The wait is over to find out where Amazon will next collect sales tax. On April 1, the ecommerce giant started to tax deliveries into Hawaii, Idaho, Maine, and New Mexico. These are the final four states to benefit from Amazon’s decision to collect and remit sales tax. It is now collecting in 45 states plus the District of Columbia (Alaska, Delaware, Montana, New Hampshire and Oregon don’t have a general state sales tax).
As a successful company run by bright people, if Amazon does not have a legal requirement to collect sales tax everywhere then it must have had a good business reason to start doing so. And even though you too are bright and successful, you will naturally wonder about the impact Amazon’s sales tax decision will have on you and your ecommerce business. For example: do other ecommerce sellers now have to start collecting tax? What about Amazon’s third-party sellers? And how can I ensure my business responds in a compliant way?
Sales tax rules for ecommerce sellers remain anything but simple. Read on to learn the answers to some of the biggest questions and get the need to know on how Amazon’s decision impacts (or doesn’t impact) your ecommerce business:
Do other sellers now have to collect sales tax?
Amazon’s decision to collect sales tax does not necessarily mean that other merchants now have to do the same since state nexus rules still apply. A business only has to collect state sales tax when it has a specific type of connection to a state, such as in-state employees, inventory, or infrastructure.
What are the implications for Amazon’s third-party sellers?
Almost half of the products Amazon sells are from third-party sellers and Amazon has created one of the most advanced fulfillment networks in the world. So this question will be on the minds of many.
The simple answer is that Amazon’s decision to collect should not immediately impact the tax position of its third-party sellers. Like other remote vendors, fulfillment by Amazon (FBA) sellers are required to collect only where they have nexus. We take it for granted that a business collects only where they are required, but it is important to remember that it is your nexus that determines where you collect and not where Amazon happens to collect.
Too many sellers believe they have nexus in every state where Amazon has nexus. But that’s not how nexus works. Amazon is a separate business from your business. Even if Amazon has nexus in every state, you only have nexus in those states where your business has a presence, such as those where you have inventory stored in FBA fulfilment centers.
The good news for you is that Amazon doesn’t have a warehouse in every state where it now collects. That means that FBA sellers need to know only where their product is stored, and where Amazon has, or will have, a warehouse. Expect more expansion in 2017; there are already three new fulfillment centers planned in origin-based sales tax states: Illinois and Texas.
There is a myth that if you are an FBA seller with a very small amount of inventory then Amazon’s decision won’t affect you. Remember, while online marketplaces like Amazon allow almost anyone to start and run a small business, with it you face the same complexities, legal requirements and sales tax compliance obligations as your larger counterparts. Whether or not you are immediately affected all comes down to that nexus.
Reducing the complexity of managing sales tax compliance
Tax management inevitably becomes more complex for FBA sellers. From getting properly registered with the states, determining the correct rate (including the correct local rate in origin sourcing states), determining the correct taxability (states do exempt some products and they exempt sales to lots of different organizations), filing the right return (some states require a different return if the seller doesn’t have a location in the state), and remitting the tax to the state (whether the state or local government wants the tax by electronic funds transfer or by paper check).
To start with you need to understand which state’s taxes apply if nexus is triggered. The simple answer is the state sales tax plus any applicable local sales tax. What isn’t always simple is knowing which local tax is the correct local tax. Most states have many local taxes and those local taxes rarely follow zip codes. In most states the correct local tax is the tax where the product is shipped to (destination sourcing), but in a handful of states it might be the location of the business (origin sourcing). To make things even more complicated, the rules defining “location of the business” vary from one origin sourcing state to another. In addition, there may be state and local businesses tax (the Washington B&O tax) that apply. There is often a separate license required for these additional taxes.
If it sounds intimidating, it’s probably because it is. To manage this process manually is difficult, error-prone and time-intensive. As a result, I predict more sellers who will now have to collect sales tax will outsource the automation of sales tax compliance. This will ensure they adhere to obligations without draining time that could be better spent growing their business.
Amazon has not only changed the way that we do business but it has also changed the way in which we think about sales tax. Many feel Amazon has taken away the shield that protected consumers who shopped online from sales tax. Some believe with this latest move, perhaps the biggest impact is that the armor is removed from sellers. For years, many ecommerce merchants haven’t realized that they already have sales tax obligations when they make remote sales. All remote vendors should keep abreast of state nexus policies — those already in effect and those under consideration. It is essential to know where you already have nexus and should be collecting and remitting tax. If you are a third-party seller on Amazon, this means you should closely monitor where Amazon has a physical presence and where you have an obligation to collect.
Ultimately, there are many who believe this move by Amazon will eventually expose the identity of Amazon’s third-party sellers to state tax officials. There are rumors that many small shops have long been flying beneath the radar of state tax officials that have lacked the resources to find them. It is essential, always, to understand your business’s sales tax obligations and adhere to them.
Scott Peterson is Vice President of U.S. Tax Policy and Government Relations at Avalara