This week, Amazon disclosed Amazon seller information to the California tax authorities in response to a legal demand letter it received late last month.This video contains important information for Amazon sellers that have recently received the notice that the California Department of Tax and Fee Administration (CDTFA) has issued a formal legal demand to Amazon. Amazon intends to comply with that legal demand on November 6th.
Following the demand, Amazon sent an email to all of its sellers, notifying them of the demand. Since this email was sent, our law firm has spoken with a number of Amazon sellers, and we have found that there are some misconceptions and misinformation surrounding the demand and the potential collection process.
I want to take the opportunity to address some of those misconceptions because I think it is important to understand what the CDTFA is really after. My hope is that with clarity, people can take constructive actions to protect their businesses and come into compliance with the state of California.
Let's start with some good news. Coming into compliance with California is flexible, and it is something sellers can address proactively. If sellers act soon, they can protect your Amazon sales business. Our firm has handled about 50 to 60 cases involving Amazon sales tax issues, and all of these businesses, for the most part, survived.
Right now this may seem like an insurmountable problem. There is a lot of fear and panic surrounding this issue. I want to assure you that with some proper planning, you can address this problem head on.
But, the bad news is is that ignorance of the law is not viewed as a valid reason for non-compliance. Once you are established having nexus with the state of California, there are consequences from a sales tax perspective and there are also consequences from a state income tax perspective. This is a big problem because a lot of people have been selling through the Amazon and not aware that they have been creating nexus with California.
A lot of sellers assumed improperly that Amazon was taking taxes and remitting taxes on their behalf. Amazon actually doesn't have an obligation, at least in California, to do that for its sellers. Through Amazon’s FBA platform, the company created a situation in which they established a nexus in California, obligating their sellers to state tax liability while failing to help them collect and remit those taxes.
California is unfortunately not offering a reprieve to Amazon sellers, but sellers can catch a break through the traditional programs that already exist. One is called the Voluntary Compliance Program and one is called the Managed Audit Program. The Voluntary Compliance Program generally has a three-year look-back window that would forgive all the penalties, and the Managed Audit Program will also forgive the penalties, but for a two-year window. Whether or not a seller qualifies for either program depends on the facts of their situation.
Another problem for Amazon sellers is is that this problem is not limited to California. There have been a number of states that have put tremendous pressure on Amazon to remit taxes to account for business conducted in their borders.
This issue stems from a Supreme Court case, Wayfair v. South Dakota. The Supreme Court’s ruling in Wayfair blesses a broad definition of economic nexus, absent a judicial or a legislative intervention. From a judicial standpoint, there will likely be a number of companion cases that will craft the Court’s position. Unfortunately, there are not currently any companion cases that will help shape this issue for current Amazon sellers. This looks like it will remain a serious issue for Amazon sellers for the foreseeable future.
Amazon's distribution of inventory through the FBA platform has created Nexus for people in a variety of states. Tax liability in those states really depends on what is being sold, the number of sales being made, and where the customers are located. It's really important for sellers to understand that this problem is a problem that crosses state lines, even though they are just now being made aware of it through California’s legal demand. Amazon’s policy of putting inventory in various warehouses has essentially availed sellers to potential nexus in every state where Amazon has a warehouse.
If you are an Amazon seller that has not been remitting taxes to California, the good news is there are ways to protect yourself through proactive action. California already has your information, and it is only a matter of time before they run your EIN. Now is the time to take steps to minimize your exposure to tax liability for past Amazon sales while coming into compliance with California.