Can you imagine overpaying on Amazon sales tax to the tune of $500,000? As crazy as it sounds, it actually happened. And we know because we were the ones who caught the mistake!
This particular seller—who was NOT a tax client of ours during this time period—had fallen behind on their bookkeeping and hired us to do a two-year catch-up project. That’s how we discovered that they had been double-paying on sales tax (more on how that can happen later).
As much as we’d like to say we were shocked, the truth is we weren’t. It’s not the first time we’ve encountered such a scenario. Not even close.
As e-commerce accounting professionals, we’ve come across A LOT of Amazon sellers who have overpaid on sales tax. So much so, in fact, that we decided to write an entire article on the subject!
In this blog post, you’ll learn why Amazon sellers overpay on sales tax, how it is costing them money, and what they can do to correct the issue. Ready to get started? Let’s jump in!
Why Amazon Sellers Overpay on Sales Tax
In the not-so-distant past, third party Amazon sellers were responsible for collecting and paying their own sales tax. But that all changed with the passing of state marketplace facilitator laws, which shifted the responsibility of sales tax remittance onto e-commerce platforms (like Amazon) instead of individual sellers.
It’s important to understand that these laws are relatively new. The first marketplace facilitator law, for example, became effective January 2018 in Washington state. Since then, multiple states have followed suit. In Tennessee, marketplace facilitator legislation became effective as recently as October 2020.
Many sellers, unaware of these recent changes, have continued to pay sales tax even though Amazon is already doing it on their behalf. Basically, that means the states are receiving double what is owed.
But don’t go thinking you’re off the hook just yet, because not all states have marketplace facilitator laws. As of the time of this writing, 42 states have this type of legislation in place (and 5 states have no sales tax at all). The three states that don’t have marketplace facilitator laws—Florida, Missouri, and Kansas—have legislation in the pipeline.
But even if these three states pass marketplace facilitator laws, that still doesn’t mean you’re off the hook entirely. Some of these laws do not cover sales tax at the local level, meaning third party sellers may still be liable for covering these costs. FYI: 38 states collect local sales taxes, and Amazon has made it clear that they don’t intend to pay any taxes they’re not required to.
“As the marketplace facilitator, Amazon will now be responsible to calculate, collect, remit, and refund state sales tax on sales sold by third party sellers for transactions destined to states where marketplace facilitator and/or marketplace collection legislation is enacted,” an official statement from Amazon.com reads. “In certain states, local taxes are not included within marketplace facilitator legislation; Amazon is not responsible for those taxes.”
In all honesty, it’s pretty unlikely that a small town of 10,000 people is going to notice that you owe sales tax, let alone come after you for such a nominal amount. However, we like to warn sellers just in case.
How Overpaying on Sales Tax Costs Amazon Sellers Money
If you already overpaid on sales tax, don’t worry—you can get a refund. All you have to do is file an amendment for each state for each period where it happened. So that’s the good news. Ready for the bad news?
It’s still going to cost you. Not so much in the form of fines or fees, but in the form of lost opportunity and of course the time it takes to do those amendments.
Let’s go back to the example of the seller who overpaid in sales tax by $500,000 over the course of two years.
If he had placed this money into a business savings account with an APY of .5%, over the course of two years he would have accumulated $5,000 in interest. However, because the government was holding onto it instead, he didn’t receive any interest. Oof 🤦♂️
Now that’s not to say that we advocate letting your money sit dormant in a savings account to collect interest; we were just using that as a baseline example. There are A LOT more lucrative ways to put that money to use, one of which is to invest it back into your business.
$500,000 can be used for a lot of things; purchasing more inventory, buying equipment, running ads, hiring help, developing a new product, etc. Not having access to these funds can set you back as far as scaling goes. It can even potentially put you in debt should you need to take out a loan due to cash flow issues.
What You Can Do To Avoid Overpaying on Sales Tax
We’d love to say, “Just stop paying taxes and let Amazon take care of it for you!” but that’s not a full-stop solution due to some of the reasons outlined above. Remember: not all states have marketplace facilitator laws, and those that do don’t always cover local taxes. Those few local taxes aren’t really an issue though; the bigger problem for most sellers is if they are also selling on a platform that doesn’t collect and remit for you at all, like the Canadian platform Shopify, which many e-com sellers use in addition to Amazon.
If all this talk of tax law has your head spinning, you’re not alone. A lot of business owners find taxes complicated and downright confusing. In their defense, it is an incredibly complex field that requires expert knowledge in order to navigate. That’s why many business owners opt to hire a tax professional rather than deal with the headache themselves.
And there’s nothing wrong with going that route! In fact, we believe you can save yourself a lot of stress, time, and money by using a tax professional. It’s one of those services that are well worth the investment.
If this is something you’re interested in, we’d be more than happy to discuss your needs and provide you with a custom quote. You can contact us via email at email@example.com or by phone at (858) 633-3573. We look forward to hearing from you!