Fulfillment by Amazon and State Sales Tax Obligations
- September 27, 2015 | Stephanie Faris
At first glance, online sales tax laws seem fairly straightforward. If your business has a physical presence in a given state, you pay sales tax on any purchases made by residents of that state. This law doesn’t only apply to businesses with storefronts. It also includes businesses that have warehouses, distribution centers, or sales representatives permanently residing in the state.
But when the Supreme Court defined “nexus” for businesses, the Internet as we know it today didn’t exist. The year was 1992 and the case was Quill Corp v. North Dakota, which came about when the state tried to collect a use tax from a software company that sold its product on floppy disks.
The law was built around mail-order businesses, exempting them from paying use tax for sales they make across state lines. As the Internet has matured, however, lawmakers have put a spotlight on the issue of Internet sales tax, asking whether or not this law should be amended to make taxation fair for local businesses.
The Amazon Dilemma
But even as lawmakers and ecommerce businesses battle it out in the legislature, a confusing issue has arisen for businesses that sell products through Amazon. Amazon has become a retail giant over the past couple of decades, with a total active user base of 244 million. By selling products through Amazon, businesses of all sizes can reach a large number of customers who can pay using their Amazon accounts and enjoy the fast shipping turnaround that most Amazon customers now expect.
This expedited shipping service comes courtesy of Fulfillment by Amazon (FBA), which handles the packing and shipping of a business’s items to customers. A business simply lists its items for sale on Amazon, ships those the inventory to the designated fulfillment centers, and lets Amazon handle the rest.
But what does this mean for nexus?
If your business ships items to an Amazon Fulfillment Center in a state with sales tax, is that considered a physical presence, since your business doesn’t own the fulfillment center?
Claiming Sales Tax
If your business uses FBA for warehousing your inventory, you need to be fully aware of the states where those centers are located. Amazon has fulfillment centers in 26 states, and many of those states collect state sales tax. If you sell to a customer located in a state with sales tax and that order is filled by an Amazon Fulfillment Center in that state, you will be responsible for paying sales tax. If you fail to collect it from customers at the time of purchase, you’ll be forced to pay it on your own later, when sales tax auditors discover you haven’t been collecting.
It’s important to note that your items can be moved from one fulfillment center to another without notice. While a larger seller may register its products in all of the states where Amazon has a fulfillment center, a smaller business will likely want to monitor inventory placement on a state-by-state basis before making the decision as to whether to register to collect sales tax on a purchase.
Selling through Amazon is a great way to get your products in the hands of customers who otherwise wouldn’t have known about your brand. While Amazon’s multiple fulfillment centers can make sales tax calculations complicated, it often means your products can be delivered to customers within a couple of days, offering a level of service you likely wouldn’t have been able to otherwise afford.