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States are seeking to expand their sales tax reach to online marketplace providers and third party sellers. In this article, Avalara's Scott Peterson discusses what third party sellers on Amazon and other marketplaces need to do to comply with sales tax collection and remittance obligations.
By Scott Peterson
Scott Peterson is Vice President of U.S. Tax Policy and Government Relations for Avalara, Inc. In his role, Scott leads Avalara's effort to be the first name in sales tax automation. Prior to joining Avalara, Scott was the first Executive Director of the Streamlined Sales Tax Governing Board.
The creation of the Internet significantly increased the ability of sellers and buyers to connect while exacerbating the state capacity to collect tax on all the sales into a state. The rise of third-party sellers on Amazon – called Fulfillment by Amazon sellers or FBAs – has created an opportunity that many U.S. states can't ignore. The stakes are high, and it's important for the players, especially the FBA sellers, to understand what is ahead and how to prepare for it.
According to Bloomberg, Amazon now collects sales tax on its retail sales to customers in all the 45 states and Washington D.C. that levy a statewide sales tax. Collecting sales tax on behalf of FBA sellers, however, is not automatic. FBA sellers must sign up and pay for the service. However, under conventional sales tax principles, an FBA is obligated to collect and remit sales taxes only in states where the seller has “nexus,” that is, a “presence” in the state.
The complication now is that Amazon is keeping FBA inventories in its own warehouses and distributing that inventory around the country as necessary. As a result, many states are asserting that the FBAs have nexus in the states where their inventory is stored or transported, leading to possible sales tax obligations. To protect themselves, Amazon and the FBA sellers as well as other marketplaces and third-party sellers, must track what changes the states are making, understand the impact on their businesses, and prepare for compliance where necessary.
In the past, states generally ignored sales taxes on FBA sales, but with third-party marketplaces doing more than a trillion dollars in sales in 2016, states now see a significant revenue opportunity. The states that have enacted or are considering enacting legislation related to taxing marketplace sales include Minnesota, Washington, Virginia, Arizona, New York, Rhode Island and Texas. The justification for imposing sales tax is not just a whim of the states. The Supreme Court has held that a sales and use tax collection obligation may be asserted over a remote seller if that seller has relationships with in-state persons who aid the remote seller in “establishing and maintaining a market for sales in the state.” SeeTyler Pipe Indus. v. Washington St. Dep't of Revenue, 483 U.S. 232, 250 (1987) and Scripto, Inc. v. Carson, 362 U.S. 207 (1960).
If some states get their way, the obligation to calculate, collect, file and remit sales taxes on online marketplace sales would eventually fall to the marketplace providers themselves, at least in states where the online marketplace has its own sales tax nexus. For example, a Minnesota bill expands the definition of a “retailer maintaining a place of business in the state” to include an online marketplace provider or other third party operating in the state under the retailer's authority to facilitate or process sales in the state. The bill defines a marketplace provider as a person who facilitates sales for a retailer through any forum, including internet-based sales sites. The bill establishes collection and remittance requirements for online marketplace providers. Unless the Supreme Court alters its current precedent in this area, the Minnesota law takes effect July 1, 2019 ( See Minn. L. 2017, H1 (1st S.S.) (c. 1).
Any online marketplace provider that becomes obligated to collect and remit sales taxes on behalf of third-party sellers under laws similar to the Minnesota law may need to dramatically improve the quality, quantity and timeliness of the information it receives from third-party sellers – as well as its ability to track and remit sales tax payments. For example, accurate sales tax calculation requires proper verified address information, proper rate calculation based on those specific addresses (sales tax boundaries do not conform to zip codes), proper application of state sales tax rules as to what is taxable and what is not, and timely filing and remittance of the taxes collected. An online marketplace provider will have to rely heavily on the ability and willingness of third-party sellers to provide this information.
Once this information is collected, the marketplace must have in place automated processes for remitting the sales taxes. Since Amazon is already collecting and remitting sales tax for its direct sales, it is well ahead of the game. Other marketplaces may want to rely on third-party service providers that automate sales tax collection and remittance.
It's important for FBAs and other third-party sellers to recognize that whether or not a marketplace is required to collect sales tax on their behalf, they may still be obligated by the states to remit the sales taxes. They may continue to ignore the requirement, but then it is likely they will eventually be required to pay back taxes and even interest and penalties. As a result, FBAs must consider carefully how to proceed. They should certainly consult with an accounting professional to weigh the pros and cons of ignoring or complying with the evolving sales tax requirements in the states.
They should also consider the benefits of participating in a new amnesty program that several states have banded together to offer. The program was launched by the Nexus Committee of the Multistate Tax Commission (MTC) and is run through MTC's National Nexus Program (NNP). Participating FBAs and other third-party sellers would voluntarily begin paying taxes in states in which they have nexus, and in return, they would be protected from liability for back taxes and in some cases interest and penalties.
It's also important for any third-party seller to recognize that collecting and remitting sales tax is an extremely complex and time-consuming process that if not properly automated will result in significant errors. Having the marketplace offer to do any part of this as a service is a tremendous value-add. In the absence of such as service, sellers should definitely consider third-party service providers that can automate or outsource the process for them.
Moving forward, the one certainty we can count on is that FBA sellers and other third-party sellers will need to pay sales tax, and it is in their best interest to begin tracking the evolving legislation in this area and planning for how they will respond.
Copyright © 2017 Tax Management Inc. All Rights Reserved.
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