Even with the many policy changes, new regulations, and surprising new competitors, the previous year was an astonishing success for Amazon. The company broke all records with its reported earnings of over $87 billion in Q4 2019, and business is booming.
Not for everyone, however.
Amazon’s third-party sellers are facing a severe problem with the new back-tax bills that left most people in shock.
Countless sellers have received letters from US states, notifying them that they owe considerable amounts in sales taxes. Some have even been told that they owe taxes for almost the entirety of the last decade, dating back to 2011.
The accusation is that Amazon’s third-party sellers have failed to collect and remit taxes from their customers, and now states are requiring payments.
South Dakota V. Wayfair
While the back-tax bills came as a big surprise to many Amazon sellers, this didn’t come out of the blue. This turn of events was to be expected after the 2018 ruling in the case of South Dakota v. Wayfair.
Here, the Supreme Court ruled that states can mandate that businesses without a physical presence in the state can collect and remit sales taxes from their transactions. At the time, it was ruled that only such companies that have over 200 transactions or over $100,000 in in-state sales are subject to back-tax.
In this case, the law was not retroactive, and South Dakota couldn’t collect taxes on sales made before this ruling.
South Dakota v. Wayfair's case was huge but had even more significant implications. Now, all states could collect sales taxes from out-of-state businesses that make transactions with in-state customers.
Regardless of whether Amazon’s third-party sellers are aware of this or not, if they receive a back-tax bill, they must pay it.
Amazon’s Third-Party Business
Amazon’s business can be separated into three main categories:
● Its online stores
● Its physical stores
● Its third-party sellers
Amazon has been collecting and remitting sales taxes from its online and physical stores and from the products shipped from the company’s warehouses. However, it’s never done that for its third-party sellers. At least not until the South Dakota v. Wayfair ruling.
After the ruling, certain states’ marketplace facilitator laws started requiring Amazon to collect from third-party sales. This could prove to be just as detrimental to Amazon as it is to its third-party sellers.
The huge back-tax bills are effectively forcing sellers out of the business as many cannot afford to pay the taxes and keep their businesses running.
In Q4 2019, 53% of paid units on Amazon were sold by third-party sellers. Without them, Amazon wouldn’t have become such a force to be reckoned with, and none of the existing sales records would have been met.
FBA Sales Taxes Explained
As a third-party seller, you can use Fulfillment by Amazon (FBA) service and allow Amazon to store, pack, and ship your products. In this case, you might be required to collect the sales tax if you meet the criteria:
● You have a sales tax nexus
● You have product taxability
A sales tax nexus is defined as a connection to a state, either in the form of a physical presence or as an economic connection.
Physical presence means that you have:
● An office in-state
● An employee in-state
● A warehouse in-state
● An affiliate in-state
● A storing inventory in-state
An economic connection would suggest that you either have a certain number of transactions in-state or have made a certain amount of money in-state.
In the South Dakota v. Wayfair ruling, South Dakota could impose a tax if you have over 200 transactions or have made over $100,000 in in-state sales. Different states might have different limitations here.
As an Amazon third-party seller who uses the FBA services, you are considered to have a physical presence in-state because you use Amazon’s storing inventory.
Amazon currently has over 75 fulfillment centers across the US, which can make you susceptible to sales tax laws. Once your merchandise has been shipped to Amazon, the company can move your products between warehouses in different states without notifying you or asking for approval.
This was precisely the biggest issue for third-party sellers who didn’t keep track of where their merchandise was stored, and therefore never collected nor remitted their sales taxes.
More States Likely to Request Tax Payments
Amazon’s warehouses are located in 33 of 45 states that currently request sales taxes from online merchants. One of the states where Amazon has numerous warehouses is California, which defines retailers as those who possess property owned by third parties and can transfer the title of the property from the seller to the buyer.
Amazon Fulfillment Services, Inc. owns and operates the warehouses as a subsidiary. Amazon Services LLC is in charge of transferring the title from the seller to the buyer as another subsidiary. Neither Amazon Fulfillment Services, Inc. nor Amazon Services LLC can perform both of these functions, so Amazon isn’t considered to be the retailer.
This allows California to pursue third-party Amazon sellers and request huge, essentially retroactive, back-tax bills that few sellers can afford to pay.
It is expected that other states will follow suit and continue pursuing third-party sellers. Besides New York and South Carolina, all 45 tax states have a very similar approach to defining “retailers,” and if they all start pursuing third-party sellers, many will be forced out of business.
Third-Party Amazon Sellers Facing Big Back-Tax Bills
Among the many affected sellers is Steve Jenson, a bookseller from Utah on Amazon. He received a $200,000 tax bill from Washington, accusing him of failing to collect and remit sales taxes.
Mindy Wright, a Washington-based seller of household goods, was charged over $36,000 in back-taxes for her sales from 2016 to 2018 in California.
Neither of them was aware that they were responsible for collecting and remitting taxes from their customers, and neither was prepared for the hefty bill they’d received.
The Bottom Line
Many sellers who’ve already received their letters are facing even higher back-tax bills, and it is expected that most of Amazon’s third-party sellers will receive similar letters. The best advice for those who receive these bills is to seek a financial advisor and a legal representative.