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Amazon Tax: 3 Teachable Moments to Clear the Confusion

author photo of Sylvia F. Dion

If you’re keeping up with the latest “Amazon” headlines, then you’re probably aware that Amazon began collecting sales tax in Florida on May 1st. Or perhaps have heard about another recent “Amazon” tax newsflash – the one dealing with a recent study which found that shoppers purchase less from Amazon in states where the e-tailer collects tax.

Yes, Amazon is once again making headlines. But what is it with this "Amazon" obsession that makes the company's every action, every hiccup, every declaration, ... newsworthy?

Now, I have to hand it Amazon for creating all this "buzz" - you see, because of all this recent Amazon news, I've been presented with a “teachable moment.”

If you’re a parent you know what I mean by a “teachable moment” – it’s those times when we, as parents, grasp the opportunity to teach our children a valuable lesson or transition to an important “talk.”

But before I jump into today's "teachable moments," I have to refer back to my last post, where I wrote about how Amazon laws are not all created equal. The focus of that post was to clarify some of the confusion about which states have enacted an “Amazon law” and what that state’s “Amazon” provision includes. (I pointed out, for instance, that all “Amazon” provisions are not just about “click-through” nexus, as many folks may think.)

But as I wrapped-up that post, I noted another perplexing thing – how all the recent flurry about Amazon collecting tax in several new states has simply added to the “Amazon confusion.” You see, it isn’t always clear whether Amazon.com started to collect tax because an “Amazon law” required them to do so, or because the retailer entered into an agreement with the state. So in some ways, you can think of today's post as a "Part 2" to that discussion.

On that note, let’s look at these recent Amazon stories and the “teachable moments” they’ve created.

TEACHABLE MOMENT #1: Just because Amazon collects tax in a particular State that does not mean the State has an “Amazon” provision in effect.

Amazon (and when I say Amazon here, I mean Amazon.com or one of its retail subsidiaries), is now collecting sales tax in twenty-one states. But the reason Amazon has begun to collect in these 21 states varies. Certainly, Amazon has begun collecting tax in states that have enacted either a “click-through” and/or affiliate (related party) nexus provision. For instance, Amazon now collects in Virginia, which in 2012 enacted a provision that effectively says a remote retailer whose goods are fulfilled through a distribution center owned by a related party has nexus to Virginia for tax collection purposes. Amazon also now collects in “click-through” nexus states – those where Amazon has entered into an agreement with marketing affiliates that post web-links on their in-state website and that are compensated if a referred customer makes a purchase from Amazon.

But Amazon also collects in states like Massachusetts, a state where Amazon does not currently have a distribution center or where its activity arguably does not exceed the state’s nexus standard. Amazon also collects tax in states where it negotiated favorable economic incentives in exchange for its promise to open distribution centers and fill jobs. Incidentally, an agreement such as this, is exactly why Amazon is now collecting in Florida.

But there’s more confusion to clarify, which leads me to the second teachable moment in this post.

TEACHABLE MOMENT #2: Just because “Amazon” collects in a particular State this does not mean that tax is collected on every sale to customers in the “collecting” state even if that sale is consummated on Amazon’s website.

A minute ago, I mentioned that when I say “Amazon” is collecting tax in 21 states, I’m referring to Amazon.com or one of its retail subsidiaries. This distinction is important because many people forget that Amazon is a marketplace, a platform where thousands of independently owned businesses market and sell their products. And whether a specific Amazon marketplace seller is required to collect tax is determined by that seller’s nexus profile.

At the beginning of my post, I also mentioned a recent Ohio State University study which showed that consumers in states where Amazon collects tax purchase less from the e-tailer (approximately 10% less according to the study). But here’s another thing the study showed. Although sellers in these states purchased less from Amazon, other on-line sellers (including those Amazon's marketplace sellers I just mentioned), saw an uptick of about 20% in their sales as a result. Although some media stories pointed this out as a strange twist, it isn't so unusual when you keep in mind that each marketplace seller collects according to their own requirement to do so.

Now, I have to throw in one last point here - which is that, yes, some Amazon marketplace sellers do find that they are required to collect tax in the same states that Amazon collects. For instance, if a marketplace seller uses Amazon’s Fulfillment by Amazon (FBA) service, the seller is likely to have a tax collection requirement in those states where the seller’s inventory is stored and fulfilled out of an Amazon distribution center. (You see, that seller still owns that inventory, which creates an actual physical presence in the state. Then there's this little nexus concept known as "agency nexus" that comes into play. But all of this is a topic for another post!)

TEACHABLE MOMENT #3: It’s important to remember that despite what Amazon is doing (or not doing), what’s really important is understanding how the sales and use tax laws apply to YOUR business.

Okay, so this last "teachable moment" is really more of an overall conclusion. While it's entertaining to follow all the “Amazon” brouhaha, it's much more important to understand how the sales tax laws apply to your or your client's business. If a state enacts an "Amazon" provision, how has that new provision changed the definition of "nexus" in that state? Is your business (or your client's business) engaged in activities in that state that create a requirement for them to register and collect tax? If Amazon (the retailer) begins collecting tax in a state - is this a result of some type of agreement that Amazon negotiated with the State? What, if any, is the impact to other on-line businesses?

In a nutshell, it's important to separate all the Amazon frenzy from what the non-Amazonian on-line business must understand and comply with.

By the way, if you'd like to see in which states Amazon collects tax, here's a quick reference chart that compares the states which have enacted a "click-through" or affiliate (related party) nexus provision and compares it to the states where Amazon (the retailer) collects tax. (And, if you'd like to see a more in-depth chart on the various state "Amazon" laws, you'll find that chart at my last post, "Amazon Laws Are Not all Created Equal")

STATE

States with a Click-Through or Affiliate (Related Party) Nexus Provision (See note A below chart)

States Where Amazon Collects Tax As of 5/1/14

Arizona

X

Arkansas

X

California

X

X

Connecticut

X

X

Florida

X

Georgia

X

X

Illinois

X

Indiana

X

Kansas

X

X

Kentucky

X

Maine

X

Massachusetts

X

Minnesota

X

Missouri

X

Nevada

X

New Jersey

X

New York

X

X

North Carolina

X

X

North Dakota

X

Pennsylvania

X

X

Rhode Island

X

Tennessee

X

Texas

X

X

Vermont

X

Virginia

X

X

Washington State

X

West Virginia

X

Wisconsin

X

Note A: Note that this column does not includes those states that have enacted a notification and/or reporting statute. Although the notification and reporting laws are sometimes grouped into the "Amazon" law category, those statute are not focused on a tax collection requirement, but are instead based on notifying customers of the requirement to voluntarily remit their state's use tax.

About the Author: Sylvia F. Dion, MPA, CPA, is the Founder and Managing Partner of SALT Consulting firm, PrietoDion Consulting Partners LLC. Sylvia has been covering Internet Sales Tax developments for SalesTaxSupport’s Issues blog since 2011. Sylvia is also the “U.S. Sales Tax for Foreign Sellers” contributor for SalesTaxSupport’s Industry blog and the “Massachusetts Sales Tax” contributor for SalesTaxSupport’s State blog. You can follow Sylvia on twitter and on Google+ and can contact Sylvia via e-mail at sylviadion@prietodiontax.com or at 978-846-1641.

Comments or questions may be submitted by using the on-page "Comment" feature, subject to disclaimer at bottom of page. Other contact options (and Consultation Requests) are also available on Sylvia's associated Firm Profile page.

Other recent “Internet Tax / E-Commerce” posts by Sylvia F. Dion, CPA:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.

Comments

10 Responses to Amazon Tax: 3 Teachable Moments to Clear the Confusion

  • Posted by Ana on May 15, 2015 5:11am:

    sylvia,
    If opening up a business selling products on amazon, do I need to open Sales Tax accounts in each of those states to pay the sales tax and do I have to pay property taxes on the inventory that Amazon partially holds on to. The business would be based out of Georgia.
    Thanks

    • Posted by Author photo of Sylvia F. DionSylvia F. Dion on May 19, 2015 12:24pm:

      Ana,
      Hello and thank you for your comment! If you will be selling on Amazon.com you are required to apply for a sales tax permit and collect sales tax only in those states where you, the seller, has "nexus". If you use Amazon's FBA service, you would have nexus in those states where Amazon places your product inventory and from where your sales are fulfilled. You would also have nexus in Georgia - the state where your business is based out of, plus any other state where your activities meet the state's requirement for creating nexus, such as states where you have employees or rent office space (but nexus can be created in many more ways). So, yes, in general you will most likely have to register to collect sales tax in at least one state (your based from state) and possibly other states as well. If you have any other questions, please feel free to contact me at sylviadion@verizon.net.

  • Posted by Antonio on October 21, 2014 6:18am:

    Hi Sylvia, i'm about to form a new LLC company in Delaware (E-commerce) but the thing is that i'm not an US citizen, i live out of the US.
    I want to know if i must deal with tax collection, state withholding and gross receipts taxes, etc.
    I hope you can clarify this
    Thanks

  • Posted by Sales on August 13, 2014 1:17am:

    [...] made during the Sales Tax Holiday are also exempt.  So if you’re a resident of a state where Amazon collects tax, and you make your purchase during the hours that your state’s Sales Tax Holiday is in [...]

  • Posted by Bob on May 25, 2014 9:46am:

    If only Amazon could "teach" other vendors how to get the states to subsidize those other vendors' operations, there would then be a 4th teachable moment to consider here!

    • Posted by Author photo of Sylvia F. DionSylvia F. Dion on June 3, 2014 6:15am:

      Bob, Because I know have a "dry" sense of humor - I know you are just taking a jab at the situation ;) But you do bring up a good point - and it's not just Amazon that benefits from Economic Incentive "perks" - name just about any other big company, e.g., Caterpillar, Toyota, Twitter, etc. and you'll find they've negotiated some economic perk or another.

  • Posted by Bob on May 25, 2014 9:43am:

    Sylvia,
    A great post as always. A question remains with click-thru nexus. Doesn't this concept conflict the soon-to-expire "hands off" taxation of the Internet" that Congress previously passed?
    I recall Susan Lindsey making this comment in a LI thread & feel it beneficial to bring it up here.
    Also, I cannot help but feel that the states that have taken click thru nexus have really taken an aggressive step that conflicts with Quill. Unless/until MFA becomes enacted, it seems to me that the states should be prohibited from passing these laws as contra to existing interstate commerce laws.
    Finally, it is very important to note the numerous "sweetheart" deals that many of the states have given Amazon.
    CA is letting Amazon pocket the local portion of the sales tax for 2 years so essentially, the CA taxpayers are building Amazon's 2 fulfillment centers with CA sales tax dollars!
    Still other states are letting Amazon have "sweetheart" loans to finance the construction of their fulfillment centers. In those states, Amazon's building of 1 or more fulfillment centers gives them concrete nexus (pun intended) in those states where Amazon built the centers.

    • Posted by Author photo of Sylvia F. DionSylvia F. Dion on May 27, 2014 12:54am:

      Bob, Thanks for the comments! You bring up a very good question about whether click-through nexus conflicts with the Internet Tax Freedom Act’s (IFTA) prohibition on federal, state & local governments imposition of taxes on internet access, discriminatory “internet only” taxes (e.g., an e-mail tax), and multiple taxes on electronic commerce. Actually, I believe one of the most common misperceptions that exist about “the taxation of internet sales” is that the IFTA is the reason remote retailers aren’t required to collect tax on sales to customers in states where they do not meet the state’s nexus threshold. (Of course, the biggest misperception is that sales made over the internet are simply “tax-free”! Actually, althought this is much older post, here's one I wrote for our blog here in 2011 about the various "Internet Sales Tax" misperceptions: http://www.salestaxsupport.com/blogs/sales-use-tax/internet-tax-ecommerce/internet-sales-tax-confusion-caused-by-myths-or-misperceptions/)
      Now I will point out that there may be some confusion that resulted recently because of the Illinois Supreme Court decision in Performance Mktg. Ass'n Inc. v. Hamer, No. 114496 (Ill. 18 Oct 2013). Recall that the Illinois SC held that Illinois’ “click-through” nexus provision was pre-empted by the Federal IFTA of 2007 in accordance with the Constitution’s Supremacy Clause, thus making the Illinois provision void and unenforceable. This past December, I wrote two articles on the Illinois Supreme Court decision where I explained the Illinois Supreme Court’s rational. (Here’s the article that was published in e-Commerce Law & Policy, “US Supreme Court may rule on the ‘click-through’ nexus”: http://www.sylviadioncpa.com/Illinois_SC_Click-Thru_Nexus_Article_E-Com_Law_Policy_Article_Dec_2013.pdf) I won’t go into too much detail here (but I do in the article), but in general, the Illinois Supreme Court found that the requirement to collect the Illinois use tax met the IFTA’s definition of a “discriminatory tax,” and that because the “click-through” nexus provision applied to remote retailers with ON-LINE marketing affiliate contracts, but did not apply to OFF-LINE marketing campaigns, the Illinois click-through nexus provision was a discriminatory tax as defined by the IFTA.
      But here’s another point that ties into your comment – the Illinois Supreme Court didn’t even address the U. S Commerce Clause issue. A point which dissenting Justice Karmeier was very quick to point out. The dissenting Justice also pointed out that if the IFTA expires in 2014, the decision will no longer be valid and Illinois’ “click-though” nexus provision can be re-instated. This would also imply that other states concerned with pre-emption of their “click-through” nexus laws would have less of a concern about a pre-emption challenge.

  • Posted by Jim on May 22, 2014 1:29am:

    This is wonderful information! But what needs to also be added to information about the Marketplace Fairness Act is that it is the creation of Walmart. Walmart has invested 50 million dollars to gain passage.
    Passage will hurt Amazon along with placing Malware into every internet business.
    Guess who is exempt? Walmart

    • Posted by Author photo of Sylvia F. DionSylvia F. Dion on May 27, 2014 1:01am:

      Jim,
      Thank you for reading my post and the comment. Since this post was really focused on how Amazon's tax news opens up a opportunity to provide more guidance, it really wasn't intended to focus at all on the pending Marketplace Fairness Act or on Walmart. I do, however, blog about MFA developments here at SalesTaxSupport.com, so PLEASE feel free to check back in. I will say, It will be interesting to see what ends up happening with the current MFA.

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