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Should Amazon Sellers Pay Sales Tax?

Cynthia Stine

Cynthia is the #1 authority in Amazon Reinstatement. Cynthia has been an Amazon seller since 2010.  She’s an Amazon expert, a sought-after spea.

Cynthia is the #1 authority in Amazon Reinstatement. Cynthia has been an Amazon seller since 2010.  She’s an Amazon expert, a sought-after spea.

Feb 28 14 minutes read

Should Amazon Sellers Pay Sales Tax?

With the recent moves by Massachusetts to identify and collect sales tax from Amazon sellers, the community is once again debating whether we should be registering and filing in states with nexus. I sat down with accountant and Sales and Local Tax (SALT) expert Chris Stout to get some guidance.  Chris has practiced this area of specialty for more than 20 years.  He works frequently with Amazon sellers and understands the issues, concerns and potential pitfalls we face. His company is Sales Tax Solutions*.

Q. Should I be worried by the fact that Amazon is giving seller data to Massachusetts?

If you are a large seller with significant inventory in the Massachusetts warehouses, then this news affects you more than sellers with limited inventory in the warehouses.  The dates Amazon lists in its notice are the dates from the opening of the warehouses to today.  This does not mean the state won’t be looking further back or looking at all sources of income.  Each case is different.  For example, if you also sell from your own website, have your own facility in Massachusetts or if you sell through other channels in Massachusetts besides Amazon, you must declare any eligible income from those sources as well.

If your business is in Massachusetts, you may wish to register with the state, if you haven’t already, for the sales tax certificate.

Whether you should be worried depends on how large a liability you have and your comfort with risk.  If your liability (tax owed) is under $5,000 per year, and you do not have a Massachusetts sales tax certificate, you are not required to file.  If your liability is higher, you must file and then you must file every year afterwards even if your liability goes below $5,000.00.

If your liability is $5,000 or higher, you may be concerned about how you will pay it.  We find that many sellers have little to no liability in Massachusetts because they have little or no inventory in the warehouses.  The first step is to figure your liability.

Please note that sellers with a Massachusetts sales tax certificate MUST file regardless of actual taxes owed.

Q. How Can I Figure My Liability?

In its notice to sellers, Amazon pointed out its Monthly Inventory History report that will show you if you had inventory in the Massachusetts warehouses.  You are looking for BOS7 (Fall River) and BOS5 (Stoughton).  That’s step one.  Sometimes sellers are surprised to see that they did have inventory in Massachusetts even though they never sent a shipment there.  This is because Amazon moves inventory around to better serve its customers.

The report can be downloaded as a text file and then opened in your spreadsheet software, so you can quickly sort by fulfillment center.  What you want to know are your gross sales from the Massachusetts warehouses.  You then take this number and multiply it by the state sales tax rate of Massachusetts, 6.25%.  There is a sales tax calculator you can use as well. This gives you a roughidea of your liability.

I say a rough idea because there are exceptions.   Most food and clothing, for example, are exempt. The complete list of exemptions is on the Massachusetts government website.

If a seller (non-Massachusetts business) had $10,000.00 in sales in Massachusetts, the tax owed, or liability, is $625.00.  For most sellers this not worrisome.  They are not required to file and can write a check for that without difficulty.

If the amount of sales is $80,000.00+, then the seller is required to file and owes $5,000.00+. Sellers need to decide for themselves the level of risk and potential liability they can live with.

Q. Some Sellers Believe That They Should Not Have To Pay Sales Tax Ever For Online Sales, Or That The Federal Government Is Going To Come Up With A Solution In The Future.  What Do You Say To Them?

I tell them that the law disagrees with them and that it is unlikely that the federal government will ever be able to take states’ sovereign rights from them.  Sales and local taxes are extremely complex and voted for by the people of that state, city and local community.  What the people decide to do with these taxes and the regular revenue from these taxes is not something they will give up without a fight.

Past attempts at sales tax reform over the past twenty years have resulted in some improvements and more uniformity, but when the populous states of Florida, New York, Texas, California and Illinois refuse to participate, there’s only so far reform can progress.

There’s a lot of confusion about what the federal proposal covered.  Many sellers don’t realize that they would still owe sales tax in nexus states under the federal plan. The only way for the federal government to change this would be a constitutional amendment that removed states’ sovereignty which is highly unlikely.

Legally, sellers should be paying taxes in all states where they have nexus. In practice, it is a risk assessment.  Just like with the example of Massachusetts, you may feel perfectly fine writing a check for $625 if they come for you.  The larger the seller, the more sense it makes to register and file in all states with nexus.  For small sellers, their risk of being audited is smaller and the fees they would pay are smaller.  It is a business decision that sellers should make with the help of their CPA or SALT expert.

I know many small sellers who have chosen to register and file because they weren’t comfortable with the risks and wanted peace of mind.  I have large seller clients who have not registered with all states where they have nexus because they are more comfortable with risk.  They may choose, for example, to start off with the biggest states of Florida, Texas, California, New York and Illinois and then add other states later as they grow.

Q. Will Amazon Be Giving Seller Data To Other States?

It depends on the state’s resources.  The state must have the resources to legally compel Amazon to turn over its records, and then they must have the resources to pursue the list.  While it would seem natural that they would all jump in with subpoenas, I don’t expect it to roll out that way.

Each state has its own strategies and priorities for tax collection.  They don’t necessarily have the bandwidth to pursue a list the size of Amazon’s.  They may only have a limited number of auditors.

Regardless of what the states do, for peace of mind I recommend that sellers calculate their potential liability in each state with nexus.  If they can live with that liability, then there is nothing to fear even if all the states compel Amazon.

Regardless of what the states do, for peace of mind I recommend that sellers calculate their potential liability in each state with nexus.  If they can live with that liability, then there is nothing to fear even if all the states compel Amazon.

Even if Amazon does not give your data to a state, it doesn’t mean you are safe from an audit.  They have other means to determine sellers who owe them money.

Q. What Can I Do Now If I Owe Money?

Voluntary compliance is preferable to forced compliance when it comes to dealing with the states.  A full audit can also be very expensive.  Assuming your intention is to pay the liability, then register with the state, file your return and make a payment.  If the payment is too large for you to handle in one check, your CPA can help you set up a payment plan with your state.  You need to state firmly that you are voluntarily complying as a good corporate citizen.  This can help you avoid most of the penalties for earlier non-compliance and possibly avoid a full audit.  If you owe a great deal, I strongly suggest you work with a professional to file and pay.

Q. Which States Are The Most Important In Terms Of Nexus And Registering My Business?

We recommend you register with your home state, California, Texas, Florida, Illinois, Washington and New York at a minimum.  They have the greatest populations and for most sellers this is where the majority of their sales are made.  There are currently 23 states with nexus.

Q. Should Sellers Be Paying Sales Tax In Every State With Nexus?

Legally yes. In practice you may decide your potential liability is so low for some states that you don’t want to right away.  Some of my clients start with the big population states and then branch out to the other states as they grow.

Q. Why Is This So Complicated?  Isn’t There One Answer For Everyone?

No.  Not only do sellers have to consider Amazon income, but if they sell on their own website or through different channels like brick and mortar stores, or have inventory temporarily stashed in co-location warehouses, they may have a greater liability.  Each business needs to make its own risk assessment.

Each state also calculates and collects taxes differently.  You can’t just multiply gross sales by sales tax in each state.  A lot may depend on where the majority of your sales are shipped to, as well as where the warehouse is located.

Q. Some States Are Requiring Amazon To Collect Sales Tax And File For The Sellers.  Do You Think Amazon Will Start Doing This Across The Platform?

Not if Jeff Bezos has anything to say about it.  He is vehemently against paying taxes and will not voluntarily file and pay sales taxes.  I base this on years of observation of Amazon and Bezos.  For sellers in those states it will be nice to have the burden of paying lifted, but they will still have other states where they have to file and pay themselves.

Q. What Are The Implications If I Don’t Register And I Don’t Pay Sales Tax?

You could be audited which is expensive, time consuming and a painful distraction from your business.  Most audits go back three years.  If this is a forced audit vs. you complying voluntarily, there could be penalties attached and even criminal charges if deliberate fraud is suspected.

Q. How Do States Find Ecommerce Businesses With Nexus In Their States If Amazon Doesn’t Give Them The Names?

States have many ways to find out who is operating in their state.  For example, when they review the sales tax certificates given to wholesalers/distributors in their state and see names that are not registered with their state, that can flag a company for further investigation.

Q. Where Can I Find A List Of Amazon Warehouses To Determine Nexus?

Wikipediahas a pretty good list.

Q. Do You Recommend Sales Tax Tools Like TaxJar?

Many of our clients use TaxJar.  Their ability to bring together sales tax liability from many platforms is very helpful to sellers.

Some states are either so complex or still require paper (like Michigan) that we recommend professional filing. For some category of sellers – like apparel –there can be additional tax exemptions or restrictions that benefit from a professional filer.

Q. What Services Does Sales Tax Solutions Offer Sellers?  Can I Hire Them To Make It All Go Away?

Taxes will always be with us.  But, Sales Tax Solutions can make it easier on businesses to comply and reduce risk.   We offer advice and sales tax filing for a reasonable fee.  We can help companies with their risk assessment, register them in different states and make sure their filings are accurate.  If they are being audited by a state, we can help them negotiate.

For more complex businesses, we help them determine nexus and, when necessary, obtain written verification from the jurisdictions explaining the basis of your filing requirement.

We offer a package where we register all 23 nexus states for $1,725.00 for clients – $75 a state.  We offer advice by email through our “Quick Answer” program where you get a response within a day for your sales tax questions.  You can use this for one-time questions or through monthly or quarterly subscriptions.

Large sellers hire us to review their accounting and business operations for compliance.  Our focus is obtaining tax savings and helping the company be prepared for audit.  We find a surprising number of businesses overpay.

www.salestaxsolutions.us

801-892-9700

*Note: eGrowth Partners is not affiliated with Sales Tax Solutions. We receive no compensation for writing this article or if you decide to work with them. We hope this article will demystify some aspects of sales tax for sellers and allow them to make the best decisions for their unique business.

This article provides general guidance and should not be constituted as advice for your particular situation. We strongly recommend working with a SALT expert for your business. Most CPAs are not trained in sales tax – particularly sales tax for other states.

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