Maybe They Will… Someday. But Not Today, or Tomorrow, or Yesterday.
South Carolina has announced that they will pursue Amazon directly to force Amazon to collect sales taxes on behalf of Amazon sellers on sales to South Carolina customers. If all states adopted this policy and Amazon simply agreed with it today, it sure would make things easier for Amazon sellers. At least in theory that sounds pretty good. However, there are at least 2 major realities that FBA sellers must face here. First, so far only one or two states have indicated that they may take this approach. Second, and not surprisingly, Amazon has stated that the assessment is without merit and that they will defend themselves vigorously in this matter.
Should Amazon be required by the states to collect sales tax for their FBA sellers? That is an interesting question for theorists and advisors to debate. Nero fiddled while Rome burned. Theorists and pundits can spout their arguments and their theories, but what happens while FBA sellers are getting burned by state tax auditors?
Here’s what you need to know if you sell online through Amazon and utilize FBA:
- I feel your pain. I have been an Amazon seller for years and the thought of having to collect sales taxes in all of these different states is PAINFUL. We do understand the frustration. After all, why wont states just let you start sending them money? Why do they make it so difficult to send them money? Why do they make you pay taxes from the past? Or, better yet, why don’t they just have Amazon collect it for you? All of these questions and more have run through my head too. Maybe I should just wait until states agree to force Amazon to collect taxes for me? It’s tempting, I know. But I have to weigh that thought against the thought of paying a sales tax assessment in just one of these states, let alone 5 or 25. That’s not to mention the cost of hiring an attorney to fight the one or 25 states that audit me. So, I take a pragmatic and conservative approach to this situation.
- The sales tax auditors don’t care about the theories — they care about getting money from taxpayers. They really like getting money from out-of- state sellers, especially if it’s easy. Going after online sellers is easy.
- States do not act together in a block. Even if it could be successfully argued in one state’s courts that Amazon should be forced to collect the sales tax in that one state, there is nothing that requires another state to change the approach they use in their state. Unless Congress were to pass some kind of specific sales tax law forcing Amazon to collect the taxes, or the Supreme Court were to rule on this issue specifically, this is a battle that would have to be won, state-by- state. You might win in some, but lose in others. In the states where you win, is the decision applied retroactively? What do you do in the states where you lose? This seems like an approach where the only guaranteed winners are the attorneys.
- Nothing happens quickly when it comes to state governments and taxation. The same can be said for Congress passing a law like this or the Supreme Court taking a case like this. Again, the theory that Amazon should collect the taxes on behalf of FBA Sellers is nothing new, and it has merit, to be sure. We have always thought that states could take this approach. But unfortunately, that’s not how things are today. Maybe in the next 3 to 5 years, some states will adopt this approach and Amazon will stop fighting it and maybe sales taxes will be easier in some states. Maybe someday, but probably not. I hate to be the bearer of bad news on this, but I’d hate for you to be audited and get even worse news from an auditor.
- States have very little incentive to negotiate with online sellers. They really don’t care about individual business owners who have no voting power in their state. Sorry, but that’s how they are. They have the law of the land in their corner. The law of the land is that inventory and independent agents acting in your behalf create nexus. That’s really all they care about. If they find you, then they will audit you. I know that I get 1-3 contacts a day from people who have been found by either WA, CA, PA and now AZ. That’s what’s really happening today. They go back 7 years and assess you for the tax your customers should have paid, plus penalty and interest. The theory that Amazon should have collected this tax means nothing to them.
- The new amnesty program is NOT everything FBA sellers may have been hoping for, but it is actually better than we expected. I think it is a great tool in at least the 8 FBA states where no back tax is owed and in some instances perhaps an additional two FBA states that are requiring back taxes. (For the general FBA seller I would ignore the rest of the states participating in the MTC amnesty as they are either not FBA states or there is a better option available.) I never thought the program would come together and I certainly didn’t expect states like TX and FL offering total amnesty. However I am glad this program is available for those sellers that qualify.
Rather than collecting tax for you, we believe it more likely that Amazon will begin forcing sellers to prove they are registered to collect tax in either certain states or all states. This is the policy Amazon adopted when the United Kingdom passed laws stating that if the marketplace sellers do not collect taxes then the marketplace is responsible for collecting the taxes. So rather than begin collecting taxes on behalf of FBA sellers in the UK, Amazon sent a letter to all of it’s third- party sellers saying if they did not submit proof that they were registered to collect the UK value added tax (VAT) by October 27th 2017, then those sellers would be prohibited shipping inventory to the EU markets.
The states of MN and WA have passed recent legislation concerning marketplaces. Contrary to what is being said about these statutes, sellers are not relieved of their responsibility to collect and remit tax. MN actually says that the marketplace is responsible for collecting the tax, unless the retailer is registered, and that the marketplace can require the retailer to be registered as a condition of doing business. Rather than collecting the tax in MN we believe Amazon will require registration of their sellers as they have done in the UK.
In WA we see a different twist that allows Amazon not to collect the tax for FBA sellers. Amazon does not have to collect the tax for sellers who have a physical presence in WA. Since WA considers having inventory in an Amazon warehouse to be nexus creating, most FBA sellers will have a physical presence in WA and will therefore be required to collect the tax in WA.
Although we can’t predict the future, we expect to see more states follow the MN & WA model rather than taking the approach that SC has. It is the path of least resistance for the states and states are more likely to get the revenue they believe they are losing without having protracted legal battles.
As a firm, we have focused exclusively on state taxes, primarily sales tax since our founding 25 years ago. During that time, we have helped thousands of companies from all around the world with their US sales taxes. We learned long ago that the time to be aggressive is when you are being audited. The time to be conservative is when you are doing tax planning. The risk of taking a position contrary to the state’s position is much too expensive as many FBA sellers are currently finding out to their dismay. The amnesty is a tool for planning how to move forward.
We take a pragmatic view and try to limit our client’s exposure by using the tools at hand such as the amnesty. Like it or not states are finding sellers in ever growing numbers. Trying to change the system may be laudable, but it can be a very long and expensive process with only the attorneys, and not you, a guaranteed winner.
Theories and opinions will not protect you from these states, but the amnesty program, if used correctly can.