Retail Arbitrage and the Sales Tax Conundrum
Target's designer collaborations with both Missoni and Lilly Pulitzer resulted in so much online traffic they crashed the Target website upon release. As one could expect, both collaborations also resulted in lines wrapped around the retail locations that cleared inventory from the stores in minutes. The Instagram and Twitter hashtag #LillyforTarget was a never ending stream of photos of disappointed customers in empty stores, lamenting the lack of merchandise and excessive demand resulting in customers leaving empty handed. Nonetheless, where there is low inventory and high customer interest, there is also a chance to be on the profitable side of the supply and demand chain.
It is probably safe to assume we live in a world in which nearly everyone has experience online shopping. Assumption #2: most people have bought goods second hand from a reseller through a site like Amazon or Ebay. Case in point: within minutes of Lilly and Missoni's release at Target, the items were listed on Ebay for double or triple their retail cost. In the age of the internet, there is always a new phrase to describe the trend du jour, and a phrase has emerged to describe precisely the scenario described above: Retail Arbitrage.
While the strategy of buying at retail, to resell on another retail format, seems like it would yield low margins, many are making a very comfortable living hunting deals at retailers and listing them online. A recent special on NPR's Planet Money, detailed the story of Sam Cohen, who has turned retail arbitrage into a million dollar a year business. This is not just unloading the stuff from mom's attic or cleaning out the closet at the end of the year for a little extra cash, this is an emerging industry.
Like all other emerging industries, however, there are legal grey areas that must be sorted out. Companies like Amazon have brought to light a huge gap in current sales and use tax laws, specifically with how they interact with the current internet economy. One such issue is the sales tax paid on a retail purchase, which eats into profit margins. Generally, if someone is buying something to resell, they would produce a valid resale certificate and purchase the items exempt from tax pursuant to Rule 12A-1.039, Florida Administrative Code. The subsequent resale would be taxed. To tax both transactions violates a fundamental principle that there shall be no pyramiding of tax. However, for retailers, such as Target, the policy is generally not to accept resale certificates, and taking it one step further, often refusing to sell to arbitragers altogether.
Amazon sellers now have nexus in at least 25 states. This means that Amazon sellers, regardless of location, must collect and remit tax on their sales into the states where Amazon has nexus. But this adds a level of complication to these transactions because sellers must now collect state sales tax, and oftentimes, local surtax. This means registering in each state to collect tax, and filing returns in each state to report, as well as remit, the tax collected. This logistical headache is made easier through a collaboration with Tax Jar. Amazon provides its sellers the opportunity to electronically track sales tax liabilities by state. Ebay has followed suit by giving sellers the option to collect and track tax due electronically through the site.
While these tax liability tracking software programs are a helpful tool, they do not remedy the fundamental issue, that paying sales tax on purchases eating into profit margins. For the sophisticated merchant, there are viable solutions.
1) Obtain a valid resale certificate and try to purchase exempt. Many stores will honor a valid resale certificate. A quick trip to your state Department of Revenue Site will walk through the steps to obtaining this. However, as stated above, not all vendors accept this certificate and allow tax-free purchases.
2) Take a credit on the tax return. In Florida, Line 6 of the DR-15 Sales and Use Tax Return is for credits to be taken against sales tax due. A situation where tax is paid on a purchase, and tax is being remitted on the sale of the same item, is precisely the instance when a credit could be applied against tax due.
3) Retroactively file for a refund. Each state is different, but in Florida a refund can recapture tax overpaid for three years retroactively. For many vendors, the best way to regain those lost profits is to file for a refund of tax paid. This requires records be kept of all purchases, tax paid, and the documentation to show the subsequent resale. Although this may be time consuming, the end result will have the most impact.
By taking the above into consideration, online merchants can turn complicated state tax hurdles into a breeze. The help of a state tax professional can ease the way. At the Law Offices of Moffa, Sutton, & Donnini, P.A. we represent taxpayers and business owners throughout the entire state of Florida, from Department of Revenue to County Property Appraisers and Tax Collectors. Call our offices today for a FREE INITIAL CONSULTATION to confidentially discuss how we can help you obtain refunds of sales taxes paid that eat into the profit margins in online sales!
About the author: Amanda Levine is an associate attorney with Moffa, Gainor, & Sutton, P.A., and also runs a clothing store on Ebay. Her primary practice area is Florida tax controversy. Ms. Levine received a B.S. in Accounting from University of Central Florida. She spent several years working in public accounting before attending Nova Southeastern University Law School. She received her Juris Doctorate in 2014. During her time at Nova Law, Ms. Levine was the Executive Justice of Academics for the Moot Court Honor Society, as well as the Finance Chair. She was awarded by the National Order of the Barrister, a national honor society which recognizes oral advocacy and brief writing skills. Read more about the author HERE.
AUTHORITY
Section 212.12(12) – Tax on sales, use and other transactions (It is hereby declared to be the legislative intent that…there be no duplication or pyramiding of the tax.)
Rule 12A-1.039 Florida Administrative Code – Sales For Resale
ADDITIONAL RESOURCES
AMAZON APPEALS CLICK-THRU-NEXUS TO US SUPREME COURT, published Aug 31, 2013, by Jerry Donnini, Esq
AMAZON STARTS CHARGING SALES TAX IN FLORIDA - MAY 1 2014, published May 2, 2014, by James Sutton, CPA, Esq
NPR Planet Money special on Sam Cohen - http://www.npr.org/2015/06/04/412046900/retailer-arbitrage-how-internet-middlemen-are-scaring-traditional-stores