What Amazon's sales tax decision means for e-commerce businesses
Just because Amazon is now collecting everywhere doesn’t mean all third-party sellers need to follow suit, writes Scott Peterson VP of US Tax Policy and Government Relations at Avalara.
Editor's Note: The following is a guest post from Scott Peterson, vice president of U.S. Tax Policy and Government Relations, Inc. at Avalara, a sales tax management firm.
The wait is over to find out where Amazon will next collect sales tax. On April 1, the e-commerce giant began taxing deliveries in Hawaii, Idaho, Maine and New Mexico. These are the final four states to benefit from Amazon’s decision to collect and remit sales tax. The e-commerce giant 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. Naturally, many companies are wondering how Amazon’s move will impact their e-commerce businesses. They may be wondering: Do other e-commerce sellers now have to start collecting tax? What about Amazon’s third-party sellers? How can I ensure my business responds in a compliant way?
Sales tax rules for e-commerce sellers remain anything but simple. Here's what e-commerce businesses need to know about how Amazon’s decision may impact their e-commerce business.
Do other e-commerce sellers 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 the e-commerce giant has created one of the most advanced fulfillment networks in the world. Amazon’s decision to collect, however, 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's the nexus that determines where businesses 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 it works. Even if Amazon has nexus in every state, third-party sellers only have it in those states where their business has a presence, such as those where they have inventory stored in FBA fulfillment centers.
The good news for third-party sellers 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 — in Illinois and Texas.
There is a myth that FBA sellers with a very small amount of inventory won't be affected by Amazon’s decision. But remember, while online marketplaces like Amazon allow almost anyone to start and run a small business, those small businesses face the same complexities, legal requirements and sales tax compliance obligations as larger counterparts. Whether or not businesses are immediately affected all comes down to that nexus.
How can online businesses reduce 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 sales to many 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, businesses 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 matters 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 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 e-commerce 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 for businesses to know where they already have nexus and should be collecting and remitting tax. For third-party sellers on Amazon, this means they should closely monitor where Amazon has a physical presence and where they 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, which means it is essential, always, for business to understand their sales tax obligations and adhere to them.