Things You Need to Know about Amazon Accounting and Taxes

When planning to start selling Amazon, find out about e-commerce pricing, Amazon’s accounting and taxes for selling at Amazon. Amazon business can be very successful, but it has its risks. In order to cope with this world, learn more about the responsibilities it brings to you.

When selling on Amazon, you need to be familiar with the tax system of both Estonia and the destination country.

Estonian VAT

When you start selling at Amazon, you need to register as VAT payer in Estonia. The reason is that buying an Amazon ad is categorized as an electronic service purchase. This creates an immediate obligation to register for limited VAT.

There are two ways to register for VAT:

1. limited VAT payer

2. the so-called common or fully liable to VAT

The limited taxable person shall pay VAT only on the intra-community acquisition of goods and the receipt of services by a foreign person engaged in business. A limited taxable person shall not be entitled to deduct or deduct input VAT in respect of goods or services he supplies. Only taxable (foreign) expenditure subject to VAT liability must be submitted to the tax authority. In line of the same expenses, VAT is payable to the Estonian state. This calculation is simple and you can probably handle it yourself.

It is significantly more profitable to immediately become a “regular” or fully entitled to pay VAT. With this option you do not actually have to pay VAT, as a bonus you can deduct input VAT on purchases within Estonia. Fortunately, VAT law also allows you to do so, choose this option.

VAT is a complex issue and the entrepreneur should not deal with it without an accountant. So think about which option is better for you – whether you pay VAT on small purchases or start outsourcing an accounting service. You can read more about Estonian VAT registration here.

VAT in another European country

If you sell goods imported from China to the USA, this turnover is not declared in Estonia. Purchases of virtual services must be declared and the VAT on purchases made in Estonia can be claimed back. If you sell goods in Europe and use the Amazon FBA service, you will also need to register for VAT in the country in which you are using the warehouse – usually either the UK or Germany. And this is valid since the first sale.

Using a UK Intermediate Warehouse, Amazon prevents you from operating without a UK VAT number. You will have to pay VAT on all European sales that go through a UK intermediate warehouse. Taxes are quarterly and if you do not file a tax return, you will receive an estimated tax claim. So you have to pay the taxes anyway. Here is how to qualify for VAT in the UK.

What you need to know about distance selling

When selling in Europe on Amazon, you also need to keep track of where your buyers come from. This is where something like “distance selling VAT” comes along. Initially, the goods sold are subject to VAT at source. If the turnover reaches the separate distance sales tax threshold in the country of destination (see the middle column in this table), you will also need to register for VAT there. It is called distance selling threshold, usually with a limit of 35,000 euros (for example, in Estonia, Latvia and Finland), some countries have a limit of up to 100,000 per year.

Taxes on USA and Canada Amazon sales

USA and Canada have no VAT as seen by europeans. In US, there is a sales tax, it is state-based and paid only by end users. A similar solution is used in Canada.

Amazon has begun to charge sales tax on sales from overseas sellers in US, so be sure to find out what this means for you. The US tax system is so complex that there are separate consultants for that, Estonian accountants cannot help you here.

Selling on Amazon does not create a permanent establishment in the United States, so you will not be charged corporate tax.

Amazon Accounting

I have seen Amazon accounting done at three different levels of accuracy. This does not affect tax accounting, we are talking about accounting details here.

1. Beginner Seller

It is quite common for a company that has just started selling on Amazon to pay for itself rather than make a profit. For example, the first sale is $ 5, but Amazon charges $ 10. In such a case, even the net amount may initially be just an expense. The simplified presentation of small amounts is entirely permitted in the accounts.

2. Low turnover Amazon dealer

When sales turn out to be three to four digits, the accounting entry is usually based on a payment notice sent by Amazon twice a month. It is deducted from sales revenue (with discounts) and the rest is expensed.

3. Advanced Amazon dealer

If the monthly cash receipts from Amazon are already higher, proper accounting must be done. This means that the accountant uses Amazon’s accounts as the basis for accounting and records in detail all income and expenses by item. Of course, not manually, files can be imported.

This gives you the ability to properly calculate and report on costs – after all, you don’t have all the costs in Amazon’s analytics programs, you can only get a complete overview of your goods’ profitability and trends from accounting. Order them separately from your accountant, reporting is not part of a normal financial accounting package.

In order to comply with the principle of cost-benefit, it is also essential to ensure that all goods sold are correctly expensed. This is one of the most difficult issues with Amazon accounting.

How much money do you need?

Considering the working capital cycle, you must invest at least 2-3 months in merchandise cash when entering Amazon. As the turnover grows, the need for money grows, meaning that you have to constantly raise more money for the company instead of withdrawing money.

Example:

Sales 21k

Cost of goods 7k

Amazon costs 7k

Other expenses 5k

Profit 2k

Cash Need: 14-21k

To finance Amazon business, you need to know that the bank will not lend to a start-up business. One option is to find a long-term and cheap loan (for example from a family member) or use your savings as a private individual. Once you have set your goal on paper, you can calculate how much money you need to make an initial investment at your expected income base.

To conclude

Being an Amazon seller must be a carefully considered decision. It is important to be clear about what tax obligations are ahead of you.

You also need to consider that you should have sufficient access to cheap money for additional investments.

Once you have a sale, you need to constantly monitor the profitability of your merchandise as well as the return on your investment – how much money you have invested in the company and what is the return on that investment.

When you become a VAT payer, it is strongly recommended that you buy external accounting as a service. Robby & Bobby monthly fees for Amazon sellers start at € 179 per month. Contact us for a more detailed price quote.