Selling products on Amazon can provide immediate impact for companies looking to expand their sales and increase their market presence. Amazon provides consumers with a trusted platform to purchase products, bringing in $59.7 billion for the quarter ending March 31, 2019, alone. However, without careful planning, it’s easy to be surprised by fees and potential sales tax implications of doing business with Amazon.
There are two distinct business models for sellers on Amazon: the seller central platform and vendor central platform, with some key differences between the two. It’s critical to understand the associated fees and sales-tax requirements associated with each and how to properly accounting for them.
Here’s what companies need to know.
The vendor central platform requires sellers to negotiate their sales price to Amazon, which then purchases and holds title to the product, warehouses the inventory, and ultimately resells it to the end consumer.
Sellers using this method frequently see sales recognized sooner, and they don’t have to hold the inventory until the end consumer makes their purchase. Also, because the seller isn’t responsible for inventory, they generally don’t have to worry about the potential sales tax implications of holding inventory in multiple states. However, there are many additional factors to consider, including collecting and maintaining resale certificates and documentation to demonstrate the wholesale nature of sales to Amazon.
Choosing the vendor central option means sellers lose the ability to set pricing for end consumers, which can create conflicts with other retailers selling the same products at higher prices. Additionally, sellers could be subject to large shipment swings, resulting from Amazon’s buying patterns as it builds inventories for seasonal products.
Vendors are subject to many fees as part of their selling agreement with Amazon. Up to 35% of the sales price paid by Amazon can be delegated to Amazon’s cooperative advertising, subscribe and save, daily deals, and return and allowance charges. Vendors can also pay Amazon to handle their freight in exchange for a freight allowance or Amazon Consulting and Marketing for additional product support, which is charged at a per-use rate.
Amazon’s fee-paying system, Amazon Deduct, makes paying fees fairly easy through automatically calculating fees as a percentage of sales price. However, accounting for these fees by Amazon’s vendors on their income statements can be more challenging. According to Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 605, sales incentives should be a function of the selling price unless they provide a separately identifiable benefit at fair value that can be purchased independently of the sale transaction.
Because Amazon is the vendor’s end customer in a vendor central relationship and fees charged are a flat percentage of sales prices, these fees should be classified as a reduction of revenues by the vendor. This means a seller’s reported sales and gross margins could be significantly lower than if the vendor had sold directly to the Amazon end customer, as discussed below in the Seller Central model used by Amazon.
Other fees through Amazon Media Group and Consulting and Marketing services generally qualify as a separate, identifiable benefit because they’re charged on actual services provided and qualify as a sales and marketing expense.
Further, under the new Financial Accounting Standards Board’s (FASB) Accounting Standard Codification (ASC) 606 for Revenue Recognition, the criteria for recognizing sales incentives separately from the selling price shifts from a separately identifiable benefit to a distinct good or service approach. ASC 606 is applicable for most private companies with fiscal years beginning after December 15, 2018, and for public companies for fiscal years beginning after December 31, 2017.
Under ASC 606, Companies will need to evaluate whether consideration provided to customers represent a distinct good or service that would provide benefits to the vendor without the sales transaction.
There isn’t a direct fee around pricing for vendors, but the loss of pricing control can particularly impact vendors who sell in other channels. Other retail or wholesale customers may find themselves competing directly with Amazon on the same products, with Amazon discounting the suggested retail price and offering free expedited shipping.
These circumstances could result in those other customers requesting price concessions from the vendor or deciding not to carry certain products. That means vendors need to fully understand the pricing options Amazon provides with products and potential implications for the vendor’s relationships with other customers.
When operating through Amazon’s seller central platform, sellers pay a referral fee to Amazon, which acts as a broker in the transaction. Amazon doesn’t take title to the product inventory, and the seller maintains pricing control by having full pricing discretion on the listed price on the Amazon platform. Amazon then assists the seller in different stages of the transaction, including fulfillment, advertising, and marketing.
There are three main advantages to seller central:
- Greater control over product pricing
- Less order volatility because the seller isn’t trying to meet Amazon’s ordering schedule
- Easier ability to account for Amazon’s fees as operating expenses instead of netted-against revenues, because Amazon is acting as a broker instead of an end customer
The downside of Amazon’s seller-central platform is that sellers have to hold the inventory longer as they wait for the end consumer’s purchase to pull the inventory through the system.
Additionally, using seller central could expose the company to more sales-tax reporting obligations because the seller holds title to inventory and sells to its end customers in multiple locations. That said, there are additional factors to consider when it comes to reporting obligations because many states have enacted marketplace-facilitator laws.
According to these laws, selling platforms must collect and remit sales tax, where appropriate, on behalf of remote sellers if they sell products and collect funds on behalf of remote sellers. In some cases, remote sellers are under marketplace-facilitator laws and relieved of sales-tax collection obligations, even though the marketplace facilitator acts in a broker capacity.
Amazon often offers generous return privileges. However, these policies often require sellers to issue a credit for the sale. They then end up with restock or open-box items that are returned to inventory and likely sold at a discounted price.
Sales Tax Calculations
The South Dakota v. Wayfair US Supreme Court decision marked a change in the way sales tax nexus is determined and created implications for taxpayers doing business remotely across state lines. Most states have already enacted or considered their own sales-tax economic nexus standards based in whole or in part on the precedent set by Wayfair, which defines economic nexus as having more than $100,000 in sales or 200 transactions in a given state.
While many questions remain regarding how this decision will be enforced, many of these standards are currently effective. That means sellers who haven’t yet registered with the states in which they meet sales-tax economic nexus standards should consider prior-period exposure as well as prospective compliance.
In most circumstances, sales tax collection and remittance is the responsibility of the seller. Understanding marketplace facilitator laws, determining how and when your business meets each state’s threshold, and planning accordingly is critical—particularly for sellers who utilize Amazon’s shipping and fulfillment services.
Moss Adams is Here to Help
For more information about accounting for Amazon fees and sales tax considerations, contact your Moss Adams professional.