In the exciting process of setting up your Amazon business, tax responsibility can often get pushed aside. Some sellers may be intimidated by a seemingly complicated system of laws, and others may simply be unaware of the tax responsibilities they have to different states since online retailer taxation operates differently than brick-and-mortar.
However, if you are not in compliance with tax laws, your entire business is at risk. The consequences for failing to file and collect taxes properly can add up to massive costs, including foreclosure of your business— and it can all be avoided if you make the effort to be informed.
Knowing how to deal with the nexus is crucial for any Amazon seller. The nexus decides if there are sufficient connections between your business and the state where you are shipping your merchandise for that state to impose its taxes on the sale. We’ll help you understand the nexus and come to grips with some of the core tax requirements surrounding e-commerce.
Understanding the “physical presence” requirement
Most states have varying tax thresholds and requirements, and the only way to keep up is to do your research. One of the fundamental court rulings to have under your belt is Quill v. North Dakota (1992), which declared that states cannot require an out-of-state seller to collect the state’s use tax when the seller has no physical presence in the taxing state. This case only applies in the context of use tax, not income or gross receipts tax, which we will discuss later.
Implications of the “Physical Presence” Requirement
This has become known as the “physical presence” requirement for collecting use tax, and has long worked to online retailers’ benefit. However, if you are carrying out any activities in that state to advance your business, such as having a representative working in that state, that qualifies as a physical presence and opens up the need to collect the state’s use tax.
Factors Constituting “Physical Presence” or Nexus
Other situations that qualify as “physical presence” and create nexus include:
- Owning or leasing property, including inventory
- Licensed intellectual property or software
- Transient property such as your company’s delivery trucks
Amazon and Use Tax Collection
Amazon has distribution centers and warehouses in several states and collects use tax on its remote sales to all states. However, Amazon does not collect use tax on behalf of Amazon FBA sellers unless directed to do so by the seller. So, it is your responsibility as a seller to understand Nexus and structure your tax activities accordingly.
State-by-State Variations and Challenges to Quill Decision
Several states have attempted to challenge the Quill decision. Colorado proposed that remote sellers exceeding $100,000/year in sales to Colorado must collect use tax, inform the customer, and report to the state annual total sales to each customer. Louisiana adopted a similar policy for remote sellers exceeding $50,000/year. Vermont’s threshold is only $500. Alabama’s is $250,000. Tennessee’s is $500,000 and requires these sellers to register as dealers in the state.
Marketplace Provider Responsibilities
Other states have bills requiring the marketplace provider to collect use tax on behalf of its sellers. Minnesota, Mississippi, New Mexico, New York, and Rhode Island currently practice this, requiring Amazon to facilitate tax collection.
What else should I be aware of?
The Streamlined Sales and Use Tax Agreement has been entered by some states, allowing an out-of-state seller to utilize an in-state drop shipper without being subjected to nexus. Other states that did not enter the agreement still deem these sellers subject to nexus.
Although the Supreme Court has not articulated a “physical presence” requirement for income tax, there is one federal law in place that protects some online retailers. Federal Public Law 86-272 declares that states cannot require an out-of-state business whose only in-state activity is to carry out a solicitation to collect that state’s tax. That means a seller who collects orders, stores inventory, and ships from outside the state is protected. Those who use a marketplace provider in a certain state, however, are considered to have crossed the threshold of solicitation and are not eligible for Federal Public Law 86-272’s protection— bad news for Amazon sellers. This means you cannot rely on the federal protection that this law appears to present, and must still be subject to taxation on a state-by-state basis.
If you are selling to Ohio, Washington, or Nevada, know that all three have a gross receipts tax, which is imposed upon a retailer’s total sales into a state for the year. This is known as the “factor presence” nexus, and it applies even when a retailer has no physical presence in a state. The idea is that a business’s economic presence in a state is enough to trigger tax liability.
What are the risks of non-compliance?
There is no statute of limitations on past due tax liability for non-filers: businesses who never filed a tax return with a state in which they are conducting sales. However, as soon as you register with a state and begin filing tax returns, you trigger the start of a statute of limitations that ranges between 3-5 years, depending on the state. So, the clear advantage of filing on time is that it vastly limits your liability exposure.
Accumulation of Penalties and Interest
You will also accumulate penalties and interest charges that only increase the longer you evade the taxes you are liable to.
Taxpayer Information Exchange Agreements
Understand that states have taxpayer information exchange agreements, meaning they are free to confidentially disclose tax information— including non-filers— to each other. Once a non-filer is located, tax collection activities may include:
Nexus Questionnaire
- A nexus questionnaire – This will go over the qualifications that trigger nexus, asking about any employees or inventory located in the state, any property owned, rented, or leased in the state, and so on.
Estimated Assessment
- An estimated assessment – The state will deliver an estimate of the income tax and use tax that you owe, based on your extent of physical and economic presence in the state. There is an administrative appeal process that goes along with the notice, but if you allow the deadline to expire without appealing, it becomes a final assessment or judgment. The state to which tax is owed can have an attorney in your state register and enforce this judgment.
Tax Consequences
- Tax liens, bank account levies, asset seizure, foreclosure, tax sale – If you allow a final judgment to be registered, these are all of the consequences you may be facing.
Penalties and Interest Rates
The amount charged in penalties and interest rates for late filing or failure to file varies between states, but the rates always increase dramatically— up to 100%— when the extent of evasion constitutes fraud.
My business is not in compliance. What can I do?
If you find yourself out of compliance and want to minimize the damage, you can look into voluntary disclosure relief.
Voluntary disclosure involves coming forward to a state’s tax department and asking for a reduction in back tax payments. Some states will offer you a “look-back period” and require back payments for a certain number of previous years: expect a minimum of three years and a maximum of five. After that, providing you file, collect, and pay taxes going forward, you are relieved from tax liability for all the years before your look-back period.
If you are interested in voluntary disclosure, you can apply anonymously, at no cost, to the Multistate Tax Commission. There are 38 participating states, and you can select which states you would like to apply to depending on where you have conducted business. You can learn more about the process and get started by applying on the MTC’s online portal.
Source: Cram, Richard. “Income and Sales Tax: Compliance Risks for Amazon FBA Sellers.” Prosper Show, 12 April 2017, Las Vegas Convention Center, Las Vegas, Nevada. Conference Presentation.
