“For Coca-Cola, $100,000 is like a rounding error, it’s not very material to them. For me, $100,000 is a whole lot of money. So for each of you out there, what’s material to you is going to be different.”

While following tax laws to the letter will cover you in terms of penalties, it may not be the most profitable thing for your business. Getting registered in every State in America is expensive for a business, so it pays to be smart about when and where you decide to register. Fleming makes a point of discussing how and when it can be worth getting registered in a state. He sums it up in five factors.

SALES VOLUME

“I can tell you what’s not material. I can’t make the math work in any state where your annual sales are going to be less than $3,000. The math just doesn’t make sense to me.”

If sales volumes are low, it may not be worth getting registered at all and simply risking the fallout should you get audited. If the overall sales volume is below $3,000 in any given state, the consequences for not obeying tax laws can be less damaging to your business than the cost of complying.

TAXABILITY

“Things are going to be taxed differently from state to state.”

Whether a product is taxable or not can depend on the type of product sold. Most FBA sellers deal in Tangible Personal Property (TPP), which is taxed in most states. However, Fleming gives some examples of minor exemptions that often occur in state tax. Some states exempt clothing items, and some exempt dietary supplements. These exemptions are common, so often it pays to learn whether or not your product is taxable in that state before proceeding to get registered.

RISK TOLERANCE

“If you can’t sleep at night, if this is keeping you up, and it does keep up a number of sellers, maybe that $3,000 number is yours.”

At this point during the speech, Fleming put the effect that sales tax issues have on the regular seller into perspective. He recommends that if you find yourself constantly worried about being audited, getting registered in states where you make even a small profit margin can be the correct decision to make. At the end of the day, as a business owner you must do what feels most comfortable for you.

CAPITAL RESERVES

“If you’re putting money aside just in case the state does find you, then you can have a higher risk tolerance”

This factor is fairly self-explanatory. If you have accumulated a healthy fund for protection in case of an unfavourable audit, then you have more agency to opt out of getting registered. The more money you have set aside, the higher your risk tolerance will be. However, for many businesses, the profits earned go right back into the business and become tied up in inventory. This scenario would lower your potential risk tolerance, as there would be very little funds available to pay fines if you are audited.

PROFIT MARGINS

“If you have a 2% profit margin, I’m thinking you absolutely need to have that $3,000 margin.”

The higher your profit margin for each product, the higher your risk tolerance can reasonably be set at. For instance, if you get audited and are found to owe the State tax, the fines will not likely bankrupt your business. However, if your profit margin is small, going out of business is a real possibility.

WHAT ARE MY OPTIONS?