If you sell on Amazon FBA and your bookkeeper only puts purchase price in your Cost of Goods Sold line, your gross margin is a fiction. You're making pricing, inventory, and growth decisions based on a number that's fundamentally wrong.
This isn't a minor accounting technicality. For most FBA sellers, the gap between what they think their margin is and what it actually is runs between 15 and 25 percentage points. On a $3M business, that's hundreds of thousands of dollars in misunderstood profit.
Here's what the IRS actually requires in COGS — and what it means for your business.
What the IRS says belongs in COGS
Under IRC §471 and the §263A uniform capitalisation rules, COGS for a reseller includes all direct and allocable indirect costs of acquiring inventory and getting it ready for sale. For an Amazon FBA seller, this goes well beyond the price you pay your supplier.
| Cost Category | Examples | Where Most Sellers Put It | Where It Should Be |
|---|---|---|---|
| Purchase Price | Supplier invoice | COGS ✓ | COGS ✓ |
| Inbound Freight | Ocean shipping, air freight, last-mile to Amazon | "Shipping Expense" | COGS |
| Customs Duties | Import tariffs, brokerage fees | "Other Expense" | COGS |
| Amazon FBA Fees | Pick & pack, referral, fulfilment | "Selling Expense" | COGS |
| Warehousing & Storage | Amazon storage fees, 3PL costs | "Rent" or "Storage" | COGS |
| Returns & Damaged | Customer returns, write-offs | Not tracked at all | COGS adjustment |
| Packaging & Labelling | Product packaging, FNSKU labels, poly bags | "Supplies" | COGS |
The principle is straightforward: any cost you wouldn't incur if you didn't have that unit of inventory belongs in COGS, not in operating expenses. If you didn't import that product, you wouldn't pay the freight, the duty, or the FBA fee for it.
Why this matters more than you think
When costs that belong in COGS sit in operating expenses instead, two things happen:
1. Your gross margin is inflated. You think you're running at 40% when you're actually at 18%. Every pricing decision, every inventory order, every growth investment is based on a number that doesn't reflect reality.
2. Your per-product profitability is invisible. Without proper COGS allocation, you can't tell which SKUs actually make money and which ones lose money after all costs. You might be doubling down on products that are destroying margin.
A real example
We recently worked with a US health & wellness brand doing $3.2M in annual revenue across Amazon FBA and Shopify. Their books showed a 42% gross margin. After we rebuilt COGS from scratch — adding freight, duties, FBA fees, and returns — the real margin was 19%.
That 23-percentage-point gap represented $274,000 in misunderstood profit. Six SKUs were actually losing money. Twelve others needed repricing. The founder had been planning a warehouse expansion based on margins that didn't exist.
How to fix your COGS — step by step
Step 1: Map every cost to a product
Start with your supplier invoices. Then add inbound freight (allocate by weight or volume), customs duties (from your broker's invoices), and FBA fees (from Amazon's fee reports). Every cost should trace to a SKU or a group of SKUs.
Step 2: Restructure your chart of accounts
In QuickBooks or Xero, create sub-accounts under COGS for each cost category: product cost, freight, duties, FBA fees, storage, returns. This gives you visibility without changing your total COGS number.
Step 3: Set up monthly allocation
Don't do this as a year-end exercise. Each month, allocate freight and duty costs as they come in. Amazon's monthly fee reports give you FBA fees per unit. Build this into your monthly close process.
Step 4: Analyse per-SKU profitability
Once COGS is correct, run a margin report by product. Sort by contribution margin. You'll immediately see which products are carrying the business and which ones are dragging it down.
Pro tip: If your bookkeeper pushes back and says "we've always done it this way" — that's the problem. Standard bookkeeping practices don't account for e-commerce complexity. You need someone who understands both IRS capitalisation rules and how Amazon's fee structure works.
The bottom line
If you're an Amazon FBA seller and your COGS only contains purchase price, your margin is wrong. Your pricing is based on fiction. Your inventory decisions are uninformed. And you might be scaling products that are actually losing money.
Getting COGS right isn't complicated — it just requires discipline and someone who understands both the tax rules and the e-commerce cost structure. Once you have real numbers, every decision gets better.