The Rise of Amazon and Problems This Creates
Amazon has begun the process of registering and collecting sales tax in most states on sales allocated. This will not be a problem for businesses that sell products directly to Amazon for resale by Amazon. However, for vendors who utilize the Amazon marketplace to sell directly to consumers, especially those who participate in Amazon Prime, state sales tax nexus is a significant consideration.
Amazon holds consignment inventory of these vendors in its warehouses in many states. The maintenance of inventory in a warehouse in any state results in nexus for both sales tax and income tax purposes. Nexus is essentially a presence within a state that subjects a business to that state’s income or sales taxes. The warehouse inventory requires businesses to collect sales tax from customers and to register and file income tax returns in the states where the inventory is held. To further exacerbate the problem, once Amazon holds a business’s inventory, it has the right to move that inventory wherever it sees fit, in response to sales demand. It is foreseeable that a vendor’s inventory could be in California one month, Illinois the next, and so on. Under a strict reading of the statutes, the business will be required to collect sales tax and file income tax returns in each of those states. This is regardless of the level of sales since the inventory meets the physical presence requirement.
Currently, the State of Massachusetts is in litigation with Amazon to obtain a list of all vendors that have inventory in an Amazon warehouse located in the state. Massachusetts has issued a subpoena to Amazon, which the company has resisted. A recent decision by the Massachusetts Appeals Court has ordered Amazon to provide the list to the state’s Department of Revenue.
Amazon is sure to appeal this ruling, but this case exemplifies the level of aggressiveness states are taking in search of tax revenue and in requiring businesses to collect and remit sales taxes. Depending on the degree of success that Massachusetts achieves in its pursuit of Amazon, it is likely that many more states will follow suit, if they have not already begun proceedings. As such, it is imperative that Amazon vendors review their Amazon accounts, understand the location of their inventory, and take steps to address any state nexus issues that arise.
As the case is in appeals and litigation, the results may be significant for companies with nexus in multiple states. Venders using or considering using Amazon should consider these cases and the effect the sales tax may have on their business. We suggest seeking out the advice of a sales tax professional.