Tax Planning for Amazon FBA Sellers: Inventory Accounting, Multi-State Nexus, Sales Tax, and Cost of Goods Sold

Amazon FBA sellers operate a retail/wholesale product business with a supply chain that spans international sourcing (often from China or other manufacturing countries), domestic warehousing (through Amazon’s fulfillment network), and nationwide direct-to-consumer delivery. The tax complexity comes from three sources: (1) multi-state nexus created by Amazon’s distributed inventory model (inventory in a state = physical nexus in that state), (2) COGS calculation complexity (the landed cost of each product includes product cost, international shipping, customs duties, inspection fees, Amazon inbound shipping, prep and labeling, and Amazon’s FBA fees), and (3) the scale at which successful FBA sellers can grow (from $50,000 to $5,000,000+ in annual revenue) without a proportional increase in tax sophistication. The most common tax mistake FBA sellers make is failing to track COGS properly, which leads to either overstating income (by not deducting all costs included in COGS) or understating income (by expensing inventory purchases as they’re made rather than when the products are sold).

How should Amazon FBA sellers minimize taxes?

How do I know if I need to collect sales tax?

Sales tax obligations depend on nexus, a connection between your business and a state that triggers a collection requirement. Physical nexus comes from having a location, employee, or inventory in a state. Economic nexus, established after the 2018 Supreme Court decision in South Dakota v. Wayfair, triggers when you exceed a state’s revenue or transaction threshold (each state sets its own figure and period; Florida and Pennsylvania use $100,000 of sales, for example, while California and Texas use $500,000). Each state sets its own rules, rates, and exemptions. If you sell online and ship to multiple states, you likely have economic nexus in several states and must register, collect, and remit sales tax in each.

What is the difference between sales tax and use tax?

Sales tax is collected by the seller at the point of sale and remitted to the state. Use tax is owed by the buyer when sales tax was not collected, typically on out-of-state purchases or items withdrawn from inventory for personal use. As a business, you owe use tax on equipment, supplies, or inventory purchased from vendors who did not charge sales tax. Many states combine sales and use tax on a single return. Failing to self-assess use tax can result in back-tax assessments for the full statute of limitations period, typically three to four years, plus interest and penalties.

Related guides:

• Tax Planning for E-Commerce Businesses: Amazon FBA, Multi-State Sales Tax Nex…
• Tax Implications of Remote Workers in Multiple States
• Tax Implications of Remote Employees for Small Businesses

Does FBA inventory in a state give you sales tax nexus?

In California and Ohio, yes, even when the warehouse belongs to someone else. California says retailers with inventory at a third-party fulfillment center there are engaged in business and must register. Ohio presumes nexus when a seller uses a warehouse or storage facility in Ohio, whether operated by the seller or any other person.

Texas lists owning or using tangible personal property in the state. There’s a carve-out, though. Beginning October 1, 2019, California doesn’t require registration when all your retail sales are facilitated by a marketplace facilitator registered with the state. The seller in the example also sells on its own website, so the carve-out doesn’t fit.

For income tax, P.L. 86-272 only covers orders filled by shipment from outside the state, so it may not help with sales shipped from an in-state warehouse.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.