Over the last decade, regardless of the products you are selling, the internet has certainly revolutionized how you do business and Amazon is a large part of that.
As clients assess how their business models will evolve to incorporate doing business with Amazon, it is certainly clear that there are many items to consider.
No doubt this change will be costly, however the loss in sales could be devastating.
The first question for many is how will this impact taxes, however, there are a few questions to consider beforehand.
How will you sell on Amazon?
- Sell to Amazon and let the retailer take it from there; therefore, your customer is Amazon.
- List your product on Amazon and you ship the product once sold.
- Ship to Amazon and have it fulfill sales for you, in which case your customer is the end user.
Some items to consider
- Will the product be listed as Prime eligible?
- What is the anticipated quantity requirements with Amazon?
- What additional fees will Amazon charge?
Significant modeling is needed to determine the payback of selling via Amazon and being listed as Prime eligible.
Amazon’s web site lists the cost to sell as “$39.99 a month + additional selling fees.”
These selling fees can range from storage to fulfillment cost and can be considerable, especially if you want to be Prime eligible.
Don’t forget to inquire about increased rates during the holiday season. How much will sales volume increase as a result of these investments? How much of the sales increase is being redirected from your current distribution channel? However, the most significant question might be how much sales volume will you continue to lose if you don’t sell on Amazon?
As you work through these questions, you will need to consider the tax impact. If the product is Prime eligible and Amazon is fulfilling sales for you, then your product will likely be re-distributed between warehouses based on sales data analytics.
This means your inventory could be in 30 different states within a couple of months. This could trigger you to have sales or income tax nexus in each state.
With certain states requiring the filing of monthly sales tax returns, you could quickly have a significant administration compliance burden. This burden is compounded by the fact that each state has different rules and rates. Owners of a flow-through entity (S Corp or Partnership) may now be required to file a personal tax return in multiple states.
The information and data a company can learn from working with Amazon is tremendous. Imagine knowing who your end customer is and getting real time product reviews from them. How will you react to this new data? No doubt, potential customers will be reading the reviews!
While a changing environment can be intimidating, diligent planning can lead to tremendous opportunity for your company.
Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.
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