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Is Hope on the Horizon for FBA Sellers in California?

CaliforniaTreasurerSealThe boxing gloves are on in California between the state's Treasurer, Fiona Ma, and the California Department of Tax and Fee Administration.  In a letter to the Governor, Ma accused the Administration of "unlawful, unconstitutional and impractical" actions against out-of-state sellers. 

Click here for the full letter. 

The letter comes on the heels of the CDTFA issuing thousands of notices requiring FBA sellers to become sales tax compliant. These notices give sellers approximately 30 days to register and opens the door for the CDTFA to demand payment for uncollected back taxes on sales made to California residents.

Receipt of the notorious “California Letter” is a nightmare for most remote sellers. They must begin collecting sales taxes and repaying thousands of dollars of back taxes. For many, payment of uncollected back taxes can lead to financial ruin.

Roadblocks for Fiona Ma’s Request
Has Fiona Ma’s letter come just in time to save these companies? Our sales tax experts at Cherry Bekaert have weighed in on the issue to help FBA sellers understand the complexity of the circumstances.

  • California tax is due on all sales. Granted, sales tax is typically paid by the purchaser. However, if not collected from the purchaser, the state will require remittance from the retailer. Many arguments debate who is the retailer -- Amazon or the FBA seller? Determining who is the “responsible party” may be murky when reading the California tax code, but in the fine print of Amazon FBA contracts (paragraph F-14, ), sales tax is explicitly spelled out as being the FBA seller’s responsibility.
  • Legislation is needed to make any tax law changes. Most states are adopting marketplace legislation requiring Amazon to collect sales tax on third party sellers, but legislation is not yet in effect in California. The legislation is likely to pass, but the sheer abundance of potential litigation will prevent it from ever being retroactive.
  • The state needs to treat all sellers uniformly. If forgiveness of back taxes is given now, what happens to the thousands of sellers who have been compliant and/or already paid back taxes in an effort to become compliant?
  • The issue is deeply rooted in politics. Presumably, most of the recipients of the “California Letter” are out-of-state companies. California desperately needs revenue. What is the political motivation to give up millions of tax dollars paid by out-of-state companies that benefits in-state citizens?

Next Steps by the CDTFA
For many FBA sellers, the best remediation for payment of these back taxes is through participation in California’s Managed Audit Program. While taxes are not forgiven by participating in a Managed Audit, penalties will be waived, as well as 50% of the interest. Based on conversations we have had with the CDTFA’s MAP group, the Administration is facing an extreme backlog of applications, and currently all new applications are on hold as they work quickly to streamline the process for FBA sellers. No indication has been given that the delay is anything but an attempt to better handle the influx resulting from the California Letters.

Didn’t Get the Letter?
If you are an Amazon FBA seller, and you are not collecting sales tax in California or any other states in which you have inventory in an Amazon warehouse, research your options now. States are getting increasing aggressive, and many will follow California’s lead.

Cherry Bekaert Can Help
While we don’t have a crystal ball to look to the future, Cherry Bekaert is working very closely with FBA sellers to ensure that they have the best representation to comply with all tax obligations and take advantage of all favorable outcomes that may result. We know this specialized FBA/eCommerce industry, having worked with hundreds of FBA sellers over the last several years. We have close working relationships with the CDTFA, numerous state tax attorneys, legislators, and other professionals in the industry. We offer our years of first-hand experience and network of contacts to keep our clients informed to make the best business decisions for their company.

To speak with one of our sales tax experts, click below:Get eCommerce Answers. You sell stuff. We do taxes. Let's Talk!

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Lauren Stinson, CMI
Written by Lauren Stinson, CMI
As a Principal with Cherry Bekaert, Lauren serves as the National Leader for the Sales & Use Tax practice within the Firm’s State & Local Tax group. Based in Cherry Bekaert’s Atlanta practice, Lauren is an expert on sales and use tax issues that directly impact manufacturers, technology businesses and eCommerce sellers on the state and national levels.

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