After many requests and questions about sales tax, I am going to address the issue of sales tax for FBA sellers in today’s post. I will begin this by saying that I am NOT a CPA, nor a tax attorney, so this CANNOT be construed as tax or legal advice. It is my interpretation of the current issues that are relevant to determining which states FBA sellers need to pay sales tax in at the time of this writing.
The issue of sales tax all begins with something called nexus. There are slightly varying word usages in the definition of nexus as it relates to sales tax, but the key word that continues to come up is having a “substantial” business presence in a state requiring the business to collect and remit sales tax in that state. Note that sometimes the term “significant” is used interchangeably with “substantial” when discussing nexus and sales tax. Instances that can result in nexus being created in a state include: having a physical presence, hiring an employee, and having inventory stored in a state, among many others. When nexus is created, sales tax must be collected.
The idea of a substantial business presence is not clearly defined, and is open to some interpretation. However, the way that you interpret the aforementioned sentence will likely provide you an answer as to which states you are required to pay sales tax in. There is little in the way of legal precedent related to FBA sellers and sales tax, the “legal standard” to date regarding nexus is Quill v. North Dakota. You can find out more about the case HERE. Another potentially relevant piece of information is the interstate commerce clause of the constitution. I would recommend you read up more on that if you are interested, but the argument is against states passing legislation that “discriminates against or excessively burdens interstate commerce.” More info, and source of the previous quote, can be found HERE.
We’ll begin the analysis with something that is rarely debated. Sellers have significant nexus in their home state, and as such are required to collect and remit sales tax in their home state. What this means is that if you are located in Iowa, and you sell an item to a customer located in Iowa, you are required to collect sales tax from the buyer and remit it to the state of Iowa. Now, assuming that you have nexus in no other state, if you sell an item to a customer in Kentucky (or any of the other 48 states in the US) you are not obligated to collect sales tax. In this instance, the buyer is generally required to pay “use tax” to the state in which they reside. Use tax is generally owed when a buyer buys an item out of state or online, brings it back to his home state to use, and did not pay sales tax on the purchase in the other state/online, but if the buyer was to purchase it in their home state then sales tax would have been due. This paragraph contains information that can generally be agreed upon, and is not subject to much debate.
Now, here’s where it starts to get a little tricky, do FBA sellers have nexus in any or all of the states in which there are amazon warehouses? Depending on whom you ask you are bound to get vastly different answers. I have even received different answers from various CPAs that I have discussed this issue with. The answers from the CPAs ranged from, yes in all states that amazon has warehouses in, to no not in any of the states, to the issue is quite complicated and we aren’t currently getting involved.
As it relates to FBA sales, there are 3 stances that could be argued and I will take a look at each one and list some arguments on either side of each stance. Note that some of the arguments for one stance will support another stance, and vice versa, so keep that in mind while reading through this. To avoid redundancy and in an effort to keep the length of this post length tolerable, I have limited listing the same argument multiple times.
The first is that having inventory stored in amazon warehouses does not create nexus at all, and as a result you are not obligated to pay sales tax in any state other than the one in which you reside.
- Having a few items, or even a few hundred items, sitting in a warehouse in another state is not enough to create a “significant” business presence. This could possibly be compared to renting a small storage unit in another state, all depending on the number of items you have stored at amazon warehouses.
- There is no legal precedent indicating that FBA sellers are required to collect sales tax in other states.
- When using FBA you cede control of the location of your inventory directly to amazon, as amazon chooses which warehouses your products are sent to.
- Buyer’s purchasing items are required to pay use tax on the items purchased, and as a result the state will be paid their share of the sales tax regardless of whether it is collected and remitted by the seller as sales tax, or paid directly to the state by the buyer as use tax.
- This is the most aggressive stance in that it creates the most exposure for having a future liability in the form of a state sending you a bill for unpaid sales taxes. In this instance a state would be arguing that you did have nexus in the state the entire time.
- Having inventory stored in a state, and shipping to a warehouse in a state on a regular basis can be considered nexus, and as such sales tax should have been paid.
- Having nexus requires the seller to collect sales tax, and as a result the use tax argument is not valid.
The second is that you decide you have significant nexus in every state in which you ship directly to when sending your products to amazon. Most sellers have 2 to 8 warehouses that they ship to on a regular basis, so this would mean paying sales tax in all of the states in which these warehouses are located (assuming the states have a sales tax).
- Sending inventory to specific warehouses on a regular basis and having items stored there, seems to constitute a significant business presence, and therefore nexus.
- There is little risk of any future liability.
- Shipping items to a warehouse and having them stored there does not constitute nexus as you don’t have control of how long they stay in each location.
- Compliance costs are high in terms of time and money.
The third option is that you decide that as you are a part of amazon’s FBA program, you have created nexus in every state in which there is an amazon warehouse. Amazon currently has warehouses in 14 states, but not all of these states currently require sales tax.
- Being a part of the amazon FBA program and sending inventory can result in having your inventory moved around to any of amazon’s warehouses and as such you have nexus in all of the states where amazon has warehouses.
- If sales taxes are paid properly, there virtually no risk of any future liability.
- If a seller has no inventory stored in a state, and never ships to state, it is quite unlikely that they could have created nexus. There could be issues related to improperly collecting sales tax, although you would be hard pressed to find a state that would dispute this. Buyers are unlikely to dispute this as well, as sales tax is generally a small portion of any purchase.
- Compliance costs are very high in terms of time and money.
There is a very important issue to note regarding the second and third options just mentioned, if you have nexus in these states for sales tax, do you also have nexus for income tax? This could require you to file and/or pay income tax on a personal or business level in these states as well as sales tax. If you do have nexus for both purposes, then it could require you to file and possibly pay income taxes in the states in which you are paying sales tax.
Another important issue to note in regards to nexus is that if you create nexus in one aspect of your business that it affects all aspects of your business. For example, if you create nexus selling FBA, and also sell on eBay, then you have nexus and the obligation to collect sales tax in the states you have nexus for the eBay business as well.
As you can see there are pros and cons to all of these arguments. It is important to note for all of these options that there is no specific legal precedent to provide guidance as to which is the best option. A lot of it will come down to what you feel is right, and what is recommended by your CPA. If you don’t have a CPA, or need to discuss the issue of FBA sales tax with your CPA, I would recommend discussing the aforementioned alternatives, and these questions:
- What are the income tax implications?
- In dollars, what is my potential liability for each option?
- If I haven’t been paying sales taxes, do I pay retroactively?
- What do you recommend I do in regards to sales tax?
- What are the implications for any other income streams?
In regards to figuring out where your FBA inventory is currently located you can find out some of this information by going to your amazon seller account home page, hover over reports, click fulfillment, and look in the inventory section. There are several reports here that show locations by the 4 character warehouse codes, and I would recommend taking a look through them to get an idea of where your items are stored when making your decision. There are also sales reports that can be viewed that show the location of your buyers.
Another piece of information that I believe is relevant is which states have amazon warehouses and the possibility of where nexus could be created. There are amazon fulfillment centers currently in 14 states. Two of these states, Delaware, and New Hampshire, do not have state sales tax, so regardless of if nexus is created or not in these 2 states, there is no obligation to collect and remit sales tax. As of the 2013 census the total population of the United States was about 316.13 million people. The total number of people living in the states with amazon fulfillment centers, and thus the states that you could have nexus in, is about 124.36 million people. If you live in one of the states that has an amazon fulfillment center, or a state that has no sales tax, then you could potentially have nexus with 39.3% of the US population that could purchase from you on amazon. If you live in a state that does not have an amazon fulfillment center, then you would have to add the population of your state to the percentage that you could potentially have nexus with. Regardless of which state you live in, you will potentially have nexus with less than half of the US population. Source for the US census data by state is HERE, and states with amazon warehouses is HERE. My point with this, is that if your amazon customers are representative of the US population, regardless of which states you decide to collect sales tax in, it will be on less than half of all of your sales. Note that these stats are subject to change as amazon builds more fulfillment centers.
If you decide you have the obligation to collect and remit sales tax, TaxJar is one service that I am aware of that can help with the collection of sales tax. I tried their free trial in the past, and they broke out the sales by state, and as a result the sales tax that would be owed in each state in an easy to see manner. I am not currently using their service, as I have found reports that allow me to gather the information I need related to sales tax. If you use TaxJar, or know of any other services that can help, please share in the comments. Along these lines, it’s worth noting that amazon will collect sales tax on your behalf by entering the tax settings when you list items for sale. This service comes with a fee of 2.9% of the transaction amount, but there aren’t really any alternatives. You are still responsible for filing returns and remitting payments to each state you decide you have nexus in.
I know this is a lot of information, but even so, this is not meant to be all encompassing for making a decision regarding sales tax. It should give you some things to think about when making your decision, and identify points to research further.
Again, I am NOT a CPA or a tax professional, and none of the above is to be construed as tax or legal advice. It is simply my understanding of issues relevant to determining where to pay sales tax when selling via FBA, and again is not meant to be all encompassing.
What are your thoughts on sales tax? Are there other important decision factors? Perhaps another option that would make sense that I don’t have listed? I would love to hear your thoughts below in the comments!
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