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September 1, 2022

The Top Guide to VAT for Amazon Sellers in the USA

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Are you an Amazon seller in the United States and are thinking of expanding to the United Kingdom or the European markets? Your biggest question must be: what is a VAT number in the US? Selling online makes it relatively simple to break into foreign markets, but you must also be aware of the local legal requirements in the countries where you are doing business.

Value Added Tax (VAT) seems complicated to many Amazon sellers. Luckily, we have compiled a top guide to VAT for Amazon sellers in the US to make it easy for you to understand.

What is a VAT Number?

VAT (Value Added Tax), just like its name, is a consumption tax based on the value of goods and services. It is used in all European Union countries and many other countries, but it may be called differently, but the principle remains the same. For example, it is known as GST (Goods and Services Tax) in Canada.

A VAT number is an identification number for VAT-registered companies, and it's something you need to register for. You may have to register for a VAT identification number in more than one country.

Value Added Tax

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In many countries, a Value Added Tax Identification Number or VAT Identification Number (VATIN) is used for value-added tax purposes.

A VAT identification number can be checked online on the European Union's (EU) official VIES website. It can give the name or other identifying information of the business to which the identifier has been assigned and validate that the number is currently allocated. However, due to data protection rules, several national governments refuse to provide VAT identification numbers.

How Does VAT Work?

VAT taxes are filed by the person or business who is VAT registered, and the VAT number means you are responsible for filing VAT reports in a given country. Each state has its own rules about VAT, so you may need to register with more than one country depending on where you are making your sales or storing your goods.

A VAT tax is charged at every stage of a supply chain, starting from production, distribution, and ending at the consumer level. Also, there is a difference between VAT taxes and company taxes. You will only need to pay company taxes if your business is locally registered in a particular country. However, with VAT numbers, you must collect and remit them based on where you sell locally.

VAT rate

Image Credit: cepr.org

Notably, you shouldn't register for VAT when starting, especially if it's not an obligation, but remember every country has distance selling thresholds. So, for example, if you are storing your goods in your home country and are not reaching the distance selling EU VAT registration threshold, you won't need to register for VAT.

However, if you reach the threshold for distance selling in a given European Union country, you will still have to pay VAT tax even though you are storing goods in the US.

On the other hand, as a non-EU business storing your goods in the UK, you will have to register for VAT from the first day.

Is there VAT in the U.S.?

No, the United States doesn't have a VAT system, but companies can register and report VAT in the UK, Australia, the EU, and parts of Asia when required. As a result, value-added taxes generate billions of dollars for other nations but not for the United States.

Vat-registered businesses don't have to account for a VAT account when importing goods from the US. However, when importing goods from the US, the US sales tax will not apply, but a UK tax rate will be charged on the import, thereby eliminating the tax.

How Do you Calculate Amazon VAT?

To calculate VAT, you should follow a simple formula:

  • All the costs of shipping and production, including the Amazon fees
  • Your profit margin is added to production costs which are now your net sales price
  • Find the VAT percentage needed by a country of sale, then multiply it by your net sales price
  • Tabulate the calculation above for your net sales price to your final selling price

How Do Amazon Sellers Handle VAT?

Taxes

Amazon sellers have two ways to handle their VAT numbers:

1. Hiring a Fiscal Agent

Hiring a fiscal representative and delegating the task to them is the easiest way to handle VAT on Amazon. We recommend this method if you are an international seller or have a company in the US. It will not only get you VAT registered, but you will also get an agent to guide you through the entire process.

Although you can save some money if you register online in the countries you will be selling in and manage it yourself, it can be a complicated process, and most sellers prefer to hire VAT experts in the given country.

2. Establishing a European business or company

Most sellers don't choose this method because it is problematic with minimal advantages.

Lastly, Amazon has created a resource center for VAT-related information. Also, since several countries have invoicing requirements, a seller will need to provide customers with a complaint VAT invoice.

In the past, you would have to deal with this through a third-party service, but Amazon now has an option to set it up in the Amazon account settings.

What are the European Storage Options for International Amazon Sellers?

Storage

There are several ways you can operate your Amazon FBA business, and below are simple and streamlined models:

1. European Fulfillment Network (EFN)

As a member of Amazon's European Fulfillment Network, that allows you to be in one marketplace while listing your products in other marketplaces and Amazon fulfilling the orders from where your products are stored.

You will need to keep a sales record and check if you are meeting the thresholds for any other country. This means you should register and pay for VAT in a country. Some advantages include:

  • It only needs registering for a company's VAT number in the countries you have stored
  • Can sell to other marketplaces within a specific distance
  • Allows you to store all your stock in one country

2. Pan-European FBA

This is an Amazon service designed to give Amazon sellers quick access to different EU markets. It operates by having Amazon automatically distribute merchandise to warehouses in different EU countries depending on demand.

However, you should remember that when you store inventory in a country, you create a VAT obligation and will need to be registered. Some sellers say that Amazon is starting to force sellers into Pan-European by charging more on every shipment if they don't register.

Advantages include:

  • Faster delivery with local customer service from Amazon
  • Low FBA fees where Amazon sends inventory throughout Europe at no additional cost
  • It allows you to reach more customers
  • Easy to meet customer demand because Amazon stocks inventory in strategic locations throughout Europe

Is it Better to Set Up a Local Company or Sell as a Non-EU/UK Seller?

Tax Documents

There are pros and cons to each method. To make the best decision possible, you should take the time to research both sides of any option you are considering and meet with business owners on both sides. There is no ideal solution, and you should only choose what suits you the best. They include:

1. Setting Up a Local Company

Starting a local business can be beneficial to drive sales, especially when consumers prefer purchasing locally. In particular, it can simplify developing local partnerships regarding ordering from suppliers and shipping to sellers. The disadvantage is that doing this can complicate the situation because you'll need to apply for a license and pay separate taxes.

2. Selling as a Non-EU/UK Seller

The simplicity of this situation is its main selling feature because you won't need to start anything new or look into new licensing requirements or corporate taxes. Alternatively, you can hire someone to handle the VAT requirements while sending your revenues back to your US-based company. However, doing so may prevent you from forming local connections.

Will VAT Lower Profit Margins?

Profit

VAT returns don't reduce your profit margin, but this is only if you set your price to include the tax. Notably, when conducting product research, it is important to consider the VAT costs apart from considering products with high demand and low, competitive rates.

In addition, keep in mind that Amazon's VAT costs are charged from your net price, not the final selling price. Therefore, if you have figured out your final selling price, you need to know how much tax to add by working backward.

How to ‍Register and File for VAT as an Amazon Seller

The biggest things to remember when registering for VAT are that you will need a separate VAT registration for each company and must file VAT returns regularly.

Also, although VAT registrations and returns are not difficult, it may be wise to leave the procedure to experts to save time, paperwork, and expensive mistakes.

a). Amazon VAT Registration

When registering for VAT, you must present the necessary paperwork, which includes business documents, administrative paperwork, and a passport. Your government-issued VAT number may take up to two months to arrive, but you can start selling your goods immediately using the validity date. ‍

b). Amazon VAT Returns

tax return

Depending on the country, several deadlines apply to submitting VAT returns. For instance, Germany expects monthly returns, whereas the UK requests quarterly ones.

Before penalties are applied, you typically have two weeks to pay. After submitting the VAT return, you will be notified and can use a bank transfer to pay the invoice. ‍

How is VAT Similar to US Sales Tax?

To start with, VAT and US sales taxes are both felt by the final consumer, and businesses collect them for the government. Also, when selling to local consumers as a foreign company or supplier, you must register as a remote taxpayer or a non-resident.

In addition, once you have a sales tax or VAT registration, you must:

  • Calculate and charge tax accurately
  • Submit regular returns giving a summary of the sales and due taxes
  • Remit the tax payable to the relevant tax authorities

What are the Differences between VAT and US Sales Tax?

VAT TAX

In several US states, the VAT is comparable to a sales tax, which must be collected from buyers if you run a business there. However, you might need to collect it from customers and send the returns to specific countries, depending on the market you sell in.

Additionally, as sales taxes differ from state to state, so do the rules and VAT rates depending on the country you are selling in.

1. Sales Tax is at a Tax Level while VAT is at a country level

45 out of the 50 US states, plus DC, have a sales tax set by the respective US states. However, this is where the topic of sales tax becomes quite confusing. The countries and cities, and other jurisdictions can set and charge taxes on transactions on top of the state sales tax.

It is difficult to choose the appropriate sales tax rate because the company must determine which jurisdictions' taxes apply and how to combine them. On the other hand, VAT is exclusively regulated and assessed by the federal government.

It is difficult to choose the appropriate sales tax rate because the company must determine which jurisdictions' taxes apply and how to combine them. On the other hand, VAT is exclusively regulated and assessed by the federal government.

2. Sales Taxes are diverse while VAT rates are few

Many US sales tax jurisdictions overlap and have a combination of rates. It is compounded by the counties, states, and countries without attempting to harmonize the rates charged on the same products. Also, the rates in some states often change, making calculations more complex.

On the other hand, VAT rates are easy to track, and almost every country has a standard rate for goods and services. They also have reduced rates on public services and basic foodstuffs, which don't change yearly.

VAT rate

Image Credit: amin-stender.com

3. The business feels VAT, but sales tax can be a marketplace's obligation too

VAT-registered businesses are responsible for VAT calculation and collections, even when sold on an online marketplace platform. In the US, most states impose a sales tax on the marketplace for their remote sellers, but the marketplace rules may vary from one state to another.

To prevent double tax reporting and losses, the seller must track when a marketplace has withheld the sales tax. Also, businesses can deduct the VAT charged against the VAT they levy on their customers. Still, it's done through a regular VAT return and VAT's factional collections process to minimize fraud.

4. VAT is collected on all transactions while sales tax is only on the final consumer

Here, sales tax is simple, and the final consumer only feels it at the checkout. However, VAT is more complicated and is charged throughout the supply chain, including B2B and B2C sales.

5. VAT is applied to Digital Services, but it may not be for the US Sales Tax

In many countries, including Europe, digital and e-services are charged with VAT. Some o these services include downloading or streaming media, advertising from membership to online clubs, apps, and e-learning tools like data storage or SAAS software.

However, the US sales tax is not yet there. About 30 states have just started to charge sales tax on digital goods.

Conclusion

Vat

Most Amazon sellers don't like these rules since they don't have large budgets to cater to tax lawyers or accountants like the big companies, and they wish the VAT rules and regulations were never invented.

Luckily, unlike other marketplaces, the Amazon marketplace understands the struggles of small Amazon sellers in the US. As a result, they have developed many VAT tools and services on the Amazon platform. So, we hope the guide has been enlightening, and you don't feel stuck anymore.

Image Credit: AndrewMinalto.com

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