I attended Jim Cockrum’s CES III conference in Louisville earlier this month and a seller there asked me an interesting questions. “Do Amazon prep services create sales tax nexus?”
Think of the implications. If an Amazon prep center does create sales tax nexus, then thousands of FBA sellers may have nexus in another state and not even realize it. I knew it was important to get to the bottom of this question, so I contacted sales tax expert Lauren Stinson of Windward Tax to help us out.
But first things first…
What is an Amazon Prep Service?
If you sell on FBA, you soon learn that your products must be packaged and prepared in a very specific way. Failing to do this can result in warnings and penalties from Amazon, as well as a hit to your bottom line. Because of this many Amazon FBA sellers ship items to a “prep service” and let the service get the items ready to be received into the Amazon Fulfillment Center.
Amazon provides a prep service, and there are other private prep centers around the country. The seller who asked me about prep centers and sales tax nexus was sending her goods to a prep center in a state where she did not currently have sales tax nexus due to her FBA activities. She worried that she was supposed to be registered for a sales tax permit and collecting sales tax in that state.
Do Amazon Prep Services Create Sales Tax Nexus for Sellers?
Our sales tax expert Lauren looked at the letter of the law in California, the home of at least one Amazon prep center. First she examined what California has to say about the activities that create nexus. California considers a seller to have nexus when he or she:
1.) maintains, occupies, or uses, permanently or temporarily, directly or indirectly, or through a subsidiary, or agent, by whatever name called, an office, place of distribution, sales or sample room or place, warehouse or storage place, or other place of business;
2.) has any representative, agent, salesperson, canvasser, independent contractor, or solicitor operating in this state under the authority of the retailer or its subsidiary for the purpose of selling, delivering, installing, assembling, or the taking of orders for any tangible personal property;
3.) as respects a lease, derives rentals from a lease of tangible personal property situated in California;
4.) is a member of a commonly controlled group and a combined reporting group, as defined, that includes another member of the retailer’s commonly controlled group that, pursuant to an agreement with or in cooperation with the retailer, performs services in this state in connection with tangible personal property to be sold by the retailer, including but not limited to the design and development of tangible personal property sold by the retailer, or the solicitation of sales of tangible personal property on behalf of the retailer;
She then tested prep services against these criteria, here:
1.) Maintains a place of business – Under this bullet point, using an Amazon Prep Service does not constitute nexus because the seller is not maintaining a place of business (or doing any of the other big list of things specified by California code!) When you send your items to a prep service, you are not holding inventory for sale in that state. Instead you are sending it off for a service to be performed on it. The prep center is not going to turn around and sell your goods, therefore your items aren’t for sale there.
2.) Has a representative, agent, salesperson, etc. in the state – Again, this test is not met because the prep service has no interaction with the purchaser.
And I’m going to spare you anymore legalese, because bullet points 3 and 4 are actually not applicable in this situation.
Lauren’s conclusion: Amazon prep services do not create sales tax nexus for sellers. Whew!
Also, just because prep services don’t give you sales tax nexus in California, don’t forget that other activities could. Here’s more about sales tax in California. And if you’d like to run this test against what other states have to say about sales tax nexus, find your state on this handy U.S. sales tax map.
Summary: Do Amazon Prep Centers Create Sales Tax Nexus?
According to our sales tax expert, sending goods to a prep center to be packaged and prepped for sale is akin to a car dealer sending a car from the dealership out of state to be painted, but then brought back to the dealership to be sold. Because the prep center isn’t holding your items for sale, or trying to sell them itself, then it doesn’t meet the criteria that creates sales tax nexus.
Have your own tricky sales tax question? Click here for a sales tax consultation with Lauren Stinson of Windward Tax. Or start the conversation about prep centers and sales tax nexus in the comments below!