Third party sellers on Amazon are responsible for collecting and remitting sales tax when they sell to buyers in any state where they have a business presence. A business presence (or nexus) in a state includes warehousing products, which is a service Amazon provides for its sellers.
When Amazon sells directly to customers in such a state, sales tax is charged. But, when a third-party seller is responsible for the sale, Amazon leaves it up to the seller to follow the various state laws and collect tax when it’s due.
Many states, including Massachusetts, are aware that online sellers often don’t charge sales tax and don’t stick to the letter of the law when it comes to storing their products in Amazon fulfillment centers. The states have become more aggressive about going after those and other online sellers as a result. And, they now seem more intent than ever on capturing the tax dollars they feel they’re owed.
As online retail sales figures continue to grow, states increasely want in on the action.
This move by Massachusetts to obtain third-part seller data helps the state identify uncollected sales taxes and puts pressure on online businesses to stay in compliance. Although Amazon initially refused to turn over the data back in September of last year, in late January of this year they acquiesced. The company has fulfillment centers all over the US, including two in Massachusetts.
How this could affect you
It is anticipated that along with Massachusetts’ success in acquiring Amazon data and more aggressively pursuing sales tax collection from online sellers will come similar moves from other states, especially the other 27 states currently with Amazon fulfillment.
If you sell online to customers out of state, including those who reside in Massachusetts, it’s now even more imperative that you know exactly where your business has an established tax presence and making sure you’re complying with tax laws there to avoid fines or unexpected audits. Also remember that it’s illegal to collect sales tax for a state where you haven’t registered a tax account.
The information obtained in this case by Massachusetts includes Federal tax ID numbers as well as the estimated value of the inventory that each seller has stored in the state. In most states, storing inventory alone constitutes a physical presence in the state and is enough to establish nexus, or a tax presence. It’s yet to be seen which states will follow Massachusetts’ lead and request the same information. As mentioned, 27 other states also house Amazon fulfillment centers or warehouses, though three of those states don’t have a sales tax.
It’s important to note that once nexus is established in a state, sales tax has little to do with where a sale is actually fulfilled from. All sales to customers in that state would be subject to sales tax regardless of where the shipment originates.
Amazon currently has warehouses in 28 states. Storing inventory in a warehouse is sufficient to establish nexus.
Other actions recently taken by states
Massachusetts is not the only state to make a move on collecting taxes on Amazon and other online retail sales to its residents. Many states see those sales as a loss to in-state brick-and-mortar retail businesses that would have collected sales tax, and online retail has certainly taken a bite out of those businesses. Colorado has also taken action to collect tax for online sales, but they’re taking a different tack.
In Colorado’s case, the state now requires an online retailer to create and deliver Annual Purchase Summaries to residents of the state who have made online purchases from them as well as to the state’s department of revenue. This way the state will have a record of any unpaid use taxes.
Use tax is imposed on a buyer when they purchase an item to use in their home state but haven’t otherwise paid sales tax on the item. This is often the case with online purchases. The Annual Purchase Summaries, required to be sent out this year, essentially notify residents of the unpaid use taxes they owe.
If you make sales in other states, affiliate relationships and fulfillment centers are two common ways to establish nexus.
How this relates to the recent SCOTUS case
If it seems like it would be easier for states to require online retailers to collect use taxes due from purchasers on behalf of the state, it would. But a Supreme Court Ruling from 1992, Quill vs. South Dakota, makes that impossible. For now.
A new case, South Dakota vs. Wayfair Inc, has recently challenged that ruling. If the states have their way, and the previous decision is overturned, the requests for seller data and Annual Purchase Summaries will be unnecessary. If that happens, online retailers will likely be required to collect sales and use tax whether they have nexus in a particular state or not.
It seems most states are set on making up for budget shortfalls rather than making life easier for online retailers. With somewhere around 96,000 different tax jurisdictions in the US, if Quill vs. South Dakota is overturned, additional tax complications for retailers are likely. The Streamlined Sales and Use Tax Agreement is an effort by some states to simplify and standardize rates and reporting for a new online economy.
The Streamlined Sales and Use Tax Agreement makes life easier for business owners who sell in multiple states.
Staying in compliance
The US Government Accountability Office has estimated that less than 10 percent of remote sellers are in compliance with current tax rules, resulting in a $13-billion-dollar shortfall in sales taxes. With numbers like that, the present rules are highly likely to change, and it’s become more important than ever to know what taxes you owe to which states if you’re selling online.
Keep in mind that when it comes to taxes owed, ignorance of the rules doesn’t mean they don’t apply, and fees and fines for being out of compliance could be steep.
If you sell online to customers in other states, your first step is to know which states your business has a tax relationship with, called nexus. The next step is to register with those states so that you can legally collect sales tax on sales you make to their residents. Then charge sales tax at the correct rate, and file and pay the sales taxes you collect to those states on time.
With states looking to make up for billions of dollars in lost taxes, it's critical to know which states you owe.
What determines nexus
Each state has its own rules when it comes to what constitutes a legal presence, or nexus, for your business. A few common criteria include:
- A physical presence such as an office or warehouse.
- An employee who makes sales, a representative, or an independent contractor doing business there.
- Inventory stored in the state in a warehouse or distribution center.
- Land owned or leased in the state.
- Deliveries made to the state in business-owned vehicles.
More and more states are now adding online affiliate relationships to this list as well. So, if you make sales from an affiliate who is located in their state, that is likely to establish nexus now and requires that you register to collect taxes.
It’s best to check with the Department of Revenue for the states in which you make sales to be certain. And, more and more, a knowledgeable up-to-date tax advisor is becoming a necessity.
For online businesses making sales in other states, it's more important than ever to stay informed.
When tax laws change and amendments to laws are made dozens of times in a single year, staying on top of those changes can be a challenge. A service such as LumaTax can help you automate and simplify the entire process and provide the peace of mind that comes from knowing you’re in compliance.
The Tax Foundation’s Center For State Tax Policy is a great resource for staying informed, and its blog is another good source of news and information. With all the changes happening it’s important to get the best tax advice you can and not rely on guesswork. Massachusetts is not the first state to take action to collect lost revenues, and they most likely won’t be the last, so stay tuned.
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