Specifically, do you, if you’re an Amazon FBA business, need to collect and then report and remit sales tax?
Here’s the quick answer to this question: Probably yes.
But because that’s an unsatisfying answer, let me explain the logic behind the answer.
Amazon FBA Sales Tax Nexus
First of all, let me explain what “nexus” means and why it’s important.
“Nexus” is some sort of connection that a state has to a business that gives the state the right to subject the business to its tax laws. Confusingly, the level of connection that’s sufficient to create nexus is different for different types of taxes (e.g. income taxes versus sales taxes). What’s more, different states often have different interpretations of the law on how tenuous a connection can be while still creating nexus.
Because the topic of this post is sales tax issues, we’re just going to focus on explaining what creates sales tax nexus.
Generally speaking, a business establishes sales tax nexus in a state if it has a “sufficient physical presence” in a state [see Quill Corp. v. North Dakota, 504 U.S. 298 (1992), and National Bellas Hess v. Department of Revenue, 386 U.S. 753 (1967)].
Remember, each state has its own definition of what creates nexus for sales tax purposes, but here are some examples of what can commonly cause sales tax nexus:
- Hiring employees in a particular state
- Having an office, warehouse, or shop location in a particular state (either by owning it or leasing it)
- Owning other property in a state (such as inventory stored in an Amazon warehouse)
- Temporarily doing business in a state at something like a trade show
The Impact of Quill
The Quill case in particular provides a lot of protection from sales tax nexus to remote sellers, so it’s worth discussing briefly.
Quill was a Delaware corporation that had no employees or tangible property in North Dakota. North Dakota had tried to amend its definition of sales tax nexus to include companies like Quill, by saying any retailer “who engages in regular or systematic solicitation of a consumer market in th[e] state” must collect and remit state sales tax.
Quill said that North Dakota didn’t have the power to make it collect sales tax since Quill had no physical presence in the state, while North Dakota argued that the rise of mail order business had become so significant that prior court precedents requiring physical presence no longer applied.
The good news? At least for Quill? The U.S. Supreme Court sided with Quill. It determined that while the due process clause doesn’t require a business’ physical presence in a state before a state may impose tax or administrative burdens, the commerce clause does. Therefore, before a state may impose a sales tax burden on businesses with no physical presence in their state, Congress must explicitly allow them to do so.
But the bad news for people wondering and worrying about the Amazon FBA sales tax issue is, clearly, Amazon FBA businesses do have sales tax nexus in states where the Amazon FBA system stores and ships your inventory. Having inventory physically present in a state is about as clear-cut as physical presence gets.
An Important Clarification
A tangential observation: It’s important to note that having employees or physical property in a state are not the only ways a business can establish physical presence for purposes of sales tax nexus.
In Scripto, Inc. v. Carson (362 U.S. 207, 1960) the U.S. Supreme court found that when a business has an independent contractor acting as a sales representative in a state, that creates sales tax nexus just as much as having an employee in the state does.
A Few Words About “Amazon Laws”
Some states have tried to respond to Quill in the age of online retail, a famous example being New York’s “Amazon law.” In 1996 Amazon began to establish commission arrangements where people with web sites could encourage users to “click through” to buy things on Amazon. New York figured that if Amazon established a commission arrangement with a person or organization in New York, that established sales tax nexus for Amazon in the state (because the independent contractor salesperson would have physical presence in New York).
Amazon challenged the rule based on Quill, but New York’s highest court upheld the law and the U.S. Supreme Court declined to hear the case further.
Another type of law designed to deal with companies like Amazon originated in Colorado, and is gaining some recent traction. Colorado’s law compels online retailers who sell to customers in Colorado, but don’t collect sales tax (presumably because they don’t have to, because they have no sales tax nexus), to do two things. First, the business must notify consumers of their requirement to pay use tax on the items purchased. Second, the business must notify the Colorado department of revenue of the names, addresses, and transaction amounts for Colorado sales that no sales tax was charged on.
Essentially, Colorado had figured out a clever way to exploit a loophole in Quill. Since this was a “reporting requirement,” not a “taxing requirement,” Quill’s definition of nexus didn’t apply. (Note that the law only applies to online sellers who make more than $100,000 of sales in the state.)
Predictably, online sellers challenged the law in court, but Colorado won in lower courts and the Supreme Court declined to look at the case, effectively allowing the law to stand. As a result, other states are now following Colorado’s example. In fact, our firm’s home state of Washington passed its own version of such a law just last month.
The big takeaway? The state sales tax landscape is changing rapidly for online retailers. Business owners and tax advisers alike need to be diligent at staying up to date on this stuff.
Sales Tax Liability
It’s important to clarify that if you have sales tax nexus in a state, that doesn’t automatically mean that you have to charge sales tax on all of your sales to customers in that state. It just means that the state you have nexus in has the right to make you do that.
This means that once you have nexus in a state, you need start some serious research on whether or not the goods you sell in that state are subject to sales tax. (Small Amazon FBA sellers often outsource this type of work to tax professionals who are used to wading through complex tax laws.)
You’ll also need to look up whether or not the state uses “origin-based” or “destination-based” sales tax. An example of what destination-based sales tax looks like is in Washington State. If a business has sales tax nexus in Washington State, and the goods it sells are subject to sales tax, then every time that business sells and delivers goods to a customer in Washington, the business needs to look up what sales tax jurisdiction the delivery address is in and apply that rate. There are several hundred sales tax jurisdictions in Washington State alone, and many other states have similar rules.
The Only Conclusion
If you’ve got a successful Amazon FBA business, you’ve got an Amazon FBA sales tax issue to deal with. Sorry. But that’s the reality.
As a practical matter, because you’re in the Fulfillment by Amazon (FBA) system, you have nexus in every state in which your firm stores inventory in an Amazon warehouse or shipping facility.
By the way, to leave you with two pieces of good news here: First, complying with the requirement to calculate, charge and report Amazon FBA sales tax isn’t necessarily bone-crushing. You can get quite a bit of help from Amazon. And you can also often use third-party sales tax systems to automate the process of looking up sales tax jurisdictions and rates by address and then filing the subsequent state sales tax returns. Many of these programs are built with Amazon in mind, and can import FBA warehouse lists and turn gibberish warehouse names into clear explanations of where you probably have nexus.
And second, many states are soon going to be participating in a brief amnesty program for Amazon FBA sellers, among others. The program is scheduled to last from August 17th, 2017 to October 17th, 2017. If reading this article gave you a sick feeling in your stomach, participating in the program is probably something you want to talk to a tax advisor about. More information on the voluntary disclosure program is available here.