The Amazon FBA program is a program that helps many online sellers leverage their resources and increase their sales. FBA stands for "Fulfillment by Amazon". The FBA program allows you to take advantage of Amazon’s distribution and logistics network. While this is a great opportunity for small and large sellers alike, it does complicate your tax obligations.
The FBA program can create nexus for sellers in a number of ways. Nexus is the link or connection that must be present before a state can require you to collect their sales tax or pay their income tax. When it comes to sales tax there must be some sort of physical component. However, what you consider to be a physical component and what the states and U.S. Supreme Court consider to be physical components are often very different. By the way income tax nexus does not generally require a physical presence.
Many sellers do not realize that the Amazon program creates nexus for them and others simply do not believe that state tax statutes, rules and regulations apply to them. Many sellers misquote Quill (Quill Corp. v. North Dakota, 504 US 298 (1992)) a 1992 US Supreme Court case and ignore all other U.S. Supreme court cases. However, whether you realized the program created nexus for you or whether you don’t believe you have nexus is immaterial.The states believe you have nexus and they are looking for you.
The reason why this is a problem is because when a seller has nexus they are required to register to collect and remit taxes. If they fail to do so, the state will pursue the seller for the tax that should have been collected. The states of CA, PA, WA are very aggressive right now and I am being contacted by 1-2 sellers a day who have been contacted. There are other states but they are not currently being as aggressive although I expect this to change.
When a state finds you they are going to ask for up to the last 10 years worth of back taxes, penalty and interest. That it why it is imperative you take action to become compliant before they find you. All of this assumes your sales are material. If they are not, then you may want to wait until your sales become material.
The specific nexus creating activities that impact FBA sellers are:
- Your location(s). Where you live or operate your business from. This applies to your employees also.
- The location of your inventory. Not where you ship it, but where Amazon moves it.
- States where Amazon makes deliveries in their own trucks or where the Amazon Flex program is active, which is currently 30 cities.
We believe there are 25 states where the FBA program can create nexus for you. These states are: AZ, CA, CO, CT, FL, GA, IL, IN, KS, KY, MA, MD, MI, MN, NJ, NV, NC, OH, PA, SC, TN, TX, VA, WA & WI. In the next couple of months UT will be added to this list.
But here is some great news! The Multistate Tax Commission has contacted a number of states and have put together a tax amnesty program. This amnesty will allow you to register going forward and not have to worry about any back taxes. Unfortunately, there is some bad news...While there are currently 15 states who have announced they are participating so far, only six of them are FBA states: CO, CT, KS, KY, NJ & TX. (BTW - If this is an important issue for you, you should also read my subsequent post "Additional Amazon FBA Tax Amnesty Information").
This amnesty is a tremendous opportunity especially in states like Texas, which are generally in a sellers' top three states. We will be holding workshops on whether this amnesty makes sense, for you, which states you should choose and what you should do about the states that are not participating.
If you have an interest in participating in the workshop or in having a one-on-one consultation you may reach out to Regan Vaughn at firstname.lastname@example.org.
Other recent “Sales Tax Basics” posts by Michael J. Fleming:
- Are Amazon FBA Sellers Responsible for Collecting Their Own Tax?
- Additional Amazon FBA Tax Amnesty Information
- Amazon FBA Tax: New Amnesty Can Protect Delinquent Sellers
- Sales Tax Filing Basics
- Taxability: Sales Tax HotSpot #2