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Form a LLC for online business using Amazon FBA

Asked by: cklion323  — 24 May, 2011

Hi, I want to form a LLC for online business and want to use Amazon FBA to store my inventory and ship orders. Amazon FBA warehouses are located at AZ, NV, and KY states. Most of my customers are from NY and CA. Fews are from Wyoming and Delaware.

1. Do I need to collect sales tax for orders shipped from FBA warehouses’ states?

2. If I register in Wyoming, do I need to collect sales tax from Wyoming customers?

3. If my sales is relatively high when compared to profits, what state do I register to minimize paying all kind of taxes?

Answered by: admin  — 24 May, 2011

First of all a little disclaimer: the answer to this question is not a legal or tax advise. Please use it as “food for thought” for further research and certainly consult an accountant before making any tax related business decisions.

Now to the question itself. It is related to the issue of what is considered “establishing a nexus” of your company in any given state (or in other words whether your company is considered to be engaged in business in that state). Let’s analyze it in the context of your particular example:

Circumstances where a retailer is considered to be engaged in business in a given state for sales and use tax purposes include (but are not limited to) the following:

1. maintaining, occupying or using any type of office, sales room, warehouse or other place of business in that state. This includes use that is temporary, indirect or through an agent or other representative.

2. having any kind of representative operating in the state for the purpose of taking orders, making sales or deliveries, installing, or assembling tangible personal property.

Based on (1) it’s safe to conclude that using Amazon FBA warehouses to store and ship your products pretty much establishes a nexus for your business in some or all FBA states (the question is of course in which of the warehouses your particular products are stored). Keep in mind that once nexus is established it cannot be “cancelled” (only if you dissolve your business).

If nexus is established in a given state you must collect sales tax from your customers in that state, which means you need to obtain a Sales Permit from that state’s Department of Treasury (or whatever authority responsible for issuing sales tax permits in that state).

As far as FBA goes keep in mind that Amazon provides no mechanism to collect sales tax from customers, so you have to build it into your item price.

As far as Wyoming sales tax goes: we have had several phone conversations with Wyoming Department of Revenue regarding some of our clients who registered their online retail businesses in Wyoming, and the conclusion we reached was that you need to register for sales tax and collect it from your Wyoming customers if you are incorporated in that state. I could not find any confirmation for that anywhere on the web, but assuming you are going to have very few Wyoming customers (after all its the least populated of all states…) its probably a good idea to just go ahead and get yourself a Wyoming Sales Tax Permit.

As far as which state to register in to minimize your taxes – Wyoming and Delaware are good choices, because they have no income taxes at all. Just keep in mind that if you live in a state that has personal income tax you will still be liable to pay it on your income, regardless of the state where you incorporate.

I hope my answer will help you with further research of that topic.

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