What's the latest in the Amazon FBA - Sales Tax World?
A perfect storm is brewing in sales tax and Amazon FBA is in the middle. Here's an update of recent state actions to keep you in the loop.
What's Changing for FBA Sellers?
States, desperate for revenue, are aggressively pursuing every angle to collect taxes that are owed. While Amazon has come forward to collect sales tax on all sales made by Amazon, FBA sellers are left in the dark, questioning their legal obligations.
The MTC Amnesty
The Multi State Tax Commission (MTC) negotiated a two month sales tax Voluntary Disclosure Agreement program with more than 20 states to allow sellers to become compliant moving forward without penalties from non-collection in the past. Most states are allowing FBA sellers to get on-board and start collecting and remitting tax going forward. For companies that have exposure for uncollected tax, this is a great program to explore.
Amazon has faced more than its fair share of backlash from states this year. In August, South Carolina sued the giant retailer, claiming that Amazon, as the marketplace, owes millions in back taxes that it should have been collecting on products sold by third party vendors (FBA sellers). South Carolina is claiming that Amazon should have collected $12.5 million in sales taxes and required the retailer to send out letters to their buyers in 2016 saying that the buyers owed use tax for items on which sales tax was not collected. Amazon insists that it will fight this battle, leaving FBA sellers unsure of their obligation. (TaxJar)
On September 25, 2017, the Commonwealth of Massachusetts filed legal action against Amazon to obtain their third-party vendor records, which would include contracts, fee arrangements, invoices, and emails (Boston Business Journal). At the time, Amazon responded to the legal action saying they had no intention of turning over their records. On the same day the suit was filed, a Massachusetts Superior Court judge ordered Amazon to turn over information regarding their third-party vendors within 20 days (Bloomberg BNA). Amazon has declined response in light of this ruling, so it is a waiting game to see what will happen.
This move should signal alarm bells for FBA sellers. The DOR's goal seems simple: go after the FBA seller for uncollected sales tax. Any unregistered FBA seller is at risk for owing thousands of uncollected sales tax. And if Massachusetts is successful, many states are sure to follow. Recently, we have been hearing about California and Washington getting very agressive contacting non-registered taxpayers.
What is happening in South Dakota is on a much larger scale for not just FBA sellers, but all eCommerce sellers. South Dakota won the "Kill Quill" race and is the first state to file a petition in South Dakota vs. Wayfair asking the U.S. Supreme Court to hear a challenge to its law requiring out-of-state retailers to collect sales tax. In Quill, the legal standard was set by SCOTUS which held that states cannot require retailers with no in-state physical presence to collect sales tax. Because today's retail landscape is dramatically different than 25 years ago, even Justice Anthony Kennedy wrote in opinion in March 2015 that the "legal system should find an appropriate case for this court to re-examine Quill.” So, is it time for Quill to be overturned?
Various Other Changes in the eCommerce Sales Tax Landscape
Beyond what is happening in South Carolina, Massachusetts, and South Dakota, states are agressively trying to lower the bar for tax collection. Whether it is economic nexus, electronic nexus, reporting reqirements, marketplace taxation legislation, or federal legislation such as the Marketplace Fairness Act, the message is clear. Something is going to change but only time will tell the direction of the change.
What does this mean for the Amazon FBA seller?
Now is the best time for most FBA sellers to get sales tax compliant. The states are not going to give up and go quietly into the night. Too much lost revenue is on the line and the states are becoming more aggressive to obtain this revenue. By getting compliant before the state DORs find you, you can avoid heftier fees, fines, and penalties. The MTC Amnesty program and other VDA programs are great options if you have not been contacted by the state. But you lose that choice if they come after you.
What steps should you take to become compliant?
With the Multi State Tax Commission (MTC) Online Marketplace Seller Voluntary Disclosure Initiative available until November 1, 2017, this could be one way to get current on your sales tax registrations. The MTC is offering this program to sellers who have not had any contact with the states (including registration, tax notices, or collecting) and want to become compliant. You can read more about the program here. This program is especially attractive in the states that are offering amnesty on past tax liability. Massachusetts is taking part in the initiative and they are limiting the lookback period to when a seller had nexus in their state. South Carolina is not taking part in the MTC initiative. So far, more than 200 applications have been received by the MTC from sellers looking for sales tax registration.
If you have not had nexus in a state for a long period of time, your best bet could be a traditional registration. In this case, you would register with the Department of Revenue using your nexus date and remit taxes on sales that have occurred since your nexus date. The states expect sales tax to be remitted on sales even if you have not collected the tax. Often, you can negotiate reduced or waived penalties and fees if you come to the state in good faith.
For those who have had nexus in a state for a while but have not registered for sales tax, two options are recommended: You can register using your nexus date and file back tax returns for those months or you can look at Voluntary Disclosure Agreements.
Looking into the future
This appears to only be the beginning of states taking action to force eCommerce sellers to collect and remit sales tax. The states are realizing that there is a potential for millions of dollars of revenue that is not being collected. It is uncertain if Amazon will comply with the court order to turn over the documents in Massachusetts or if other states will follow Massachusetts and South Carolina and begin to file lawsuits. The day may come when Amazon collects tax on behalf of its third-party vendors but until then, you don’t want to be found noncompliant by any state. There is no way to know what will happen next but it is important to think ahead before its too late.
Windward Tax can help
We offer sales tax consultations with our eCommerce/FBA sales tax advisor, who can help you make important decisions regarding these issues. Contact Windward Tax today to find out more information on state sales tax registration.