News that Amazon would start collecting Washington sales tax on Jan. 1, 2018, for its third-party sellers broke yesterday on Amazon’s Seller Forums. Under Washington’s new marketplace fairness law, which is one of the first of its kind, the ecommerce giant is required either to collect and remit tax on these sales as of Jan. 1, or comply with use tax notice and reporting requirements. Washington is Amazon’s home state.

Amazon currently collects and remits tax nationwide on sales of its own products, which now comprise only about half of all its sales. Its contract with third-party (or marketplace) sellers stipulates that sellers are responsible for handling tax on their sales themselves, although upon request and for a fee, Amazon will collect tax on their behalf (sellers are responsible for remitting collected taxes to the state). As a result, many if not most of Amazon’s third-party sales go untaxed.

Inventory in Amazon warehouses triggers nexus

Businesses have an obligation to collect and remit tax where they have nexus, a substantial physical connection such as an office or employees. Yet nexus is also triggered by the presence of inventory in an Amazon facility — and Amazon has facilities in more than 25 states.

When a marketplace seller uses the company’s Fulfillment by Amazon (FBA) service, Amazon moves and stores its inventory at will and often without immediately notifying the seller. As a result, FBA sellers may establish nexus with a state without knowing it — one reason FBA sellers have long argued Amazon should assume responsibility for collecting and remitting tax on their behalf.

Several states share that stance: Minnesota, Pennsylvania, Rhode Island, and Washington have all enacted laws that hold marketplace facilitators like Amazon liable for tax on their marketplace sales. Yet until now, there has been no indication that Amazon would comply with any of these laws. Indeed, it is currently fighting South Carolina’s claim that it’s liable for the tax on its South Carolina marketplace sales.

Meanwhile, numerous states are working to increase remote sales and use tax collections on multiple fronts. A Virginia law clarifies that the storage of inventory within the commonwealth establishes nexus for out-of-state sellers. Washington’s law requires remote sellers with $10,000 in Washington retail sales to either collect and remit tax or comply with use tax notice and reporting requirements. This means remote FBA sellers that sell into Washington individually, in addition to through the FBA program, could be liable for the tax on those sales themselves (more on that from the Washington Department of Revenue). Rhode Island has a similar provision in its new law.

The Multistate Tax Commission recently coordinated a voluntary disclosure program to encourage online marketplace sellers to register to collect and remit tax in 24+ states. Participating states waived some or all back sales and use and/or franchise and income tax liability for online marketplace sellers that agreed to voluntarily collect and remit applicable taxes moving forward. The program received 852 applicants by the Nov. 1, 2017, deadline. Washington did not participate.

Celebrate with caution

While the news that Amazon will manage sales and use tax for its marketplace sellers is surely cause for celebration among many FBA sellers, it should be tempered. Before changing your tax strategy, Avalara recommends consulting with a tax expert. Recommended sales and use tax advisors are listed in the FAQ section here.

Updated 11.14.2017, 9:45 p.m. An earlier version of the article stated that Amazon would remit taxes collected on behalf of seller’s for a fee. Although Amazon does offer tax collection services for marketplace sellers, it’s up to the seller to remit the tax.