Taxes for Amazon sellers is a topic that a lot of people are intimidated by, but one that is very important to understand.
While I was at the SellerCon event in Orlando, Florida I had the opportunity to interview Jeremiah Kovacs, the Founder of MuseMinded, which is an accounting and bookkeeping firm for Amazon sellers.
A major obstacle for many e-commerce business owners is knowing how to manage their sales taxes. Jeremiah is an Amazon sales tax expert. His mission is to empower Amazon sellers to overcome the financial corner of their businesses so that they can build their ultimate dream lifestyle.
The days when Amazon sellers could sell their products, tax-free, has finally come to an end. Are you ready to learn what you need to know about collecting Amazon sales taxes? If you already have an Amazon business or are thinking about starting one, this is an interview that you don't want to miss!
Watch the video below:
(Click here to watch on YouTube)
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Do you want to learn how to build a profitable business selling on Amazon? CLICK HERE for instant access to my free video training!
Do you want to receive help with your Amazon sales taxes? CLICK HERE to learn more about MuseMinded!
The topic of taxes for Amazon sellers has become a hot topic in the e-commerce world.
Amazon created a large portion of its business by not collecting sales tax, but the game has changed. Here is a sneak peek of my interview with Jeremiah, where he talks about everything that you need to know about collecting Amazon sales taxes.
Can you share with people a little bit about your background? How did you build your firm, MuseMinded?
I have a four-year accounting degree. I started working for a cloud accounting firm. The technology and the industry is changing and I wanted to be on the cutting-edge of that. I parted ways with them and started my own firm. I had a mentor that helped me get into the e-commerce space. He started to send me clients that were too small for him.
Within 5 months, I started to realize that there was an amazing opportunity on the Amazon platform.
All of my best and fastest growing clients were leveraging Amazon to supercharge their businesses. I knew that there was something there, so I decided to focus on Amazon solely. Since we did that, we haven't looked back. In our business, we do bookkeeping, sales tax consulting, income tax, and we are just starting to get into strategic growth consulting which will help people prepare for the future.
As of late, there has been an explosion of Amazon sellers. You were mentioning to me that, last year alone, there were 300,000 new seller central accounts on Amazon. How many did you say were making $100,000?
This information came straight from Amazon. I got an email 3 weeks ago. There were 300,000 new seller accounts in 2017 and over 180,000 sellers in the US make 6-figures a year or more. There's a lot of bad press about how Amazon is taking jobs, but the reality is that Amazon's platform has been a wealth factory for the common citizen.
I know you work with a lot of Amazon sellers and businesses. What do you see as the biggest challenges that people struggle with, in terms of bookkeeping, taxes, and accounting?
The very first pitfall that I see people make is that, if you are just starting on Amazon, don't worry about playing business and getting the perfect accounting system in the first few months. Focus on making sales. Once you have 3-6 months of good activity, then we can start working together and get you caught up. Don't freak out about the tax process early on.
Nowadays, there is so much automation and tools to help speed up this process.
Accounting may be something that is super foreign to you, but it's really accessible. You don't have to get overwhelmed by it. I have free stuff that helps people get set up. A lot of people try to track all of their receipts in a big excel document.
There are some great tools out there that can turn that whole side of your business into something that you only do for a couple hours every month.
Another issue that I see is how people deal with handling inventory. When people are just getting started they think that when they buy inventory they need to make all of it an expense. On my website, there is a whole set of tools and free courses that can help walk you through this process.
At what point d0es it make sense for someone to hire a bookkeeper or an accountant, or work with someone like you?
When someone gets to $20,00 in sales per month, that's a decent time to start thinking about hiring someone. With those numbers, you have a little bit of money to play with. Maybe you are really aggressive and want to scale up. When that happens, there are more complexities to the process and it takes more time to do everything yourself.
Can you share with people what they need to know about sales tax?
First I'll talk about why there are so much confusion, tension, and anxiety around the topic of sales tax. The way that I understand it is that there are two forms of nexus or connection to a state.
There's what some people call “hard nexus.” If you have employees, owners, or real estate that you own, it's a deep, permanent connection in a state.
This is why they want you to sign up for a business license and do sales tax. For folks that are just getting started, that's their home state. Until you start having employees, you are going to be confined to your home state. That's when sales tax compliance comes into play. Generally, that's not too complicated.
The special part for e-commerce sellers is what some people coin as “soft nexus.” It's when you have this semi-permanent presence in the state. For Amazon sellers that use fulfillment by Amazon or a third-party logistics company, you may have staged inventory in a lot of states.
For the typical FBA seller, you are going to have 20+ states that you are going to have to deal with sales tax in.
The level of complexity there is massive. The laws are clear. The accountants and the tax people are saying, “This is what you have to do.” It creates a need and I think that's legitimate. However, on the other side, you have sellers that have never known anybody that's ever been audited outside of their home state. On top of that, the cost to comply in 20+ states is so high that people tend to under comply.
It creates a tension where you know what you should do, but a lot of people aren't doing it. People are either all in or they bury their head in the sand. My personal perspective and what I see a lot of sellers do is that they find some type of middle ground.
They say,“I know that I have a legal requirement in all of these states. I'm going to track my exposure outside of my home state.”
Generally, they set up some type of threshold in each of the states, like $1000. They use a tool like TaxJar.com and they monitor exposure across all of these states. You may say to yourself, “Once I hit $5000, that will be my trigger to start complying.” For small Amazons sellers, the reason why a lot of people do that is that it causes their compliance to stair step. They don't do it all at once. It allows them to get some momentum, sales, and cash into their business before they start forking out a ton of money.
You might sell $200 in the state of Wyoming but the sales tax is 6 percent of that, so that's $12. From a practical perspective, most people don't want to pay more money to comply than it would cost them if they were caught not complying. You want to take a level-headed approach and make a plan so that as your business grows, you start complying more and knocking out your biggest risk states first.
Can you walk us through what the sales tax process looks like?
You first need to figure out where you have nexus. Essentially, if you have inventory stored, that is going to be as wide as your nexus is. Once you have nexus and you are ready to start complying, you have to go directly to the state and register for a license. There are accountants that do that. Legally, you cannot collect sales tax without a license. That's illegal. Once you register, then you need to start collecting.
In Amazon, you go into tax settings and you turn it on in each individual state.
You don't need to know what the rates are. Amazon figures that out and they charge you a little fee to calculate and collect that on your behalf. Shopify and Woocommerce work the same way. The shopping cart facilitates the process and will pay it out to you. The sales tax will come to you through your deposit.
Once you've collected it, you need to go file a report with the state and send the money to them. That all gets done at the exact same time. You can do this yourself. Tax Jar that will help you track and report that, and will do it automatically.
In some states, you need to do this monthly, quarterly or annually. Generally, the states will let you know what that is, you tell Tax Jar what your cadence is, and it's done. One misunderstanding that people have is that you may send inventory into 3-4 states, but then on the backend Amazon is reallocating that inventory to any number of warehouses all across the country.
They don't ask you. That's in your terms of service. Once you hand it over to them, they have free reign about where they are going to put your inventory. You may only send it to a handful of states, but within 6-12 months if you are doing volume, it will be scattered everywhere.
There are two ways to figure out exactly where that inventory is and when you first had it in a warehouse.
If you Google, “Tax Jar how to find out where my inventory is”, they have a great blog post that will offer you a step-by-step process of how you can do it yourself. This is where a paid tool comes in handy, called, Where Stock. For $20 per month, it will give you a report that says, “Stefan, your inventory is in these states, and this is the very first month that it arrived.” That's your perfect nexus tool.
What should Amazon sellers be tracking throughout the year and reporting, year-end?
Some people misunderstand accounting. The way I see it is that accounting is like a financial scorecard for your business. You have two types – financial statements that you do bookkeeping for and you make what's called an income statement. That's one type. That's a very zoomed out perspective of your business. However, it's really hard to run your business from your financial savings.
Financial statements are more for tax purposes. In the beginning stages, you need to zoom in on your business and have something like an analytics tool that will help you understand the specifics, like which skew is more profitable than another one, or when do you need to replenish your inventory because you've stocked out.
A lot of people associate accounting with those detailed granular metrics.
Non-accounting inventory management systems are great for that. When it comes to bookkeeping, every business has a revenue section and what is called a direct cost, or all the costs that are associated with your inventory. You then have all of these operating expenses, like your phone bill, software, etc. On the revenue side, at the top, a lot of people think that the bi-weekly payout that they get from Amazon should be called sales.
The reality of that is that every two weeks when you get that payout, you actually had sales up here, then Amazon took out a bunch of fees, added in a little sales tax, and then they brought you your payout. It's important that you have a way to track that because the government will think that you are underreporting your sales. You are not going to get in trouble, but you will go through the hassle of explaining to them that you just did the accounting wrong.
On the revenue side, you will really need a tool that will help split all of that stuff out, like A2X accounting. That works with zero cloud accounting system and QuickBooks online. It's challenging to get it going, but once you do, it's push-button easy.
Direct costs are all the costs that, when you make a sale, your expenses go up. These are processing fees, seller fees, fulfillment fees, and the costs of your inventory. When you make a sale and it creates an expense, that's the stuff that you want to track in the middle level. Most people think that because they made an inventory purchase, they made an inventory expense.
In accounting, when you make an inventory purchase, it actually keeps its value.
It doesn't immediately just go away. You need to turn that inventory into an asset in your accounting. Once it sells, you take it out of inventory. You want to make sure that you are matching the inventory expense with the inventory revenue.
What are things that an Amazon seller could write-off and use as an expense in their business?
I think that some of the things that people don't realize are business expenses are things that you typically use on a personal level as well. If you have an expense, the principal is that, whatever portion of the time you use it for business, you want to write that off. If it's $100 and 70% of that is for your business, write off $70. It's a good idea to talk to an accountant to understand and be aware of what constitutes an expense.
Is there anything else that a lot of sellers need to be aware of when it comes to accounting?
I tell people to not get accounting software to be your analytics tool. On the flipside, don't try to get your analytics tool to be your accounting software. They have two different functions. Lastly, most people care about accuracy when they are doing accounting.
You need to think about material accuracy.
This is something that we've learned the hard way over the last few years. A lot of people are sticklers. They want to know something down to the penny. At the end of the day, accuracy has two purposes when it comes to your books. One is the IRS. In the US, they just want to know that you are making a good faith effort to report it in a material way. They don't care if you are off by a few cents on your inventory evaluation.
The second purpose of your books is to make decisions. Accounting systems are like a 50,000-foot view. People spend hours upon hours doing their own accounting and trying to figure out their inventory value down to the penny because they want it to be perfect.
At the end of the day, you need to be balancing efficiency with accuracy. For us, we want to get stuff really close, so that it's materially accurate. After that, we want to move on. That way, this part of your business doesn't drag you down. Don't make your life hell. Look at the big picture. In terms of how we can help them, we have two options. We have free courses that walk through our bookkeeping process and how to step up the exact same automation that we use. I would definitely check those out.
We are putting a group together so that if you are doing it yourself and you have questions along the way, we are there to support you.
In the beginning, when you have to do it yourself, you will get to the point where you want to leverage your time and expertise so that you aren't doing admin. It will be about generating revenue, scaling up, and building teams.
We provide a done-for-you option so that you can take all of the admin off of your plate. There is no hand-holding.
We have a US-based team that does people's books each month, and we can consult on the sales tax side, make sure that payroll is set up right, and do corporate tax returns. Our pricing is very transparent. We charge a fixed price so that it's super predictable and it doesn't penalize us for getting better at what we do.
Jeremiah has graciously provided a 10% discount for those of you who are reading this and want the done-for-you type of service.
Stefan has an amazing community. We have a 10% off for the first 6 months that you use our service. We also have a free trial that you can check out. When you are ready to get this stuff off of your plate, the code is PLM418. When you become a client of ours it will ask you if you have a referral code. Plug in that 6 digit code and that discount will allow you to get off of the ground and put a little bit of margin back into your business to keep things going.
I encourage you to check out Jeremiah's free courses that will help you understand more about taxes for Amazon sellers.
If you are at the stage in your business where you are seeking the help of someone like Jeremiah, take advantage of his discount! The Amazon tax process doesn't have to be difficult, especially with firms like MuseMinded who are there to help you every step of the way.
Do you want to learn how to build a profitable business selling on Amazon? CLICK HERE for instant access to my free video training!
Do you want to receive help with your Amazon sales taxes? CLICK HERE to learn more about MuseMinded!