April 14, 2016

Using Fulfillment by Amazon: State and Local Tax Issues at Stake (article)

Fulfillment by Amazon (FBA) is a common service provided by Amazon that is used by merchants and retailers of all shapes and sizes. This service allows online sellers and retailers to use Amazon’s personnel and facilities to handle the entire fulfillment process (warehousing, storage, order processing, returns, etc.). The strategy is for Amazon to have distribution centers in almost every state (currently in 28 states) where its retailers’ product can be in close proximity to customers. Applying this strategy, Amazon can eliminate significant distribution time and provide fast product shipment to the ultimate consumer. In this instance, retailers who use FBA benefit not only from the order taking, handling, packaging, and storage of inventory, among other services, but also from the quick delivery of product to their customers. While this can be a big opportunity for the online retailer, the sales tax implications of using such a service should not be overlooked.

Can an Amazon Warehouse Location Create Sales Tax Nexus for an Online Retailer?

Nexus can be defined as the minimal connection that must be present between a state and a business that requires the business to collect and remit tax to the state. Inventory of an online retailer, housed in an Amazon Fulfillment Center or warehouse, meets the minimal connection or physical presence standard, thereby creating sales tax nexus and sales tax reporting and collection responsibilities for the FBA online retailer. Simply stated, the physical storage of a retailer’s goods in an Amazon warehouse would meet the minimal connection requirement between the state and the retailer, thus requiring the retailer to register, collect and file sales tax returns in the state where the goods are being stored by Amazon. This can cause a retailer operating in just one state to suddenly be operating in every state where inventory is being held as a result of using FBA. From a sales tax nexus perspective, the using FBA may establish nexus and sales tax reporting requirements in every state that the retailer houses inventory.

Can Amazon Fulfillment Services Create Sales Tax Nexus for an Online Retailer?

An online retailer can also establish nexus in a state by use of Amazon Fulfillment Services. Activities performed by a third party generally create nexus for an online retailer if the activities are closely related to the taxpayer’s ability to carry on business in the state. As stated above, fulfillment services offered by Amazon include services such as storage or warehousing of inventory, order processing, returns management, etc. These fulfillment services are activities that are closely related to the taxpayer’s ability to carry on business in that state, thereby establishing nexus.

Taxability of Sales

Once nexus is established in a state, sales of tangible personal property (TPP) from the online retailer (from all sources) into that state may require the collection and remittance of sales tax. Generally, TPP is subject to sales tax in all but five states, unless exempted by statute. As an example, some states exempt the sale of food and clothing from tax as a matter of tax policy, because food and clothing are essential elements of daily living. In general, most FBA merchandise, however, will be taxable.

In connection with its FBA service, Amazon provides a service called the Tax Collection Service that records and tracks the taxability and collects the right sales tax rates for a retailer’s product sales once the retailer has registered with a particular state. This simplifies the administrative task of keeping up with product sales for the online retailer. This Tax Collection Service, provided to FBA retailers, will basically charge and collect sales tax on products ordered through Amazon. Management of the service, including setup and maintenance, and making taxability determinations (i.e., deciding whether to collect or not collect sales tax on each item in a particular state) is the responsibility of the online retailer. The online retailer is also responsible for determining which states require registration/collection of sales tax, calculating the correct tax liability of merchandise sold, filing returns and remitting tax to the various states, refunding tax to customers for returned merchandise, and any penalty and/or interest on sales tax that may have arisen as a result of the FBA process.

The bottom line is that sales tax compliance for retailers participating in FBA business is not only a requirement, but an added cost (both time and money) for the retailer. This is causing some retailers with immaterial sales to forego state sales tax registrations until a later point in time when their sales volumes increase. Other FBA retailers may be unaware of the various states’ sales tax nexus laws, while others may think they have no nexus at all. In the end, state registration and filing/remitting sales tax is a business decision that each retailer needs to consider. In making this decision, the online retailer should consider issues such as the length of time nexus has existed, its ability to pay any assessed taxes, interest, and penalties resulting from an audit and the cost of implementing sales tax compliance into its business operations, among other issues.

The conservative approach for all companies would be to enroll in the Tax Collection Service provided by Amazon and then make appropriate nexus, taxability and collection determinations. Addressing the sales tax compliance and state registration up front is advantageous over dealing with the consequences of noncompliance on the back end. If monitoring the location of inventory is difficult or cumbersome, consideration should be given to the registration and collection of sales tax in all states where Amazon has warehouses. Should you need assistance, CBIZ MHM can offer assistance with nexus determinations, taxability determinations, and related sales tax compliance for FBA online retailers.

Copyright © 2016, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

Accelerated Recovery Resources

Access articles and tools to help your business generate cash, improve leverage, and align & transform as you recover from the pandemic.

COVID-19 Resources

Access all COVID-19 related articles to help your business respond to the pandemic.

Insights in Your Inbox