Nov 01, 2019
By Todd Helle, Partner and Tax Director at Terry Lockridge & Dunn
If you or your business sells products on Amazon using the Fulfillment by Amazon (FBA) service, you are well into the multi-state sales tax mess ... even if you are not aware of it. You may be asking yourself:
- Do I now need to register my business with every state and collect tax on their behalf?
- Do I really have physical nexus? What about economic nexus? What is nexus?
The old sales tax standard required you to collect and remit sales tax only in states that you have a physical presence (also known as physical nexus). The recent South Dakota vs. Wayfair, Inc. decision by the Supreme Court then legitimized the concept of economic nexus. This means your business could be required to collect and remit sales tax based on where you ship a product and not whether you ever set foot in a particular state (economic nexus).
The bigger mess
States were quick to jump on the bandwagon and actively identify Amazon, eBay and Walmart sellers to demand sales tax for website sales. Some states, like California, got even more aggressive and decided that FBA sellers do have physical presence because Amazon may put your product in a warehouse in their state.
Marketplace facilitator to the rescue?
To help address this mess and alleviate the need for small businesses to collect and remit sales tax forms to 50 states, many states acknowledged the problem and have passed what is called Marketplace Facilitator laws. In short, it’s on the facilitator, NOT you. States with these laws require Amazon, eBay and similar companies that facilitate sales for resellers to collect and remit sales tax on reseller Amazon activity. There are more than 30 states that have adapted these laws.
You DO NOT need to register your business to collect sales tax in states that have Market Facilitator legislation unless you are otherwise required to do so (such as having a physical presence in the state).
What you need to know
- Know the states. Know which states have Marketplace Facilitator laws. If you do not, you could unwittingly register your business with a state when you do not have to do so. Of our surrounding states, Iowa, Illinois, Wisconsin, Nebraska, the Dakotas and Minnesota have adopted a marketplace facilitator sales tax policy. Missouri and Kansas have not.
- Some states deploy deceptive tactics. For example, California passed a Marketplace Facilitator law effective October 2019. Despite this law, the California Department of Tax and Fee Administration (CDTFA) is actively soliciting small businesses who sell on Amazon to register and remit sales taxes for a time period prior to this date without disclosing the new law.
- Know the minimums. Even states without Marketplace Facilitator laws typically have minimum thresholds before they require you to collect and remit sales tax. Every state is different, but the typical limit is 200 transactions or $100,000 in sales.
- Check out streamline states. Collecting and remitting sales tax is a daunting task for any small business. Using a third-party sales tax administrator is very expensive. There is some help, albeit still complicated, for registering with 23 states that are part of a streamline sales tax agreement. Iowa is one of the states that belongs to the Streamlined Sales and Use Tax Agreement. Sales tax collection in multiple states is not for the faint of heart.
If you are selling a taxable product on the Internet, make sure you know the rules for collecting sales tax. Feel free to reach out to Todd at firstname.lastname@example.org or any of the accountants at Terry Lockridge & Dunn. They can be reached at 319-364-2945 in Cedar Rapids, or 319-339-4884 in Iowa City.