If you’re looking closely at your Amazon merchant settlement, and you have sales in one or more states in the US, then you will likely have noticed amounts of the type marketplace facilitator tax.
What is the Amazon marketplace facilitator tax?
Is the Amazon marketplace facilitator tax a tax on the seller for providing the marketplace facilitator service (i.e. a business expense)? Or is it tax collected by the marketplace on behalf of the merchant, tax that the merchant then needs to submit to the relevant tax authorities? (i.e. a current asset with a corresponding tax liability)
You may have noticed that Amazon has started to charge and collect Sales Tax on behalf of all sellers in certain states of the US. Washington was the first state to enact the marketplace facilitator legislation, however, as per the below article provided by Amazon, it is now up to 4 states (Washington, Minnesota, Oklahoma, Pennsylvania). This number could change at anytime as Marketplace Facilitator and/or Marketplace collection legislation is enacted in more states throughout the US.
Please review Amazon's help article titled: Marketplace Tax Collection for more detailed information.
“A Marketplace Facilitator is defined as a marketplace that contracts with third party sellers to promote their sale of physical property, digital goods, and services through the marketplace. As a result, Amazon is deemed to be a marketplace facilitator for third-party sales facilitated through www.amazon.com.
Marketplace Facilitator legislation is a set of laws that shifts the sales tax collection and remittance obligations from a third party seller to the marketplace facilitator. As the marketplace facilitator, Amazon will now be responsible to calculate, collect, and remit tax on sales sold by third party sellers for transactions destined to states where Marketplace Facilitator and/or Marketplace collection legislation is enacted.”
In states where marketplace facilitator legislation applies, sales tax is still collected from consumers, however, it becomes the responsibility of the marketplace (in this case, Amazon) rather than the seller.
The following States have marketplace facilitator tax legislation in place:
- New Jersey
- Rhode Island (Amazon is required to report, but not collect sales tax to the State. Click here for more info)
- South Dakota
You can find reference to the applicable legislation codes here.
In these States (apart from Rhode Island), Amazon collects and remits sales tax to the State on the seller’s behalf. Whilst this might seem great on the surface, it increases the risk of being audited by the State, and doesn’t really do much to help most sellers.
Why is that?
Amazon is only responsible for remitting sales tax on business conducted through its platform from the date when it became a requirement. If you have sales on other platforms, or past exposure from unpaid sales tax on Amazon, this is NOT the responsibility of Amazon.
Due to the fact that Amazon is now handing information over to the states (in the form of marketplace facilitator tax returns), state tax collection departments now have much more knowledge of who is paying tax and can much more easily pursue sellers that haven’t registered.
Where can we find more information on each state’s thresholds and effective dates?
What about my past tax exposure?
If you have backdated taxes owing in these states but haven’t registered for sales tax, then it is worth considering registering sooner rather than later.
For smaller Amazon sellers, registering for sales tax in every state can be quite overwhelming. The Stair-Step Method is an effective way of gradually becoming compliant in each state without breaking the bank. This method involves identifying where you owe the most sales tax (or sell the most goods) and register in these States - gradually moving out to smaller States as cashflow allows.
If you currently have backdated tax exposure that needs addressing, I recommend speaking with a sales tax expert about your specific circumstances.
Do I still need to register and file returns in these States?
“The biggest issue that sellers face when Amazon begins collecting sales tax is past exposure. While the state does not start asking for information immediately it is only a matter of time before they do. When they do if you are not complying with what the state wants you to do, your past exposure is more likely to be found.”
States such as Washington and Pennsylvania seem to hold the view that all sellers need to be registered and filing sales tax returns. If you’re only selling on a platform that is subject to marketplace facilitator tax laws and have no past tax exposure, then in theory you could skip the process of registering and filing. However, the tax agencies state that sellers should still register for sales tax and file a zero return if Amazon is looking after their sales tax collection.
Of course, this is a risk management decision that should be made with respect to your specific financial circumstances and in conjunction with an expert tax accountant.
For smaller sellers, the cost of registering and filing returns can often be larger than the potential penalties for not being compliant. However, as the business grows (and past tax exposure accumulates), the risk of not filing will eventually outweigh any possible cost savings.
Sales tax apps such as TaxJar and Taxify make it much easier for sellers to gain an accurate understanding of how much sales tax is owing in each State. By using one or other of these apps, it is possible to automate most of the workload associated with collecting and remitting sales tax.
How to set up A2X to account for marketplace facilitator taxes
What this all means is that you may see some new transaction lines coming through to your Amazon settlements such as:
MarketplaceFacilitatorTax-Principal and MarketplaceFacilitatorTax-Shipping.
These settlement lines will offset any ItemPrice Tax and/or ShippingTax that Amazon has charged the customer so that it results in a total of 0 to your overall settlement.
These are the new lines appearing in settlements:
To account for this recent change, we suggest you to create a new account in your accounting system chart of accounts, which will be used for the allocation of the new Tax amounts. These can then be used to offset whatever Amazon Sales Tax accounts you have. This will either completely offset the other, if this is the only state you collect sales tax, or it will be a partial offset, if you collect sales tax in other states.
To see the new account/s you have just created, please refresh your Cache in A2X:
The Accounts and Taxes tab can be found at the top of any A2X page, as seen in the screenshot below:
A2X will have picked up the new settlement line items, but it won't know where to allocate them, so you will need to map the lines to the account you have created.
Once you have mapped the new line items you can finalize the Accounts by clicking "Save Mapping" as in the screenshot below:
The end result is that you can track how much tax has been held back by Amazon for under the Marketplace Facilitator Tax system.
Is it likely that most or all States will implement Marketplace Facilitator Tax laws?
We asked Michael Fleming this question, to which he responded:
“Maybe, but the states don't seem to be in too great a rush to do so. The speed may pick up, but let's look at California and Massachusetts. They seem determined to pursue sellers directly. I expect we'll see some states going this route.
For sellers wishing to see more marketplace facilitator states, I would be careful of what you wish for. Without any additional language being added to prevent sellers from being pursued for past exposure, their risks of being found may be rising.”
What if I need more help?
This guide was compiled with expert advice from Michael Fleming of Michael J. Fleming & Associates Sales Tax and More. For US sales tax advice, we couldn’t recommend Michael and his team more.
Disclaimer: This information is provided for educational purposes only, and should not be construed as financial or tax advice. If you require professional advice on the matter, we highly recommend that you speak with a qualified accountant or tax adviser.