A Big Sales Tax Bill May Be Looming For Amazon Sellers

Amazon sellers face retroactive bills and penalties for uncollected sales tax

June 3, 2020, Los Angeles, CA – Cash-strapped cities and states bracing for economic reckoning from coronavirus carnage may implement stronger collection practices for overdue sales tax.

Amazon third-party sellers contribute to about 60% of Amazon sales and are liable for past sales tax in any state if they had prior nexus. If the Amazon seller had either physical nexus (Amazon FBA inventory) or passed the state’s economic nexus threshold BEFORE the marketplace facilitator had nexus (Amazon), there is a sales tax liability for the third-party seller. States are looking for sellers who owe past sales tax and may send out a letter or two with late notices as a low-cost method, which usually results in additional revenue.

"You have over 100,000 sellers in the US who are affected by a sizable unpaid sales tax liability. For many of them, they either don't know that they have this liability or they don't believe that the liability is theirs," according to a CBS News report.

It’s easy for sellers to overlook nagging administrative business details, and one of the most vexing and confusing of those is sales tax.

Many Amazon sellers don't realize sales tax registration is still required in most states, even if Amazon is collecting and remitting. This does NOT erase the previous sales tax due, along with penalties, interest, and late fees on any past returns. However, Fulfilled by Amazon (FBA) merchants say the state should be looking to Amazon for uncollected sales tax. Additionally, some states still have late fees on returns that are not filed on time, even though there may not be any amount due.

"We realize that most sellers who are NOT in compliance in the states where they had physical presence are HOPING that since most states require Amazon (and other marketplace facilitators) to collect and remit sales tax, that the states will “forget about” or “not pursue” past sales tax due as a result of previous physical nexus established by the seller in the state," says SalesTaxSystem.com, a tax-consulting service.

How bad can it get?

Brian Freifelder, who sells clothing, shoes, and groceries on Amazon.com out of a small warehouse in Bensalem, Pa., is caught in what his tax lawyer called “an interstate commerce speed trap.” The 36-year-old recently received a jaw-dropping notice from California that he could owe as much as $1.6 million for sales tax that he didn’t collect from consumers who bought his goods through Amazon. The state says that as soon as Freifelder’s goods showed up at an Amazon warehouse in California, he had the same obligation to collect sales tax as any retailer with a store there — even if he had no idea where Amazon was storing his goods.

"Retroactivity is always bad policy, but in this case, it raises serious constitutional due process concerns, because due process requires that you have notice and can anticipate a policy. Here the retailers lacked notice to collect. No one believed they were supposed to be collecting this tax for all of these years," says Jared Walczak, director of state tax policy at the Tax Foundation in Washington

"For small merchants, the complexity of compliance is overwhelming," said Ina Steiner, editor of Ecommercebytes.com.

A lawsuit filed in California last August intends to hold Amazon and the California Department of Taxation and Fee Administration (CDTFA) accountable. “Despite numerous attempts to explain the situation, CDTFA refuses to do what’s right and is now putting Californians at risk of losing out on billions." Therefore, we are bringing this action, says Paul Rafelson, one of the attorneys representing the plaintiff.

“Amazon is responsible for collecting and paying these taxes to the state, but instead of following the law and playing by the rules, Amazon tried to work-around them so they could sell stuff cheaper than local businesses, falsely labeling themselves as a marketplace, not a retailer. This has cost California taxpayers billions, and it’s all because, when it came to Amazon, CDTFA refused to enforce the law," says the plaintiff.