I recently met with a company that has been growing their business primarily through Amazon’s FBA program. As like many nascent businesses, sales tax compliance was not a significant concern as they were launching and taking off. They collected sales tax in their home state and the state where they shipped their inventory to Amazon. Unbeknownst to them (or perhaps a calculated business decision), they had created sales tax nexus in multiple states and had not been collecting the sales tax due.
Sales tax nexus is a physical connection to a jurisdiction significant enough to allow that jurisdiction to subject a business to their sales tax rules in this situation. Sales tax nexus can be created in a variety of ways including owning inventory in a state. With the Amazon FBA program, when a seller ships their inventory to a specific Amazon location, Amazon then has the ability to move the inventory to their various warehouses to minimize the shipping time and costs. This physical inventory that the seller owns can create sales tax nexus wherever it sits in an Amazon warehouse. (You can learn more about sales tax nexus and Amazon FBA sellers by downloaded this Amazon Executive Briefing.)
Getting back to the business that was realizing this unfortunate situation, they have some difficult choices to make:
- Approach the state through a Voluntary Disclosure Agreement and pay the back sales tax that should have been collected including interest;
- Register with the proper date as to when the business first established sales tax nexus, prepare the requisite returns for the prior periods and remit any sales tax due likely resulting in a notice of penalty and interest;
- Comply prospectively and recognize the risk associated with the prior periods and that sales tax is still due in these prior periods; or
- Do nothing and continue to increase their sales tax risk.
None of the options are great.
These difficult decisions could have been avoided by implementing a sales tax compliance strategy from the beginning. Sales tax is meant to be a pass-through tax and should not create or represent risk for a business. Of course there is a cost to comply which is negligible when compared to the cost of paying back taxes out-of-pocket, and paying interest and penalties. Especially for the Amazon FBA seller, Amazon has a great platform to collect the sales tax. The seller only needs to register and file the returns. TaxConnex can be a great resource for any business with a multistate sales tax collection and remittance obligation and especially an Amazon FBA seller.