At least five states are now pursuing Amazon FBA sellers for back sales tax.
It is now officially confirmed that the state departments of revenue in California, Washington, Massachusetts, Minnesota and Wisconsin have all sent Amazon sellers sales tax bills related to inventory stored in Amazon fulfillment centers in those states.
How can states do that?
Most state sales tax laws require that any retailer with a “sales tax nexus” in the state collect sales tax from buyers in that state. And for most states, inventory stored in an Amazon fulfillment center creates nexus.
This means an Amazon FBA seller who lived and ran their business in New York might end up with sales tax nexus (and the obligation to collect sales tax) in the 30+ US states with an Amazon fulfillment center.
Many sellers were unaware of this requirement. State taxing authorities, however, were not.
Fortunately, most states have now passed marketplace facilitator laws. These laws require that online marketplaces (like Amazon, eBay, Walmart and Etsy) collect sales tax on behalf of third-party sellers who use the service. After all, it’s much easier to collect lots of sales tax at a time from a marketplace rather than smaller sales tax amounts from individual sellers.
But any seller who had nexus in a state before that state’s marketplace facilitator law went into effect may still be liable for historic sales tax they did not collect.
This can be a little confusing, so let’s look at an example.
Sales tax scenario:
Pat’s famous pet brand has sold their pet accessories on Amazon FBA since 2012. Pat’s company is based in Florida and they knew about their sales tax liability there. They registered for a Florida sales tax permit and collected sales tax every time they made a sale to a buyer in Florida.
But Amazon stored their inventory in fulfillment centers all over the country, such as in California, Nevada, and Texas. (We’re keeping this sample size small for the sake of this example, but most Amazon sellers would have inventory stored in many more states.)
Because Pat’s inventory was also being stored in CA, NV and TX, they were on the hook to register for a sales tax permit and collect sales tax from buyers in those three states. Even though Pat may not have been aware of this obligation.
CA, NV and Texas all have marketplace facilitator laws now, but those laws did not go into effect until October 1, 2019.
Therefore, each of those states considers Pat, the individual Amazon seller/company, to be responsible for collecting sales tax from the date Amazon began storing their inventory in their state to the day the marketplace facilitator law went into effect and Amazon became responsible for collecting sales tax on Pat’s behalf.
California has been shown to have pursued individual Amazon FBA sellers as far back as 2016. The good news for Pat in this example is that Texas and Nevada haven’t been shown to have pursued individual Amazon FBA sellers, but they could still learn from other states and jump on the bandwagon.
What does it all mean for Amazon sellers?
States have always been hungry for eCommerce sales tax revenue. But they were slow to realize how eCommerce technology was growing and changing.
Now that many states realize that sellers had nexus and an obligation to collect sales tax, they are attempting to collect what they see as past due taxes owed to them.
For example, back in 2017, 25 U.S. states participated in a “sales tax amnesty” where they encouraged sellers to become sales tax compliant by rewarding them with reduced penalties and fees.
Now, as this Bloomberg article reports, at least five states seem to be taking a more aggressive approach, identifying sellers via information they request through Amazon and then sending a past due tax bill.
What can you do if you’re worried about being pursued for past due sales tax?
We get it. It’s scary to think that a big tax bill is out there somewhere waiting for you. However, there are some ways you can determine potential liability and mitigate any possible damage to your business.
Knowledge is power. With TaxJar, you can connect your Amazon account (and the other channels on which you sell) and determine how much sales tax liability you are facing. With TaxJar, you can download historical data from Amazon and other sales channels for a fee. Find out more here. A sales tax expert can also help you determine the amount of sales tax liability you may be facing.
If you’ve checked your potential sales tax liability and you owe an amount you’d be uncomfortable paying out of pocket (plus interest and penalties), then you do have options. A sales tax expert can help you with a Voluntary Disclosure Agreement (VDA). To put it simply, a sales tax expert negotiates with the state on your behalf while you remain anonymous. While you will still need to pay out of pocket, you will likely be able to pay a lower total. If you’re worried about a surprise sales tax bill, we recommend talking to a sales tax expert about a VDA or other options to get ahead of tax collectors.
On Tuesday, March 3, 2020, the United States House of Representatives Small Business Committee heard from sellers who are facing large retroactive tax bills. Several of the sellers who testified brought states’ actions when it came to back sales tax to Congress’s attention and asked for some relief.
Find your congresspeople and add your voice. The more your representatives hear from business owners facing difficult choices, the more likely they are to act.
The sales tax landscape changes every day. Stay tuned right here for more information on states pursuing eCommerce sellers for past due sales tax.
Ready to automate sales tax? To learn more about TaxJar and get started, visit TaxJar.com/how-it-works.