Over the last few year’s small and medium online retailers have had tremendous opportunities for rapid growth thanks to innovative companies like Amazon who has created “Fulfillment by Amazon” (FBA) services. Amazon has built distribution facilities (Fulfillment Centers) across the country for efficient/timely shipping of product. This service allows online sellers to utilize these Amazon facilities and essentially outsource the entire fulfillment process. While in most cases this is a win for both Amazon and the online retailer, there are challenges in the area of state/local sales tax collection/compliance. Here are 4 important sales tax facts that every Amazon FBA online retailer needs to know:
- Location of Inventory alone in a state can create Sales Tax Nexus.
Inventory of an online retailer transferred to an Amazon Fulfillment Center creates sales tax nexus and potential sales tax reporting and collection responsibilities for the FBA online retailer. It is not unusual for a small online retailer operating only from their home state before FBA can literally overnight find themselves with sales tax reporting and collection obligations in many states in which inventory is located.
- Currently, Amazon has fulfillment centers in 14 states and new facilities planned in 4 additional states that have a sales tax.
FBA Sellers may have tax collection responsibilities in all of these 14 (soon to be 18) states. Amazon’s strategy is to locate FBA inventory as close to the potential market as it can to insure timely delivery of product. Amazon controls this process closely but actual tracking of this inventory may be an issue.
- Once nexus is established in these states, ALL sales from the online retailer (from all sources, not just through Amazon) become potentially taxable and reportable to that state.
- Amazon provides a service called “Tax Collection Service” to their FBA retailers that will charge and collect sales tax when ordered through the Amazon process. The online retailer however, through agreement with Amazon, is responsible for set up and maintenance of this service. This service by agreement does not relieve the online retailer from:
- Determining which states the retailer should be registered/collecting tax.
- Determining the correct taxability of the products sold.
- Filing Returns/Remitting tax collected.
- Refunding of tax collected for returns of merchandise to customers etc.
- Any tax, penalty, and interest liability on sales through the FBA process no matter what may have caused the liability.
Our advice to online retailers is to be proactive in determining where inventory is to be located by utilizing Amazon FBA and be aware that taxability/tax rates/return filing/sales tax payment remains the retailer’s responsibility. Set up of the FBA “Tax Collection Service” is vital. At a minimum registration and planning for the resulting sales tax compliance needs to be addressed. If inventory tracking within the FBA process is an issue, you probably need to consider registering and begin collecting tax in all the states where Amazon has facilities.
Our firm, as well as others, of course offer services that can provide assistance in nexus determination, taxability of products by state, and in providing sales tax return preparation/tax remittance services for FBA online retailers.