Editor’s note: This is a guest post from Michael J. Fleming, Founder of Michael J. Fleming & Associates.
We often hear from many international FBA and other eCommerce sellers that international sellers are not subject to US sales tax. We hear the same statement from their advisors. The reasons for this belief are varied, but unfortunately, this statement is just not true. In this post, we will explain why sales tax is important for all sellers including those outside of the US and why ignoring sales tax can be dangerous.
There are more than 5 inaccuracies, but here are what I believe to be the top 5:
Tax treaties are generally to prevent the double taxation of income. Sales tax is not an income tax. It is generally paid by the purchaser and collected by the seller. Sales tax is not covered in any of these tax treaties. In addition, each individual US state is a sovereign entity and is not a party to any tax treaty signed by the US and another country.
Nexus is just a fancy term, that is used to describe the link or connection that must be present with a state before the state can require you to collect or pay its taxes. When it comes to sales tax, there currently needs to be some sort of physical component to this link. However, what common sense tells you is a physical link and what the individual states and even the US Supreme Court believe to be a physical link can be very different. When it comes down to it, it really doesn’t matter what you or I believe, but rather what each state and the courts believe.
As of now, there are two primary activities that create nexus for international Amazon FBA sellers. The first is where Amazon stores your inventory. Owning property in a state, inventory is property, will generally create nexus in just about all the states where Amazon has a warehouse except New York. Now I have heard all the arguments about why inventory should not count, unfortunately, the individual states believe it counts.
The second way that the Amazon FBA program creates nexus is by helping you to establish or maintain a market. The language about creating or establishing a market comes directly, out of a 1967 US Supreme Court case. (Tyler Pipe v. Wash. Dept. of Rev., 483 U.S. 232 (1987)). In this case, the Court was talking about how third-parties, even when they represent multiple parties can create nexus for unaffiliated companies. This language is very important because many states incorporated it directly into their statutes, their rules, regulation, etc.
I do not hear many FBA sellers or their advisors mention this case, but the states do and can use it as a back up to their inventory argument. While some may want to continue to argue about inventory, it is a much tougher argument to make, that Amazon is not helping to establish or maintain a market.
Many sellers think that ignoring the issue is the best course of action. It is not. When a seller is not registered and has not filed a return, the statute of limitations does not apply. In theory, when they find you, a state can go back to the first day your nexus began. In practice, individual states routinely go back 7-10 years. As of now, very few states are in the 7-10 year range because the Amazon warehouses have not been open that long. For example, the first warehouse in California was opened in 2012. Last year, the state government was going after FBA sellers for five years of back taxes, penalty, and interest. This year it will be 6 years, next year it will be 7 and the year after that 8.
The penalty and interest can often exceed 65% or more especially in a state like WA who was imposing 39% penalties. Interest can add up quickly. Once a state finds you, there are no good options. States do not generally bargain. If you are proactive you have a number of options you can pursue to limit any potential past exposure.
Waiting for Amazon to collect the tax does not help. It can even make matters worse. In the two states where Amazon is collecting tax for sellers, Pennsylvania and Washington, Amazon is only responsible for collecting sales tax going forward. The seller is still responsible for past sales and both of these states still require sales tax registration and sales tax returns to be filed. This is potentially troubling because the states are now one step closer to getting all your information from Amazon. All the states basically need to do is request it, which is why Amazon collecting the tax is not necessarily a good thing if you are not registered.
Many Amazon sellers, both domestic and international, mistakenly believe that states have limited enforcement powers. This is not the case. In the last eight years, I have seen states reach across state lines to levy bank accounts, I have seen states levy customer account receivables, and seize other assets. Some foreign Amazon sellers say that they don’t have assets in the US. However, think of what the state of Washington told me when a seller I was representing told me that they would not cooperate with the state and to tell the state that since they were located outside the US, the state had no jurisdiction over them. The state responded by saying they would issue an estimated assessment, which is usually higher than any real numbers, and if not paid within 30 days the state would turn it over to their collections department. Collections would then levy the Amazon accounts where money was due to the seller, they would put a lien on the inventory in the state of Washington, and track down any other merchant, bank or other types of accounts to place additional levies. Lastly, they said they would pressure Amazon to terminate the seller. This seller did not want to potentially lose access to the US market and complied.
I am not aware of any state that has followed through on placing a levy on any monies held at Amazon, but if they can levy customer account receivables, it is not hard to believe they would follow through with Amazon.
This is perhaps is the biggest reason and a game changer in my opinion. It is a whole different world for Amazon sellers since Massachusetts successfully sued Amazon for their seller list. Prior to 2018, the states had to expend a lot of effort and resources to find sellers. Amazon announced in January this year that it had been forced by the courts to turn over information about FBA sellers who had inventory stored in Massachusetts. Now that Amazon has been forced to turn the information over, it is a lot easier for states to follow the leader.
For FBA sellers who believe the states want Amazon to collect the tax, this should be a wake-up call. The state of Massachusetts is not pursuing Amazon, but rather sellers directly. Other states have the same mindset. So it is just not that easy for Amazon to say we are going to collect the tax.
Amazon made another announcement about a week after the Massachusetts announcement stating they were turning over seller information to the state of Rhode Island to comply with notice and reporting requirements, which are a topic for another post. It is my belief that Amazon will continue to be forced to turn over information to more and more states.
I understand that many FBA sellers are firm in their belief that they don’t have to worry about sales tax. But what if they are wrong? I think that being compliant with sales tax is like having insurance. I do not think my house is going to burn down and insurance does not add any value to my home. I also think that all insurance is expensive until you need it. Then you are glad you have it.
To me, compliance is the same mindset. Maybe a state will never find me. Maybe I don’t have to worry about sales tax. But what if I am wrong? If a state finds me I still have to address the issue and pay to defend myself. If I have been proactive and have taken the steps to be compliant I should not have any worries. Like insurance, there is a cost to be compliant. However, the cost of compliance is pennies when weighed against the costs of fighting a state, especially when you may not win.
These 5 inaccuracies sum up my top 5 reasons why you should care about sales tax. However, these are broad-based reasons and may not be applicable to anyone seller. Maybe what you are selling is not taxable, or maybe your sales are not yet material. I think the first step for all FBA sellers is to review their specific situation and decide what options are best for moving forward. Some of those options may include past exposure mitigation like amnesties or voluntary disclosure agreements (VDAs). For some of you maybe the best option is to just register going forward and for others maybe the right thing is to continue doing nothing.
While reviewing your situation it is probably best if you seek the input of a sales tax expert who understands the Amazon FBA program. There are a number of us out here. For those of you, referred by Payoneer, I am offering a free consultation where we can discuss your specific situation and discuss the best options for you.
If you are an international seller and wish to understand your potential exposure, please use the link below to schedule a free consultation with the author. Once you click the link enter your local time zone and his availability will be shown based on your local time. Or you may contact him by email at mfleming@salestaxandmore.com
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Mike is the founder of Michael J. Fleming & Associates which operates as Sales Tax and More. Prior to beginning this new venture, Mike spent the better part of a decade as a Director with Peisner Johnson, an accounting firm that is focused entirely on solving state and local tax issues. Mike’s state tax knowledge is well rounded, but he is one of the country’s leading authorities when it comes to eCommerce, nexus, and drop shipping. Mike is often quoted by the press, is a frequently requested speaker, and is a prolific writer. He welcomes questions and inquiries about both the US and Canadian taxing system and his firm offers solutions for all your tax needs.