SALES TAX NEXUS - FULFILLMENT BY AMAZON FBA

SALES TAX NEXUS – FULFILLMENT BY AMAZON FBA

You just decided to open your business on Amazon’s Fulfillment By Amazon (“FBA”) service. Congratulations! This step is huge for taking your business to the next level. But what Amazon, and possibly others, are not telling you involves the potential sales tax liability you created when using FBA.

When you begin your relationship with Amazon to use the FBA service, Amazon takes the inventory you send to Amazon and ships the inventory to Amazon’s warehouses across the country. Many States then say (right or wrong) that because Amazon has brought your inventory into the State, the State requires your business to begin collecting sales tax on taxable sales made in the State. The State claims you have something called “nexus.”

“Nexus” is a legal term used to demonstrate when an individual or business has sufficient connections with the State that the individual or business must collect sales tax on transactions. As if this was not confusing and overwhelming enough, the States vary on the types of nexus requiring you to collect sales tax.

The United States Supreme Court has ruled nexus, for sales tax purposes, means the seller has some sort of physical presence in that State. For instance, the seller has employees or an office in the State. If the seller has physical presence in the State, then sales tax must be collected by the seller.

Some States are becoming creative and are taking a position that nexus can be created through alternative facts. One way States do this is through “economic nexus.” This means that if a seller does a certain dollar amount of business in the State over a specific period of time, then the seller has nexus with the State and must collect sales tax on sales to that State. For instance, Tennessee has effectuated an economic nexus standard that says if a seller engages in over $500,000 of sales to Tennessee customers over the previous twelve months, that seller has nexus.

Another State-invented nexus is “click-through nexus.” Click-through nexus means a seller has an agreement with a third-party in the subject State in which that third-party receives some payment for referring potential customers to the seller, even if only by a website link. This means that if you have agreements with individuals in other States and these people put your website link on their webpage with you paying them a commission for the prospective customer, then you have nexus in this State.

A final category of nexus created by States is “affiliate nexus.” “Affiliate nexus” means on out-of-state seller (e.g., you) that is affiliated with a business in the subject State. This has been defined to mean if either business owns (directly or indirectly) a certain percentage of the other business. Sometimes the subject State will impose other criteria or conditions in order to establish affiliate nexus.

What if you find out you have nexus but have not been collecting sales tax? The answer is a painful one – you owe the sales tax. Yes, that is correct. And this creates a problem. The sales tax comes out of your bottom line even though you did not collect the sales tax from your customer, even if your customer would have owed the sales tax. Understandably, this does not sound just. Do not expect your customer to pay you the sales tax months or years later, as most customers will simply laugh at the fact you want to bill them much later after the sale.

As if this was not enough, when the State comes knocking, it is not only going to expect the tax, but interest and possibly penalties on top of the tax. This can really add salt to the wound. What is the best solution to avoid or mitigate this problem then?

There are three different possibilities.

First, if you have not been collecting sales tax (or even if you have been but have not remitted the tax) and you have not yet been contacted by the State, then you can go through something called a “voluntary disclosure.” A voluntary disclosure allows you to come clean with the State on the tax liability. Through the voluntary disclosure process, States may also consider waiving penalties and interest associated with the tax due. The voluntary disclosure process could save you more money than you realized. It truly is a useful tool in mitigating one’s exposure.

Second, if you just created nexus with a State, then you have a decision on whether to collect the sales tax from your customers. While collecting the sales tax is technically required, there may be a cost/benefit analysis that must be done. For instance, assume the administrative cost is $1200/year to collect and remit $500 in sales tax. Even adding on penalties and interest at a later date, the amount of tax, penalty, and interest might not exceed $1200 a year. In this case, the business might decide to save the money and take a chance, knowing that when the State starts making inquiries, they may go back in time several years to when the business first had nexus.

Alternatively, the business may not want to be looking over its shoulder indefinitely in the future. Thus, the business may decide to register, despite the higher costs with doing so, in order to maintain peace of mind. The hidden cost to registering with a State to remit sales tax is multifold. For instance, the seller is now on the State’s radar and is required to file returns periodically, with a failure to file a return resulting in a penalty. Another example is being subject to audit by the State. During audit, if the proper documentation is not available, then the business could still be forced to pay taxes that were already paid. Furthermore, if the business were to collect sales tax but not remit all of it, the owner could be subject to criminal prosecution.

As if the above was not bad enough, sellers are facing class action lawsuits from their customers for improperly collecting sales tax. The sales tax on each sale may be small, but one thing to remember is the over-collected sales tax is for each and every one of your customers. As the number of customers grows, so does this liability. As the class of plaintiff increases as well, then so do the legal fees associated with the class action.

Third, if the State has begun making inquiries with your business, you can choose to admit you were wrong and hope for the best, or you can fight. The fight would be based primarily upon the State’s lack of authority to assert you have nexus because a third party (Amazon) brought your goods into that State. Based on United States Supreme Court rulings, the Court appears to take the position nexus, for sales tax purposes, may only exist in instances in which the seller purposefully established nexus with the State and it was not the conduct of an unrelated, third party that established the nexus.

In conclusion, sellers have multiple options to sales tax nexus issues. The key is being well-informed ahead of time so an educated decision can be made to minimize the risk. Having competent and knowledgeable advisors can ensure a business navigates the sales tax minefield to ensure the least amount of damage is done.

At the Law Office of Moffa, Sutton, & Donnini, PA, our primary practice area is Florida taxes, with a very heavy emphasis in Florida sales and use tax. We have defended clients against Florida sales and use taxes for more than 25 years with over 100 years of cumulative experience working for our firm. Our partners are both CPAs/Accountants and Attorneys, so we understand both the accounting side of the situation as well as the legal side. We represent taxpayers and business owners from the entire State of Florida. Call our offices today for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.

AUTHORITY

International Shoe Co. v. Washington, 326 U.S. 310 (1945).

Complete Auto Transit v. Brady, 430 U.S. 274 (1977).

World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286 (1980).

Quill Corp. v. North Dakota, 504 U.S. 298, 312 (1992).

ADDITIONAL ARTICLES TO READ

FL SALES TAX ON DROP SHIPMENTS, published March 24, 2016, by Amanda Levine, Esq.

FL SALES TAX CLASS ACTION ON PIZZA HUT DELIVERY FEE, published December 9, 2015, by Jerry Donnini, Esq.

FLORIDA USE TAX AUDIT LETTER?, published June 14, 2015, by James Sutton, CPA, Esq. and Jerry Donnini, Esq.

AMAZON STARTS CHARGING SALES TAX IN FLORIDA - MAY 1 2014, published May 2, 2014, by James Sutton, CPA, Esq.

GOING TO JAIL FOR NOT PAYING FLORIDA SALES TAX?, published November 3, 2013, by James Sutton, CPA, Esq.