Internet Retailers

State and Local Tax Implications for Internet Retailers

Based on U.S. Department of Commerce estimates, retail online sales are predicted to reach almost $500 billion this year.  Just about every retailer is now selling online and state taxing authorities are losing out on a significant amount of tax revenue since sales tax is not being charged on a majority of these sales.  This is because the sellers do not have physical presence (nexus) in these states; which is a requirement stemming from the 1992 Quill decision reached by the Supreme Court of the United States.

This has not stopped the states from attempting to compel internet retailers to collect sales tax.  State are becoming more aggressive with their efforts to expand nexus on their own terms due to a lack of Congressional action.  In recent months, a number of states have enacted so-called "Kill Quill" legislation aimed at bringing this matter back to Supreme Court.  Taking into consideration changes in the economy and technology, the states are hopeful that the Court will reconsider their 25 year-old decision due to the impact its having on state tax collections.

Internet retailers should be aware that these efforts may result in increased state and local tax compliance burdens on their businesses in coming years.  Our SALT team has a considerable amount of experience working with internet retailers across the U.S. and we have identified a number of issues these businesses need to be addressing to manage their state and local tax risk.

  • Online sales of products and services are subject to sales tax if your business has physical presence (nexus) in a state or local taxing jurisdiction;
  • If your business has nexus, you need to determine if what you are selling is taxable or not. Most sales of tangible personal property are subject to sales tax unless excluded by the tax law or exempt based on their use.   
  • If you are selling taxable products for resale or that are exempt due to their use, you need to collect resale or exemption certificates from your customers to document the nontaxable nature of the sale.
  • Once you have resolved the above issues, the business should quantify its potential exposure and decide whether to register in certain states or request voluntary disclosure to deal with prior liabilities.
  • Sales and use tax compliance in multiple states can quickly become burdensome.  There over 10,000 sales tax jurisdictions in the U.S. and properly reporting sales can be a nightmare without automated solutions that provide sales tax rates, segregate sales by state/local jurisdictions and assist with filing returns or remitting tax.

Internet retailers should not ignore these issues.  Additionally, do not ignore notices or nexus questionnaires from states.  Once state taxing authorities have your business in their sights, it may be too late to voluntarily register or comply with their tax laws.  Don't risk your profits or the future of your business over unpaid taxes.  To discuss how state and local tax issues may affect your internet business, please contact Tom Mazurek at tmazurek@tsacpa.com

Fulfillment by Amazon

If your business uses Fulfillment by Amazon (FBA) and Amazon is storing your products in their fulfillment centers and providing picking, packing, shipping and customer service for your business, then you may be creating nexus for state and local taxes in the states where your inventory is being stored.

FBA sellers do not have a choice regarding which Amazon fulfillment center their inventory is stored in or moved to.  Amazon now operates fulfillment centers in over 25 states across the U.S. and is seemingly breaking ground on new warehouses every month.  Owning tangible personal property (inventory) in a state creates nexus for sales and use tax and income/franchise tax purposes in most states.  The fact that you did not voluntarily ship or move your inventory to a particular fulfillment center does not matter to state taxing authorities.  Internet retailers may be required to register, collect and remit sales tax in these states, as well as file periodic returns.  The presence of inventory exceeds the scope of Federal protection for income and non-income based franchise taxes in most states as well.

States are getting more aggressive with Amazon in connection with the identity of FBA sellers who may own inventory in their state.  California recently sent nexus questionnaires to businesses they believe are using FBA to facilitate their online sales.  In Massachusetts, a judge recently ordered Amazon to turn over records about all the Marketplace sellers who stored inventory in their warehouses in Mass. after the Company failed to comply with a Department of Revenue summons.  FBA sellers need to get out ahead of these efforts and determine where their inventory is stored and their potential state and local tax exposure.  

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