Selling online through Amazon, eBay or any e-commerce site offers a great opportunity to make a location-independent income. If you are selling online in the US market and generate a steady income, be aware of the US tax implications. These five Amazon seller tax tips can save you money and headaches.
1. Get a good tax accountant
Dave Hamrick from Jungle Scout has this advice (and we couldn’t agree more):
“When it comes to sales taxes for Amazon FBA sellers, I always give the same piece of advice: Get a good accountant. Not only are there a lot of moving parts that come with owning a business, but if you have a legal business entity like an LLC, they can save you a ton of money in tax write-offs, too. In addition, software like Fetcher can make sorting through your financial data a lot easier as it is specifically created for Amazon sellers by Amazon sellers.”
2. Stay on top of state sales tax
A big concern for Amazon sellers is state sales tax. For online sellers who ship solely from one state, the sales tax remains the same. Let’s say for California, state sales tax is 7.25% plus any local tax if they live in a city that imposes it.
For FBA sellers, however, Amazon takes care of shipping the products from their warehouses all over the US. This means that they may be subject to state sales tax in those states where their products are shipped from.
As you can see, sales tax can become very complex. We generally recommend using a service called TaxJar to track and pay sales tax.
3. Select the right inventory accounting method
The Tax Cut and Jobs Act signed in December 2017 brought changes to inventory accounting. If you are a small retailer with less than $25 million in sales and hold inventory, you can elect to treat the inventory as “non-incidental” material and supplies. Previously the threshold was $1 million.
This can simplify your accounting and even result in significant tax savings for retailers and Amazon resellers if they qualify.
4. Don’t forget deductions
When selling online as a business you can, of course, deduct some business expenses. Tax-deductible expenses include:
- Amazon fees
- Shipping expenses
- Home office and office expenses
- Travel to suppliers
- Marketing/branding, e.g. to develop your brand logo when selling your own brand
- Sponsored ads
5. Incorporate the right way
The right business structure has a big impact on Amazon seller tax.
For non-US sellers, doing business through a US LLC may be the most tax-efficient way. For a single-member LLC, all the income passes through to the owner who then has to declare the income in his or her country of residence.
Contrary to common advice, selling through a Belize company that owns the US LLC may not be the income-tax-free solution that is often portrayed.
A foreign company that owns a US LLC and continuously transacts substantial business in the US, collecting sales tax, and holding inventory in the US to be shipped to US-based customers is considered engaged in a trade or business in the US. Therefore the income is considered effectively connected. This means that the income of the foreign company is subject to US tax.
This applies to Belize and other countries that don’t have an income tax treaty with the US, such as Hong Kong, Singapore, or Dubai. If you are in a country that has a tax treaty, income may be exempt. You can avoid US tax if you have an office with a permanent establishment outside of the US as per the tax treaty.
Consult with an experienced tax accountant to avoid costly structuring mistakes.
Do you need help to set up the best business structure for your online business and with the US tax filings? We’re here to help. Contact us for more info.