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Chapter 2.2: Taxes and records

What you'll learn: the US tax basics every Amazon seller should know from day one: who collects sales tax on your Amazon sales, how sales tax on the stock you buy affects your profit, how your income is taxed and reported, and the record-keeping habits that keep it all simple.

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General information only, not tax advice. We keep this light on purpose. Your returns, estimated payments and state registrations are a job for a CPA or tax professional, ideally one who works with online sellers. Find one early.

Sales tax on your Amazon sales: Amazon collects it​

Every US state with a sales tax has a marketplace facilitator law. On orders placed through Amazon.com, Amazon calculates, collects and pays the sales tax to the state for you. You don't add sales tax to your prices, and you don't remit it for those orders yourself. Amazon: marketplace tax collection

That doesn't always mean you have nothing to do with your state:

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Check your home state. Some states don't require you to register if all your sales go through a marketplace. Others still expect sellers based there to hold a sales tax permit and file returns, even when Amazon collects the tax. A permit is also what you'll need for resale certificates (below). Check your state's Department of Revenue website, or ask your CPA, and check again if you start selling anywhere other than Amazon.

Sales tax on what you buy: the cost to watch​

This is where US sellers' profit quietly leaks away. When you buy stock from a retailer, you'll normally be charged sales tax on top of the shelf price. If you pay it and can't recover it, it's part of your cost, and on a thin-margin product it can turn a profit into a loss.

There are legitimate ways to buy stock tax-exempt for resale:

  1. A resale certificate. Once you hold a sales tax permit, most states let you give retailers a resale (exemption) certificate, so you don't pay sales tax on stock you're buying to resell. Acceptance varies by retailer: some have a tax-exempt program you register with, some accept certificates only in store, and some don't accept them at all. Check each retailer's tax-exemption page before you rely on it.
  2. Amazon Business tax exemption (ATEP). If you buy on Amazon to resell (A2A flips, Chapter 16), you can register a resale certificate with Amazon Business's Tax Exemption Program so qualifying purchases are tax-free. Amazon Business Tax Exemption Program
Only for stock you'll resell.

Using a resale certificate for personal or business-use purchases (your printer, your packing supplies, your groceries) is tax fraud. Keep tax-exempt orders strictly for inventory.

What this means for your numbers: if you pay sales tax on a purchase, count it as part of what that item cost you. Part 2 shows how to factor it into profit and ROI, and 4.3 shows where it fits in ArbiSource.

Income tax and self-employment tax​

  • As a sole proprietor or single-member LLC (by default), your Amazon profit (sales minus allowable costs such as stock sold, Amazon fees, prep supplies, shipping and software) goes on Schedule C with your personal federal return.
  • Self-employment tax (Social Security and Medicare) applies to that profit on top of income tax. Self-employment tax (IRS)
  • No employer is withholding tax for you, so if you expect to owe more than a modest amount for the year, the IRS expects quarterly estimated payments. Self-employed individuals tax center (IRS)
  • Most states add their own income tax. Your CPA will cover this.
Stock is a cost when it sells, not when you buy it.

For tax purposes, the cost of inventory is generally deducted as you sell it (as "cost of goods sold"), not the day you pay the retailer. Your CPA will explain how this applies to you, and it's one more reason to log every purchase.

Amazon's tax interview and Form 1099-K​

  • When you register, Amazon asks you to complete a tax interview (it collects the details from IRS Form W-9) using your SSN or EIN. Make sure the name and number match IRS records exactly.
  • Amazon reports sellers' gross sales (not profit) to the IRS on Form 1099-K once they pass the federal reporting threshold (more than $20,000 in sales and more than 200 transactions in a calendar year; the IRS page has the current rule). Form 1099-K FAQs (IRS)
  • Some states have their own, lower reporting thresholds, so you may get a 1099-K for your state even if you're below the federal one. Rules change, so check your state or ask your CPA.
  • Your income is taxable whether or not you receive a 1099-K. The form is just a report of your gross sales; your records of what you paid for stock and fees are what bring that down to your real profit.

Good records: the simplest habit in the business​

Organized records make your CPA's job quicker, your returns accurate and your business easier to grow. They also matter if Amazon ever asks where your stock came from. A little discipline from day one is all it takes:

  • Keep every receipt and order confirmation for stock, online or in store. Save them in one place (a cloud folder per month works well) and name each file with the date and retailer.
  • Note the sales tax on each purchase, or that it was tax-exempt.
  • Log each purchase in a simple spreadsheet: date, retailer, product, ASIN, quantity, cost, sales tax and which shipment it went into. ArbiSource's Sourcing List export gives you a head start.
  • Download your Amazon settlement reports regularly from Seller Central.
  • Track other costs: prep supplies, software subscriptions, postage and mileage for sourcing trips.

Checklist​

  • I understand that Amazon collects sales tax on my Amazon sales, and I've checked what my home state expects of me
  • I know sales tax on stock is a real cost unless I buy tax-exempt for resale, and I'll only ever use a resale certificate for inventory
  • I know my profit is taxed (including self-employment tax), and I'll ask a CPA about quarterly estimates
  • I have a folder and a purchase log ready for my records