Online Arbitrage Seller's Guide to 2025 Tax Season

August 03, 2025

Amazon sellers face complex tax challenges in 2025, with 1099-K reporting threshold at $600, potential tax nexus in 26 states, and various filing requirements. While Amazon handles most sales tax collection, you're still responsible for compliance, reporting, and maximizing deductions to reduce your tax burden.

Key Takeaways

  • Amazon automatically calculates and remits sales tax in most states, but sellers must still report and verify all tax obligations

  • Online arbitrage sellers using FBA may have tax nexus in up to 26 states where Amazon has fulfillment centers

  • The IRS will issue 1099-K forms to sellers who exceed $600 in annual sales for the 2025 tax season

  • Proper tax planning and understanding of marketplace facilitator laws can significantly reduce your tax burden

Key Tax Changes Affecting Online Arbitrage Sellers in 2025

The 2025 tax season brings significant considerations for Amazon online arbitrage sellers. If you're buying products at lower prices and reselling them on Amazon for profit, understanding your tax obligations is crucial to maintaining compliance and maximizing your bottom line.

Tax regulations for e-commerce continue to change, with FBA Lead List tracking these changes to help online arbitrage sellers stay ahead of compliance requirements. The most significant development affecting Amazon sellers is the continued enforcement of the $600 reporting threshold for 1099-K forms, down from the previous $20,000 threshold that existed before 2022.

As an online arbitrage seller, you'll face three primary tax obligations: sales tax, income tax, and potentially VAT if selling internationally. Each comes with its own complexities, especially when your inventory moves through multiple states via Amazon's fulfillment network.

While Amazon handles much of the sales tax collection and remittance as a marketplace facilitator, sellers remain ultimately responsible for ensuring proper tax compliance. This includes understanding where you have tax nexus, properly reporting all income, and maximizing legitimate deductions to reduce your tax burden.

Understanding Sales Tax Nexus for Amazon Sellers

Sales tax nexus is a legal connection between your business and a state that requires you to collect and remit sales tax. For online arbitrage sellers, this is particularly complex because your inventory might be stored in multiple Amazon fulfillment centers across different states.

What Creates a Sales Tax Nexus for FBA Sellers

For FBA sellers, several factors can establish a sales tax nexus:

  • Physical presence: Having a warehouse, office, or employees in a state

  • Inventory presence: Your products being stored in Amazon's fulfillment centers

  • Economic nexus: Exceeding a state's sales threshold (typically $100,000 in sales or 200 transactions)

  • Affiliate relationships: Working with partners or affiliates based in a state

The 26 States Where Amazon Inventory Creates Tax Obligations

If you use FBA, your products may be stored in Amazon warehouses across up to 26 states, including:

  • Arizona, California, Colorado, Connecticut

  • Delaware, Florida, Georgia, Illinois

  • Indiana, Kansas, Kentucky, Maryland

  • Massachusetts, Michigan, Minnesota, Nevada

  • New Hampshire, New Jersey, North Carolina, Ohio

  • Pennsylvania, South Carolina, Tennessee, Texas

  • Virginia, Washington, Wisconsin

This means you potentially have sales tax nexus in each of these states, even if you've never physically been there.

How to Verify Your Nexus Status in Seller Central

Amazon provides tools to help you determine where your inventory is stored:

  1. Log into Seller Central

  2. Navigate to Reports > Fulfillment > Inventory Event Detail

  3. Download the report and look for the 'fulfillment-center-id' column

  4. The first two letters indicate the state (e.g., UNV1 is in Nevada)

Managing Sales Tax Collection and Reporting

Setting Up Tax Collection in Seller Central

While Amazon automatically collects and remits sales tax in most states through Marketplace Facilitator laws, you may need to configure your tax settings for certain situations:

  1. Go to Settings > Tax Settings in Seller Central

  2. Select the states where you want Amazon to calculate and collect tax

  3. Configure product tax codes for special categories (like food or clothing)

  4. Review and update your settings periodically as laws change

Accessing and Understanding Your Sales Tax Reports

Amazon provides detailed sales tax reports to help you verify what's been collected:

  1. In Seller Central, go to Reports > Tax Document Library

  2. Select 'Generate Tax Report'

  3. Choose between the Sales Tax Calculation Report, Marketplace Tax Collection Report, or Combined Sales Tax Report

  4. Download the report to see detailed breakdowns by state, county, city, and district

Pay special attention to the 'Total_Tax' and 'Total_Tax_Collected_By_Amazon' columns to identify any discrepancies.

Marketplace Facilitator Laws and Your Responsibilities

Most states now have Marketplace Facilitator laws that require Amazon to collect and remit sales tax on your behalf. However, these laws don't completely absolve you of responsibility:

  • You still need to register for a sales tax permit in states where you have nexus

  • You must file sales tax returns, even if the amount due is zero

  • You're responsible for collecting and remitting sales tax on sales through other channels

  • You must verify Amazon's collections match what's required by law

Income Tax Filing Essentials for Online Arbitrage

Understanding Your 1099-K from Amazon

If your online arbitrage business generates $600 or more in annual sales, Amazon will issue you a 1099-K form. This document reports your gross transaction amount—not your profit—to both you and the IRS. Key points to understand:

  • The 1099-K reflects total sales, including shipping fees and sales tax collected

  • It doesn't account for Amazon fees, product costs, or other business expenses

  • You'll need to reconcile this amount with your actual business income

  • Even if you don't receive a 1099-K, you're still legally required to report all income

When you receive your 1099-K, compare it with your Seller Central reports to ensure accuracy. Discrepancies should be addressed immediately with Amazon Seller Support.

Choosing the Right Tax Form Based on Business Structure

Your business structure determines which tax forms you'll use:

  • Sole Proprietors: File Schedule C with your personal Form 1040

  • Partnerships: File Form 1065, with each partner receiving a Schedule K-1

  • LLCs: Depending on your election, file as sole proprietor, partnership, or corporation

  • S Corporations: File Form 1120S, with shareholders receiving Schedule K-1

  • C Corporations: File Form 1120

Online arbitrage sellers frequently operate as sole proprietors or single-member LLCs, making Schedule C the most common filing method. This form allows you to report both your business income and expenses on your personal tax return.

Quarterly vs. Annual Filing Requirements

As a self-employed online arbitrage seller, you'll likely need to make quarterly estimated tax payments if you expect to owe $1,000 or more in taxes. These payments cover both income tax and self-employment tax obligations.

Quarterly tax deadlines for 2025 are:

  • Q1: April 15, 2025

  • Q2: June 16, 2025

  • Q3: September 15, 2025

  • Q4: January 15, 2026

Failing to make timely quarterly payments can result in penalties, even if you file your annual return on time. Use Form 1040-ES to calculate and submit these payments.

6 Critical Tax Deductions for Online Arbitrage Sellers

1. Inventory and Product Costs

The cost of goods sold (COGS) is typically your largest deduction as an online arbitrage seller. This includes:

  • Purchase price of items you resell

  • Shipping costs to receive inventory

  • Product inspection and preparation expenses

  • Storage costs before sending to Amazon

Keep detailed records of all purchase receipts, as these will be your primary documentation for COGS deductions.

2. Amazon Fees and Commissions

Amazon charges various fees that are fully deductible:

  • Monthly Professional seller subscription fee

  • Referral fees (percentage of each sale)

  • FBA fees (picking, packing, shipping, customer service)

  • Storage fees (monthly and long-term)

  • Advertising costs within Amazon

These fees are automatically tracked in Seller Central, but you should regularly download and save these reports for your records.

3. Shipping and Packaging Expenses

Even as an FBA seller, you'll incur deductible shipping costs:

  • Shipping inventory to Amazon fulfillment centers

  • Packaging materials (boxes, bubble wrap, tape, labels)

  • Postage and carrier fees

  • Shipping insurance

  • Return shipping costs

4. Software and Research Tools

Online arbitrage requires specialized tools that are tax-deductible:

  • Product research software

  • Repricing tools

  • Inventory management systems

  • Accounting and bookkeeping software

  • Tax preparation services

  • Subscription fees for sourcing lists

5. Home Office and Business Operations

If you use part of your home exclusively for business, you may qualify for the home office deduction. Additionally, operational expenses include:

  • Internet and phone services

  • Computer and equipment purchases

  • Office supplies

  • Business insurance

  • Banking fees and interest on business loans

6. Education and Professional Services

Investments in your business knowledge and professional support are deductible:

  • Online courses about Amazon selling or online arbitrage

  • Business books and publications

  • Professional memberships and subscriptions

  • Fees paid to accountants, bookkeepers, and lawyers

  • Business coaching and consulting services

Tax Software Solutions for Amazon Sellers

Integration Capabilities with Amazon Seller Central

Tax software designed specifically for e-commerce sellers can save you considerable time and reduce errors. Look for solutions that offer direct integration with Amazon Seller Central, automatically importing your sales data, fees, and other financial information.

Popular options include:

  • TaxJar: Specializes in sales tax automation and offers Amazon integration

  • Avalara: Provides comprehensive tax compliance solutions across multiple platforms

  • A2X Accounting: Bridges Amazon and accounting software like QuickBooks or Xero

  • Hellotax: Focuses on international sellers with VAT requirements

  • Taxify by Sovos: Offers automated tax calculation, filing, and reporting

  • SimplyVAT: Specializes in international VAT compliance

Automation Features That Save Time and Reduce Errors

When evaluating tax software, prioritize automation features that will save you time and minimize mistakes:

  • Automatic sales tax rate calculation based on customer location

  • Real-time nexus tracking as your inventory moves between fulfillment centers

  • Automatic generation of state registration forms

  • Scheduled sales tax filing and remittance

  • Expense categorization and deduction tracking

  • Audit trail and documentation storage

Prepare Now to Minimize Your 2025 Tax Burden

Don't wait until tax season to start preparing. Implement these strategies now to reduce your 2025 tax liability:

  1. Maintain separate business and personal finances to simplify bookkeeping and strengthen deduction claims

  2. Track inventory movements using inventory management software to document where your products are stored

  3. Set aside funds for quarterly tax payments to avoid penalties and cash flow problems

  4. Consult with a tax professional who specializes in e-commerce to identify additional deduction opportunities

  5. Consider entity restructuring if your business has grown significantly, as different structures offer varying tax advantages

  6. Implement a systematic record-keeping process for all receipts and business expenses

  7. Review state tax registration requirements regularly as your business expands into new markets

With proper planning and the right tools, you can handle the complexities of tax compliance while maximizing your online arbitrage profitability. FBA Lead List is your trusted partner for discovering profitable online arbitrage opportunities while maintaining tax compliance.