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June 7, 2016

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

Fulfillment by Amazon (FBA) is a service provided by Amazon used by merchants and retailers. This service allows online retailers to use Amazon’s personnel and facilities to handle the fulfillment process. 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 a big opportunity for the 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 is defined as the minimal connection that must be present between a state and a business that requires the business to remit tax to the state. The physical storage of an FBA retailer’s goods in an Amazon warehouse constitutes this minimal connection. This can cause a retailer operating in just one state to suddenly be operating in every state where inventory is being held and 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’s fulfillment services. Activities performed by a third party generally create nexus for a retailer if the activities are closely related to the taxpayer’s ability to carry on business in the state. FBA includes warehousing of inventory, order processing, returns management, etc. These activities 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 retailer 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. Usually, most FBA merchandise will be taxable.

Alongside its FBA service, Amazon provides a service called the Tax Collection Service that assists with the sales tax compliance for a retailer’s product sales once the retailer has registered with a state. This simplifies the task of keeping up with product sales for the online retailer. Management of the service is the responsibility of the retailer and includes determining which states require collection of sales tax, calculating the correct tax liability, filing returns and remitting tax to the various states, refunding tax to customers for returned merchandise, and reporting any penalty and/or interest on sales tax materializing as a result of the FBA process.

Sales tax compliance for retailers participating in FBA business is not only a requirement but also an added cost of time and money. This is causing some retailers with immaterial sales to forego state tax registrations until a later point in time when their sales increase. Other retailers may be unaware of states’ sales tax laws while others may think they have no nexus at all. In the end, registration and filing/remitting sales tax is a decision that each retailer needs to consider. 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.

The safest approach for all companies would be to enroll in Amazon’s Tax Collection Service to make nexus, taxability and collection determinations. Addressing the sales tax compliance and state registration up front is advantageous over the consequences of noncompliance. If monitoring the inventory location is difficult, consideration should be given to the registration and sales tax collection in all states where Amazon has warehouses.

 

GEOFFREY J. CHRISTIAN
CBIZ MHM, LLC – National State & Local Tax
Greenville, SC
864.241.2009 • gchristian@cbiz.com

 

TR YODER
CBIZ MHM, LLC – National State & Local Tax
Greenville, SC
864.478.1140 • tyoder@cbiz.com

 



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