Tax authorities in California are pursuing "up to eight years" of back taxes from merchants using Amazon Fulfillment services, claiming that constitutes physical presence.
In June 2018, the Supreme Court upended e-commerce with a 5-4 ruling in South Dakota v. Wayfair, Inc., allowing states to collect sales tax for sales on the web in which the merchant had no physical presence in that state. The problem with the ruling, however, is that it opened the floodgates and provided no practical guidance for compliance, with Chief Justice John Roberts stating in his dissent that the ruling "breezily disregards the costs that its decision will impose on retailers," adding that "correctly calculating and remitting sales taxes on all e-commerce sales will likely prove baffling for many retailers."
Larger retailers like Amazon are practically unaffected by the change. Amazon began voluntarily collecting sales taxes in states that levy them in 2012 for items sold by Amazon, though merchants selling on Amazon and other platforms bear the burden of complying with the hodgepodge of tax laws across the US.
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This situation is further complicated by the California Tax and Fee Administration (CDTFA), which is pursuing up to eight years of unpaid back taxes from users of Fulfillment by Amazon (FBA) services when selling items through Amazon Marketplace, claiming that Amazon's fulfillment centers constitute physical nexus in California. This interpretation of nexus—which is contested—makes merchants liable for sales tax in California for past sales, not just sales tax for items sold after the Wayfair decision.
The CDTFA has issued demand letters to Amazon to force disclosure of business information, according to correspondence provided to TechRepublic by the Online Merchants Guild, a trade association advocating for merchants including those utilizing FBA services. Likewise, the CDTFA is demanding that sellers obtain permits to sell in California, informing sellers that failing to "voluntarily comply" with registration "can be prosecuted" for a felony, punishable by up to three years in prison, and/or fines.
How is California justifying attempts to collect these taxes?
Demand letters issued by CDTFA make the claim to that "Your nexus in California may have been established because you use Fulfillment by Amazon services for sales you make over the internet and some of your inventory is stored in fulfillment center warehouses in California for delivery to consumers in this state."
The letter cites Revenue and Taxation Code 6203, subdivision (c)(1), which states:
Any retailer maintaining, occupying, or using, permanently or temporarily, directly or indirectly, or through a subsidiary, or agent, by whatever name called, an office, place of distribution, sales or sample room or place, warehouse or storage place, or other place of business.
The contention is the definition of retailer, defined in the Business Taxes Law Guide, Title 18, section 1569:
A person who has possession of property owned by another, and also the power to cause title to that property to be transferred to a third person without any further action on the part of its owner, and who exercises such power, is a retailer when the party to whom title is transferred is a consumer. Tax applies to his gross receipts from such a sale.
This passage is cited by California State Treasurer Fiona Ma, in a letter to Governor Gavin Newsom, demanding that collections against out-of-state, third-party sellers using FBA stop, claiming that "CDTFA is ignoring the plain reading of California law," and noting that the sellers were not informed in advance of where their inventory would be placed, and "the shifting of goods to various warehouses was solely at the online retail platform's discretion."
Further, platform providers such as Amazon "typically do not allow these third-party sellers to retain customer information, engage in direct marketing, resolving customer service disputes or dictate return policies... [and] also handle the storage, packaging, payment processing, logistics, and delivery of the products," Ma wrote.
Ma's letter is peppered with arguments against the CDTFA's interpretation of law, including, critically, that "the Supreme court as addressed the issue of consigned inventory being placed in a state by another party... does not establish nexus under the Due Process clause," adding that "when a consignee sells a good that has been consigned to it for sale, the consignee is obligated to collect the sales tax, not the consignor."
Why is Amazon not collecting sales tax goods sold via FBA?
Ma is not the only person looking to compel Amazon to collect sales tax for goods sold through FBA. In 2012, a representative of the California State Board of Equalization—which was responsible for collecting sales tax at the time—told CNET that "since Amazon is handling the merchandise and all aspects of the sale, the Board of Equalization would consider them the retailer, and Amazon would have to collect tax on the transaction," though walked back those statements after CNET contacted Amazon for a response.
In a July 2018 interview with Capital & Main, Ma said "the governor's office has been trying to woo Amazon into putting a headquarters here. I've been pushing and they haven't wanted to do anything up front." Los Angeles was the sole city in California on the published shortlist, with Amazon originally divvying up the HQ2 plans between Northern Virginia and New York City, though abandoned plans in the latter following political backlash.
There is no technical encumbrance for Amazon to do this, as the company already knows the taxation levels across the US, and Amazon and other sales platforms already collect sales tax in Washington, Pennsylvania, and Minnesota for third-party sales.
The cost of compliance for your organization
Independent of California's pursuit of back taxes, the Wayfair ruling forces small businesses to spend thousands of dollars to ensure compliance with tax law.
Zachary Williams, owner of a company that uses FBA for sales on Amazon, told TechRepublic the company has spent over $3,000 to date on "fees for tax registration and application programming in order to assist in our compliance," excluding advice from a tax attorney who has yet to send a bill. In the first five weeks of work to attain compliance, the company has registered in 19 states, and is preparing for registration in 10 more. In total, Williams expects to "spend approximately $2,500-$3,500 per year for filing obligations in the states we are, or plan to, register in."
Compliance is not limited to the state level, however. As of October 2017, there are at least 10,800 sales tax jurisdictions in the US.
International sellers flouting tax laws
Williams points out that foreign companies using FBA "get a distinct advantage in states where we are required to collect and remit sales tax," as enforcement of and compliance with these tax laws outside the US is unlikely.
Ma claimed in her letter to Governor Newsom that 38% of FBA third-party sellers are located in China, which she claims is evidence that "CDTFA's approach is inefficient and ineffective."
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Paul Rafelson, executive director of the Online Merchants Guild, went a step further, and told TechRepublic that that these international sellers "don't care."
"There's probably a massive fraud that's going on, where they're probably taking the tax and pocketing it, because it's so easy to get away with it," Rafelson said. "For the first time, Amazon has made it super easy to commit sales tax fraud from a foreign location. I fully expected this is happening, because Amazon's not even required to tell states what tax is collected by what sellers. I'm sure it's not just avoidance, it's complete fraud."
The best case scenario to ease the burden on small business
In California, the easiest solution for small business owners and the state of California would be for Amazon to collect sales tax on behalf of sellers—the cost of compliance and enforcement would be dramatically reduced, though this solution does nothing to answer the question of the back taxes that the state of California asserts it is owed.
The dispute between the treasurer and governor in California is "quite extraordinary," according to Stephen Yarbrough, vice president of tax at Kruze Consulting.
"Rarely do you see an elected official argue so passionately against the imposition of a tax that technically does not impact their constituency," Yarbrough told TechRepublic.
Yarbrough's best case scenario is a national standard for sales tax, though current political circumstances may not make that viable in the near future. "In the interim, I think that people just need to sign up with automated solutions like either like Avalara or TaxJar, because realistically it's going to be a huge administrative burden otherwise," he said.
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