If you sell on Amazon, you may have (perhaps unknowingly) established a sales tax nexus with the state in which your Amazon inventory resides. Sound confusing? It is, but this article will help you understand what you need to do in order to comply.
You probably love being a small business owner but like any job, there are some frustrations. Nexus might be near the top of your list—it is for most small business owners. But what if your business relies on Amazon for most of its revenue—or even a significant portion? Nexus might be even more difficult.
What is Nexus?
Nexus is simply a link. In the tax sense, once you establish a nexus with a certain state, you have to pay state sales tax or any other tax according to its tax laws. The problem is that each state is different and keeping up with various tax laws is a burdensome task.
Adding Amazon into the mix makes it even more difficult. As an Amazon FBA (fulfilled by Amazon) seller, you probably sent your inventory to one of its fulfilment centers. Simply sending it the fulfillment center (fancy word for warehouse) is enough to establish a nexus in many states. Here are few examples.
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If you’re starting an LLC in California, there are some things you need to know. California law says, “The retailer maintains, occupies, or uses, permanently or temporarily, directly or indirectly, or through a subsidiary, or agent, by whatever name called, an office, place of distribution, sales or sample room or place, warehouse or storage place, or other place of business in California;”
How about New Jersey? “Have any type of property location in New Jersey (whether owned, leased or rented, real estate, consignments, inventory, merchandise, drop shipments, etc.)?
Texas: “A seller is engaged in business in this state if the seller: maintains, occupies, or uses in this state, permanently or temporarily, directly or indirectly, or through an agent by whatever name called, a kiosk, office, distribution center, sales or sample room or place, warehouse or storage place, or any other physical location where business is conducted;”
And finally, Maryland: “Maintaining a stock of inventory in a public warehouse or placement of the corporation’s inventory in the hands of a distributor or other non-employee representative.”
Many other states have laws similar to the above. In fact, you will have tax liabilities in just about any state where you store inventory.
Unfortunately, it gets even more complicated. Once you send your inventory to a fulfillment center, Amazon may move it to any number of other centers around the nation in order to speed up shipping times. You may not know that your inventory was moved but the same rules apply. If your goods are in a state, even without your knowledge, you owe taxes. That makes it your responsibility to know where Amazon is housing your inventory.
You can find that information in your Amazon Pro account. Look in the inventory section. There’s an option that shows your product details that includes the location of your inventory. The strange codes that denote the warehouses correspond to the abbreviations of the airports in the area. For detailed instructions on how to find and interpret this information, check out this article.
“What if I Don’t Comply?”
It should go without saying that as an ethical business owner operating with integrity you should comply with all applicable laws regardless of how burdensome. (And there’s no doubt that nexus is burdensome)
States are strapped for cash and are looking for any revenue source they can find. Laws regarding online sales are still in the early stages of development and companies like Amazon are committing large amounts of money to fighting legislation that forces online retailers to pay individual state taxes. The company has even gone as high as the U.S. Supreme Court to wage war but the company is losing the battle. Although it has pulled out of some states that has laws it considers to be “heavy handed”, momentum is on the side of the states.
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So what happens if you don’t collect sales tax? At first, probably nothing but once the state tax auditor catches up with you, you will pay back taxes, interest and penalties out of your pocket. States have differing laws regarding the statute of limitations. California, for example, has no limit. The state can go back as many as years as it would like.
“You can assume we’ll have ways of finding out who’s holding stocks of goods in California,” a representative of the State Board of Equalization, which collects California sales taxes, told CNET. “We have enforcement authority to obtain information in a variety of ways. We’ll be approaching them with respect to their tax obligations.”
The good news is that only 15 states have fulfillment centers but in order to collect state sales tax, you have to apply for a permit or you’re probably not collecting it lawfully. This article provides a link to each state that has a fulfillment center.
You’re probably going to need help navigating this issue. Talk to your tax preparer or a tax attorney if you already have a relationship with one.