Part 1: US and Canada - the ecommerce giant
An in-depth series on tax for Amazon and Shopify sellers
There are very few words which can accurately describe the sheer scale of the ecommerce industry in the United States – it’s something out of this world. In 2018, consumers worldwide spent approximately USD$2.86 trillion online. The US ecommerce market is reported to have hit USD$513.6 billion, up 14.2% from 2017 – with almost 50% of that coming from Amazon sales.
Canada’s ecommerce industry may have only tipped the scales slightly in 2018 with total sales around the $22 billion mark – but it has the world’s largest trading relationship with its neighbours in the United States. In many ways, that’s one of its defining features.
The United States is well-known for its complex tax system – but truth be told, Canada’s tax system isn’t too far off. Michael Fleming is one of the world’s leading experts on sales tax in the US and Canada – and he has a resumé to prove it.
Prior to starting his own venture, Sales Tax and More, in April 2018, Michael was the director of a CPA firm that specialised in sales tax for 10 years. The man was talking about the sales tax responsibilities of Amazon FBA sellers well before anybody else was. He may be frequently asked to speak at Amazon FBA conferences all around the world, but Michael jokes that even after 20 years, he’s surprised he has a grasp on it.
This guide is part one of a four-part series on tax for ecommerce sellers. All four articles will explore the tax obligations of different markets – US and Canada, Europe (including the UK), Hong Kong, Australia and New Zealand – with insider information from leading tax experts in each market about how best to stay on top of your international taxes.
In this guide Michael helps to explain:
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Sales tax in the United States of
America
- Physical nexus
- Economic nexus
- Marketplace sellers (Amazon)
- Other ecommerce sellers (Shopify)
- Getting registered
- Income tax in the United States
- Does it make good business sense to get registered?
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Canada – the alphabet soup of taxes
- Federal and local taxes
- Input tax credits
- Carrying on business
- Getting registered
- Income tax in Canada
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Staying on top of your taxes
- A2X plays a big role
As an international ecommerce seller, you might also have tax obligations in:
Sales tax in the United States of America
Physical nexusWithout a doubt, the biggest tax issue for ecommerce sellers in the United States is sales tax. Each state has its own state or local tax rate (or both).
Historically, you needed to have some sort of physical presence in a state, i.e. a store or employees to create a linker connection – or nexus.
However, the states take the position that inventory in an Amazon FBA warehouse creates nexus – which means foreign sellers who generally don’t have any type of physical presence in the US, now also have nexus.
“FBA sellers don’t believe that, they’ll give you all sorts of arguments and reasons why it doesn’t create nexus, but that doesn’t mean anything to the states. They’re on firm ground if you look at their statutes. The state statutes say owning tangible personal property in the state creates nexus, and inventory is tangible personal property – doesn’t matter who moves it there or who controls it, it’s about who owns it,” Michael says.
What this all means, Michael explains, is that the states have been pursuing domestic and foreign companies for back sales tax based on the physical nexus of Amazon FBA warehouses – some states are pursuing money owing from up to 10 years back.
“In a state like Washington where Amazon was originally located, they’ve had warehouses there forever, they’ve been going back the full 7 years, and the penalty in the state of Washington is 39%, so the liabilities can be tremendous!
“In California, the penalties are a lot less, they’re 10%, but sales in California are generally a lot higher because that state has the biggest population – roughly 15% of the US population. California goes back to 2012 when the first Amazon FBA warehouse opened, and they want all their back tax, the penalty, and any interest,” Michael says.
Economic nexus
On June 21, 2018 the US Supreme Court offered an opinion in the S. Dakota vs Wayfair case, giving states the right to collect tax on remote sales without a physical presence – now known as economic nexus.
At a minimum, if you process more than 200 transactions or $100,000 of in-state sales, you must collect and remit sales taxes on transactions in the state.
“So now, all of a sudden, a lot of ecommerce sellers who aren’t selling through Amazon – maybe they’re selling through their own Shopify website or drop-shipping – have this linker connection where they may have never had it before,” Michael says.
For individual state economic-nexus thresholds, Sales Tax and More regularly update their Economic Nexus Thresholds for Sales Tax Chart.
Amazon sellers
Good news if you’re an Amazon FBA seller: Amazon will collect these taxes for you. There are now 36 states, plus Washington DC, where marketplaces like Amazon are required to collect taxes. At the moment Amazon is only collecting tax in 21 states – it will take until the end of the year for the rest of the states to jump on board.
“I expect almost all of the states to want the marketplaces to be collecting tax, maybe one or two that for some reason don’t get with the programme.
“If you’re an Amazon seller by this time next year, the only two states you might have to worry about will be Connecticut, where state sales have to be above $250,000 – still a requirement to file there – and Washington, which actually has two taxes. One is the sales tax, the other is what we call the business and occupation tax. Amazon’s not going to pay that because it’s a gross receipts tax,” Michael explains.
“There are a lot of nervous people right now, because they’re hearing how the tax world has been stood on its head inside the US, and we have Amazon sending us sellers from Germany, Italy, China.
“We’re trying to get everyone to understand it’s not a big deal if you’re only selling on a marketplace like Amazon,” Michael says.
Shopify sellers
While there’s light at the end tunnel for marketplace-only sellers, unfortunately the news isn’t so good for other ecommerce sellers. If you’re an ecommerce seller making sales in the US through your own Shopify website, you’ll need to account for and file your own sales tax returns.
If you sell on both Amazon and Shopify, you still need to report your marketplace sales when filing your return for your Shopify sales – but you don’t want to pay double the tax. Michael adds there are lots of different ways you can exclude the marketplace sales, but the important thing is making sure you still account for them.
One more thing to bear in mind: yes, Amazon collects the sales tax for you, but that doesn’t mean the stock you have in their FBA warehouse doesn’t create nexus.
“A lot of people in California who sell on Amazon and their own website, argue their sales aren’t $500,000 in California, so once Amazon starts collecting on October 1, 2019, they can deregister. Unfortunately, it doesn’t work that way. You still have nexus in California, because you still have inventory there. You don’t have the responsibility to remit the tax on the Amazon sales, but nexus is nexus. Now, even though you’re not over the threshold, you still have to collect the tax on your Shopify sales,” Michael says.
“When it comes to selling through Shopify, the states over the next two years will be getting very aggressive, beefing up what we call their discovery units. These units are looking for sellers they think should be paying sales tax but are not. For foreign sellers, if they find you, they’ll still come after you but it’s a lot harder to come after a foreign seller, especially if they’re not selling on Amazon.”
The problem now becomes whether unfair advantage has been created between domestic US-based sellers, and foreign sellers. Michael talks about how the Supreme Court admit they made a mistake when originally talking about physical presence, because they’ve inadvertently created a protected class – which is hurting US-based businesses.
“Fast-forward 18 months, I don’t know what that’s going to look like, but it will get a lot easier to pursue foreign sellers, like the UK and Germany who have really cracked down. For those companies that have been compliant in the US, they shouldn’t have anything to worry about.
“Right now, there’s not a lot of past exposure with this economic nexus because it’s not that old. You really want to become compliant today if your sales are material – rather than taking the risks of being excluded from the market or paying years of back tax at some point down the road,” Michael advises.
Getting registered
If you need to get registered for sales tax, there are lots of companies out there that can help you. But as a foreign seller, Michael says, you want to make sure someone understands how to register you.
Whether you’re a US or foreign entity, the states want you to have a social security number. Michael explains there are workarounds for this in every state but, “You’ve got to know what those workarounds are, know the right people to talk to, know how to get the registration approved – that’s something we specialise in.”
Once you’re registered, someone needs to file your returns on your behalf. There are software companies you can use, but Michael says they come with their limitations. One of those limitations is they can’t work with foreign companies that don’t have a US bank account.
Most states don’t allow a transfer from a foreign bank account, even when using a money-transfer firm. Michael explains what they do: “We open up a sub-account under our primary account here. It’s only used for your taxes – you would send us the funds and we’d pay the state directly on your behalf.”
Michael adds that getting a US bank account is not easy – and it gets harder ever year.
“Opening a personal account is a lot easier, but you generally have to do that in person. If you can open a US bank account, you have a lot of options on who can do your returns. If you’re a foreign seller, you’ve got to pick and choose because why go out and get registered, and not be able to file your returns? You need to line that up before you decide to get registered.”