So you’re up and running as an Amazon seller, and you think you’ve figured out the Amazon marketplace.
The good news is, if you’ve made it out alive (and profitably) through your first holiday shopping season, you’re doing well.
But, there are a number of issues that even large or long-term Amazon sellers don’t figure out.
Selling on Amazon is endlessly complex, with traps that even veterans fall into.
I’m pleased to unveil the pitfalls to you now – but like a child who thinks she’s figured out how a magician does a trick, you will still need to work hard to avoid the common problems many sellers encounter when they start selling on Amazon.
At the very least, knowing these will set you up to be more aware of where those pitfalls might be hiding. Use the infographic to help visualize the issues and read through exactly how to solve them in the article below.
It’s a little shocking how many sellers never set up state tax collection options on Amazon, thinking that Amazon somehow automatically takes care of all sales tax issues from sales on the Amazon marketplace.
It turns out nothing could be further from the truth.
While Amazon is happy to collect state sales tax for you (for a small fee), it’s up to every seller to indicate in which states it wants Amazon to collect tax, and to manage the remittance of the taxes to the appropriate tax jurisdictions across the country.
There are many tax remittance services available for online sellers, but the seller ultimately has the responsibility of paying its taxes.
Here are a few services that can help:
While a seller may choose not to collect state sales tax (choosing to absorb that as a cost of doing business), the responsibility of remitting the tax is not optional.
A seller can designate its account to collect state sales tax in particular states.
Unfortunately, however, Amazon’s default when setting up new listings is to designate each SKU as having a no-tax label, which can overwrite the seller’s general request to collect state sales tax across all of its catalog.
Set your taxes up right the first go around.
Immediately upon signing up a new seller account, my advice is to:
- Go into the Settings –> Tax Settings.
- Designate in which states you want Amazon to collect state sales tax.
- Set the “Use default Product Tax Code” setting to “A_GEN_TAX.”
Amazon typically defaults to A_GEN_NOTAX, where no tax is being collected.
While the seller may offer products that warrant a slightly different tax rate, that level of tweaking can follow later.
If the seller is using Fulfillment by Amazon (FBA) and isn’t proactively collecting state sales tax in all of the tax-collecting states where Amazon has fulfillment centers, it won’t be long before the seller accumulates tax liability from having incurred tax nexus by way of FBA inventory being stored – even briefly – in these states’ fulfillment warehouses.
PRO TIP: Each FBA seller should invest in a tax consultation with an online seller tax consultant to understand the responsibilities and potential liabilities of using FBA.
Too many sellers focus on top line sales numbers rather than bottom line profits.
“I want to sell $1MM/year on Amazon” or “If only I could get to be a $10MM/year seller on Amazon.”
Honestly, other than ego and maybe a few volume discounts, there isn’t much long-term benefit to being a big, but not particularly profitable, seller on Amazon.
Focus on bottom growth and account for all costs upfront.
I’d much rather see any seller grow its bottom line profits year-over-year much faster than its top-line sales.
That typically requires a SKU-level understanding of profitability, incorporating overhead and indirect costs into each SKU’s profit calculation.
This includes certain less-than-obvious Amazon fees, and product write-downs/write-offs.
While I’ll discuss this matter much more in a subsequent chapter, it’s important to focus on those parts of your catalog that make you money and shed those parts that don’t.
- Stop averaging everything out, and looking only at your overall sales numbers and margins.
- Start thinking about every SKU you sell on Amazon as having its own P&L, its own market forces, and its own level and types of competitions.
Such an approach has helped many a seller rationalize its catalog, focusing on bottom line growth ahead of all other financial goals.
Fulfillment by Amazon
Fulfillment by Amazon – commonly referred to as FBA – is exactly what it sounds like.
You send your products to Amazon’s warehouses and they pick, pack and ship your items to meet their strict shipping and delivery timelines.
The Issue with Co-Mingled SKUs.
There are a number of problems here, and I’ll start with the use of co-mingled “stickerless” SKUs.
As mentioned in a previous chapter, a seller has the option of sending product into FBA without having to provide SKU-level stickers on each unit.
Such stickerless inventory has the potential to get mixed in with the inventory of other FBA sellers of the same SKU.
Then when a customer places an order from one FBA seller, Amazon pulls the most convenient inventory, even if that inventory isn’t actually the inventory that the seller sent into FBA itself.
And, if other sellers have sent in a counterfeit product or used-condition product that they are trying to pawn off as a new-condition product, now the new seller may get itself into trouble with Amazon for selling a problematic product to a customer even if it was technically not their product.
Amazon responds when customers complain about product quality – and the heavy lifting falls on the individual sale-level brand.
At roughly $0.20/unit for Amazon to sticker items, or whatever a seller’s own warehouse costs are, we see the costs of stickering FBA units as far lower than the implied cost of having one’s seller account suspended for allegedly selling a counterfeit co-mingled product to a customer.
Stickerless vs. Stickered Inventory.
The other complicated issue around stickerless vs. stickered FBA inventory is when…