Marketplace Tax for Hawaii

The kids wishing they were in Hawaii while really there’s a blizzard

A Few Definitions

Just to start out lets talk a few terms to make sure we’re all on the same page:

Marketplace - These are really any online seller that is not your own. Think Amazon, Walmart, TikTok, Intagram, Meta etc. Most of these have legal requirements to collect and remit tax with recent regulations.

FBA - Fulfillment by Amazon. Basically, you are giving your goods to the marketplace and the marketplace is shipping to the end customer. Now other marketplaces also do this, but we’ll focus a bit more on Amazon but the below will apply to most of these.

FBM/MFN/SFP - While these do have different meaning, they all boil down to, the order flows from the marketplace into your order fulfillment system, and you the vendor fulfill the order to the customer.

Sales Tax - Tax imposed on a consumer by the government for the exchange of goods or service. These are placed on the final buyer (generally) of the goods and services.

Please note I am not a tax attorney, laws/regulations and rules can change at any time. The information below is meant to be helpful, but should not be taken as legal advice. Also, before you get to far…I want you to know, you might be disappointed with the business central solution.

Marketplace Sales for Tax

For the most parts marketplaces are going to collect and remit tax, then when these sales come to you: you don’t accrue this tax and/or remit this tax to the government authority.

Now, there is a chance you may still need to report these sales or count them in if you are nexus or not. See this guide from Avalara.

The Curious Case of Hawaii

Then there’s Hawaii. Hawaii has what’s called an excise tax. Excise tax are NOT imposed on the buyer, they can be passed along to the buyer but there is no legal obligation like we see with sales tax to do so. That tax is as low as 0.5% up to 4.5%. 4% to the state and 0.5% to the Island - note there are some islands/locations with additional amounts at the time of writing this article. You are required to pay this excise tax if you are nexus in Hawaii; which is either physical presence or the $100K economic nexus rule set. Nexus article.

What does this mean to you the merchant?

1) This is imposed at all levels of a transactions, resale/manufacturing certs to do not apply

2) This is normally imposed at the landed cost, which might mean tax on tax

What does it mean in terms of a Marketplace?

This is where things get a bit interesting:

If you sell where you are delivering the goods to the consumer, according to Hawaiian rule set you are the Wholesaler and you have a 0.5% tax you must pay. If you’re reading this right, this means, you the seller if nexus in Hawaii and you ship a good to a Hawaiian you must pay a 0.5% wholesale tax on top of the order. You can read more about that here.

FBA - If you ship FBA, where you (for the most part) sell to Amazon first, that sell to Amazon is considered the trigger event to pay the full tax rate: 4.5%. That’s right, if you ship via FBA to Hawaii while nexus in Hawaii you pay 4.5% on the landed cost into Hawaii. Does Amazon also collect the 4.5%, probably…but they don’t remit that to you to give to the Hawaii government, this is your tax, this is imposed on you.

Avalara

If you’re using Avalara and sending these sales, and you have all setup correctly, Avalara will apply the 0.5% to 4.5% tax correctly for you. The other states will show up as 0% and a marketplace exemption. No Avalara didn’t calculate this wrong, and you’re not losing your mind.

Avalara handling of the 4.5% showing an exemption for marketplace

Though, as an ERP user you should know - this tax is only accruing to be paid. It’s appearing on your invoice, but that’s not the invoice to Amazon or the consumer; and will follow the normal path that just will accrue the amount. You will need to expense this amount; chances are it’s currently sitting in your AR account for your Amazon consumer card(s). Just to go a bit further down a rabbit hole, if your Amazon orders are set to automatically “pay themselves” the account out of balance is most likely a cash/incoming credit card account. As that auto payment took the full invoice amount and put it as expected cash…but you’ll never get that full cash.

Business Central without Avalara

If you’re using Business Central without Avalara, while of course meeting the conditions of marketplace sellers doing FBA and are nexus in Hawaii, there’s no simple solution for this.

If you add the tax to the order, it will do exactly like Avalara is doing - it will accrue the sales tax and the other side is AR. If you’re thinking, okay I will just use what I learned about Canada, let’s capitalize the expense. That’s also what I thought…sadly, this also doesn’t work. Maybe remove Tax Liable, and capitalize: nope, that will record the sale as exempt but not expense this.

Then if you thought, but wait! There’s an Excise Tax in the Tax Details table…but once again, this didn’t do much for me. This made Total Include that tax, it also hard lined the tax amount at $4.50 vs a 4.5% and while it did accrue and reduce revenue it still made the assumption the customer was paying this.

What am I getting at here? While you can accrue this tax, you cannot expense this tax. You’re best bet is to setup the tax as a Tax Area called HIFBA and HIFBM with their respective tax rates. Your Amazon FBA card coming in with the one, and the FBM coming in with the other…and accruing, then issuing a monthly sales credit memo against an Income Statement account to expense it and apply against all the open invoices. If invoices aren’t open, you would apply to the most likely incorrect account, which is most likely your incoming cash account.

A big thank you to Judy Vorndran at TaxOps, without her I thought I was going crazy when Avalara kept applying the 4.5%. She sent me in the right direction and confirmed the ruling. She’s also an amazing tax accountant who specializes in sales tax if you have questions about tax group codes or sales/use tax laws.

As well, thank you to a client for bringing this up and their patience while I sorted it.

If someone has a great idea of how to resolve this better let me know!