How Does Amazon Tax Work? A Breakdown for Buyers & Sellers

Amazon, a global e-commerce platform, presents a multifaceted landscape for tax considerations impacting both buyers and sellers. Navigating these tax obligations requires understanding various federal, state, and international regulations. The complexity arises from Amazon’s expansive operations across numerous jurisdictions. This guide aims to demystify the tax implications associated with Amazon, providing clarity on how taxes apply to purchases and how income and sales taxes affect individuals and businesses selling on the platform.

Sales Tax on Purchases

When consumers purchase items on Amazon, sales tax is typically applied to their orders. The sales tax rate is influenced by the buyer’s shipping address and the nature of the product. Certain goods, like some food items or clothing in specific jurisdictions, might be exempt or taxed at a reduced rate.

Amazon simplifies the sales tax process for buyers through its function as a “marketplace facilitator.” In most states with sales tax, Amazon is responsible for calculating, collecting, and remitting sales tax on behalf of third-party sellers. This means buyers generally see the applicable sales tax included at checkout. Amazon handles forwarding these funds to the correct tax authorities, and buyers can view a detailed breakdown of the sales tax applied to their orders during checkout and on order confirmations.

Sales Tax for Sellers

Sales tax obligations for third-party sellers on Amazon have evolved considerably due to changes in tax laws. Historically, sellers were primarily concerned with “sales tax nexus,” a connection obligating them to collect and remit sales tax in a particular state. This nexus could be established through a physical presence, such as an office, warehouse, or employees, or through economic activity exceeding certain sales thresholds.

The introduction of “marketplace facilitator laws” has significantly altered sales tax responsibilities for most sellers. These laws, now adopted by nearly all states with sales tax, mandate that online marketplaces like Amazon collect and remit sales tax on behalf of third-party sellers for transactions conducted through their platforms. This shift has substantially reduced the direct sales tax compliance burden for many Amazon sellers, as Amazon assumes responsibility for these tasks in most instances.

Despite Amazon handling sales tax collection for most sales, sellers retain some responsibilities. Sellers must still manage sales tax for transactions made outside of the Amazon platform, such as through their own websites. Additionally, while Amazon provides services for sales tax calculation and reporting, sellers should still monitor their sales data and tax reports available in Seller Central. Amazon offers various reports, including sales tax calculation reports and marketplace tax collection reports, to assist sellers in understanding their tax data.

Income Tax for Sellers

Individuals and businesses selling on Amazon must account for income tax on their earnings. The Internal Revenue Service (IRS) requires reporting of income generated from sales activities, which typically involves the Form 1099-K. This form is issued by payment processors, including Amazon, to report the gross amount of payment transactions. For the 2024 tax year, the reporting threshold for Form 1099-K is $5,000, with no transaction minimum. This threshold is scheduled to decrease to $2,500 for 2025 and $600 for 2026 and beyond. Regardless of whether a 1099-K is received, sellers are obligated to report all income from their sales.

Taxable income from Amazon sales is generally calculated as gross sales revenue minus the cost of goods sold and other allowable business expenses. The cost of goods sold includes the direct costs of acquiring or producing the products sold. Many common business expenses incurred by Amazon sellers are deductible, helping to reduce their taxable income.

Deductible expenses include Amazon fees (such as referral, fulfillment, and storage fees), shipping costs and packaging materials, advertising and marketing expenses, and software subscriptions used for business operations. If a dedicated area of a seller’s home is used exclusively and regularly for business, a portion of home office expenses may also be deductible. Maintaining accurate and detailed records of all income and expenses is important for tax purposes. Sellers who expect to owe at least $1,000 in federal income tax for the year, after accounting for withholding and credits, are generally required to make estimated tax payments throughout the year. These payments are typically made quarterly to avoid potential underpayment penalties.

International Tax Considerations

Cross-border transactions on Amazon involve specific tax considerations, primarily Value Added Tax (VAT) and Goods and Services Tax (GST). These consumption taxes are common outside the United States, applying to sales made by Amazon sellers to customers in regions like the UK, European Union, Canada, and Australia. The application of VAT or GST depends on factors like the location of the seller, the buyer, and the goods themselves.

Amazon often collects and remits VAT or GST in international scenarios. For instance, Amazon is responsible for collecting these taxes on goods shipped from outside the destination country or when international marketplace facilitator rules apply. This simplifies the process for both sellers and buyers by integrating tax collection into the transaction at the point of sale.

Buyers making international purchases may also encounter import duties and customs fees, levied by the destination country’s customs authorities. Amazon may provide an “Import Fees Deposit” or “Import Charges” estimate at checkout for certain international orders. This covers estimated duties, taxes, and handling costs, streamlining the customs process by ensuring fees are paid upfront.