I registered with my state as a sole proprietor as a first step in complying with the sales tax requirements that is required when selling goods online. I live in Washington and the following statement is taken directly from the Washington State Department of Revenue’s website in their “Online Sale of Goods” section:
- Individuals routinely making retail sales through online auctions or marketplaces are considered engaging in business and are required to register with the Department of Revenue and collect retail sales tax on sales to Washington customers.
Unfortunately for those selling through the Amazon FBA program, collecting sales tax is more complicated than just collecting sales tax for purchases made in your home state. We have nexus (a business presence) in the states that our inventory is stored in. The FBA Sales Tax Guide and the TaxJar website are good places to learn more about the sales tax requirements that people selling online with Amazon FBA face.
Please keep in mind while you are reading this post that I am not a professional tax consultant or a legal advisor. I am a person in the process of figuring this all out and am doing what I believe should be done so that I don’t get in trouble with the tax authorities. Also, I have no desire to pay the sales tax out of my own pocket to the different states because I didn’t collect it from the buyer.
The way that I will collect the sales tax is through Amazon’s sales tax collection service. With this service, they collect the sales tax from the buyers and pass along the tax to the sellers. They charge 2.9% of the tax collected for this service. But before they will do this, you need to provide them with your state registration number for the states that you want them to collect sales tax in. This means that you need to register for a sales tax license in each of the states that you have nexus in.
I live in Washington and they do not give state registration numbers and sales tax licenses to individuals (at least from what I can tell from their website). Therefore, I had to start a business. In doing so, I had to come up with a DBA name and choose my business structure. I chose the sole proprietor business structure as it is the simplest one to form and the least expensive. The process of signing up as a sole proprietor was simple – fill out an online application and pay the state $24.00.
I was tempted to start a LLC business structure for the personal liability protection that it offers and to avoid the process of changing my business structure later. But I chose not to do so at this point because it seemed like overkill for the few items that I currently have listed on Amazon. Later on down the road if my Amazon FBA business takes off, then I will talk with my accountant about changing to a LLC. You can learn more about the different business structures through the the SBA website.
After I formed my business, I went to the IRS website and obtained an Employee Identification Number. Since I am a sole proprietor without employees, this step wasn’t necessary but I did so to avoid giving out my social security number in case I need to apply for anything that requires a SSN or EIN. It’s free to get one and it only took a few minutes to do.
Then I designated one of my several checking accounts that I accumulated over the years as my new business account. Technically it is a personal checking account that I will now use only for Amazon FBA. Having a separate account will help me keep track of my income and expenses and will help me stick to my budget. (Oct 2014 update: I opened a business checking account to be used for FBA only). As mentioned in my post, Amazon FBA: Goals and Action Plan, I will contribute $100.00 per month of my personal funds towards my Amazon business until I can support it through my profits. By only keeping a set amount in that checking account, I won’t be going over budget.
The last two items that I did was changing my tax settings so that Amazon collects sales tax for me in Washington State and signing up for my free month of TaxJar. I jumped the gun on TaxJar and wish that I waited until I had a sale that sales tax needs to be collected on. My initial thoughts on TaxJar is that they have a simple to use interface and they simplify the tax collection process for sellers. However, it is another $9.95 per month expense after the first month – most likely I will continue their service after my 30 day trial period ends. The good thing is that I now have a reseller’s permit so I don’t have to pay sales tax when I purchase inventory. My sales tax savings will offset the cost of TaxJar.
My next steps are to register for tax licenses in the other states that I have nexus in.
Again, I repeat, I am not a tax or legal professional.
Please feel free to comment below and let me know what you are doing in terms of setting up your business. Also, if I provided any incorrect information in my post, please let me know.
Photo Credit: © Timothy Masters – Fotolia.com