Editor’s note: This is a guest post from Michael J. Fleming, Founder of Michael J. Fleming & Associates.
Amazon sent a shockwave through the FBA community on the afternoon of October 23, 2018 when they sent an email stating they had received a “valid and binding legal demand” from the state of CA to turn over third-party seller information. They announced they would be complying on 11/6/2018.
The big questions on most seller’s minds were what this means and how does it impact me. Do I have any past sales tax exposure? What if I am a foreign seller? We will address each of these questions in the following paragraphs.
Before we get directly into the California announcement, let’s look at some trends. The news for eCommerce sellers has been getting progressively worse this year, especially for FBA sellers. Amazon started the year out by turning over third-party information to Massachusetts and Rhode Island. This was followed a few months later by the US Supreme Court decision in the Wayfair case, which negated the need for a physical presence before a state could require a seller to collect their sales tax. Just selling into a state can now create nexus and a requirement to collect sales tax.
This impacts all eCommerce sellers both foreign and domestic, not just FBA sellers.
And now we have Amazon turning over seller information to Ironical. This could be the last big warning that seller’s get. What other states may follow? One of the biggest takeaways from states like California, Massachusetts & Rhode Island all forcing Amazon to turn over third-party information is that not all states will require Amazon to collect the tax for sellers, or at least not in the short run. And even when Amazon does collect the tax they are only responsible for collecting tax going forward. The seller is still responsible for past liability. So when Amazon begins collecting in a state, where a seller is not registered, it can actually make it worse for the seller, because the state is now one step closer to the seller’s history.
We think California will continue to aggressively pursue sellers who have inventory in California warehouses for up to six years of back taxes, penalty and/or interest. For the last 18 months or so, my sources in California have told me that the state has been using some type of “web-crawling” software to scrape data off the Amazon website which they then turn over to a skip tracing company. This company then provides them with as much contact information as they can find. California uses this information to send out letters or to make calls. This really went into overdrive in September 2017 when California started sending out large batches of mail.
The letters basically said “we have reason to believe you are selling through the Amazon FBA program and we want you to complete this nexus questionnaire”. If a seller was already registered, they just entered their tax number and skipped the rest of the form.
If they were not registered California wanted the questionnaire filled out. Many sellers chose to ignore the letters and all the subsequent follow up letters. In some instances, where the state’s information was not complete this was a semi-effective strategy. However, for those sellers where California had good information, we are beginning to hear these sellers are now getting letters, a year or more later, saying they are being turned over to audit. We believe California will continue to follow this strategy, because of all the information California could have requested, they only asked for contact information and FEINs. This is the same information they were getting from the skip tracing company. Only now all the information will be accurate. I can’t imagine anyone will escape this time, once California targets a seller. So, if California stays true to form, if a seller is registered, they just provide their sales tax number. It’s the sellers who are not registered that should worry.
It has taken Massachusetts, who received data from Amazon the last week in January, almost 7 months before they started tracking down sellers. So, we don’t expect California to start using this data immediately, they will have to analyze and process it. However, we expect California to begin using it much quicker than Massachusetts, because unlike Massachusetts, California already has a system in place and has been aggressively pursuing FBA sellers. This new information will allow California to speed up and enhance their current efforts.
The risk for sellers not registered in California is much greater than in Massachusetts. First, California is generally a seller’s largest market when broken down by sales per state. Larger sales equal greater liability. Secondly the warehouses have been open much longer in California than Massachusetts. The first Amazon California warehouse opened in October of 2012. The first Massachusetts warehouse opened in October 2016 roughly four years after the California warehouse. This is extremely important because if a state finds a seller, they will want back taxes, plus penalty plus interest going back to the date the seller’s inventory first appeared in the Amazon warehouse. That could be four extra years of exposure. Thirdly there are a lot more warehouse in California than Massachusetts and while not everyone may have inventory in Massachusetts, virtually everyone has inventory in California.
However, it’s not just California that sellers have to worry about. Sales tax is a huge issue for both domestic and foreign sellers and the states are becoming increasingly more aggressive. As we head into the new year, we think states, will become even more emboldened and will not just enforce the new economic nexus thresholds but pursue sellers who have had inventory in Amazon warehouses for years of back taxes, penalty and interest.
There are programs available that can help mitigate past exposure. One is called a voluntary disclosure agreement or VDA. These programs reward you for stepping forward voluntarily by waiving years of back taxes, penalty, and interest. The drawback is that your generally have to pay at least 3 years of back taxes and interest. VDAs are a great option for some, but not for all sellers. A VDA is only available if a seller initiates it prior to being contacted by the state. Once a state contacts a seller, the VDA is not an option. There are other options and strategies available. We suggest contacting a sales tax professional to discuss what’s best for you before a state contacts you and it’s too late. Hoping this will all go away is not a strategy.
For anyone who would like to learn more about us or talk about their situation I suggest contacting John Haggerty at jhaggerty@salestaxandmore.com or by visiting our website at www.salestaxandmore.com.
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