Amazon sales account and automatically calculates the taxes. Settlement is also handled through the program.
What else to consider?
As described above, Amazon handles the calculation and payment of sales taxes automatically. However, this is not all, as the company will have to pay tax on its profits, just like in Finland. In Amazon, the basic principle is that Amazon deducts income tax from sales. This is of course bad, because the tax would be paid twice, both in Finland and in the USA. However, Finland and the US have a tax treaty, which means that there is no taxation in the US.
There are two possible ways to deal with this:
- The seller registers a company (LLC) in the US
a) The seller applies for an Individual Tax Identification Number (ITIN) and an EIN for the company.
b) Fill out a W-9 form and upload it to an Amazon sales account
- Seller operates through a non-US registered business
a) Seller applies for an EIN number for a non-US registered company (e.g., a Finnish company)
b) Seller fills out a W8-BEN-E form, which is uploaded to an Amazon sales account
Note: YAP Growth is not a tax expert and does not take responsibility for the accuracy or timeliness of the information in the future. The above information is based on our own experience and articles published by third parties. We help our clients solve all their Amazon selling challenges.
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