If you’re an Amazon FBA seller – and even if you’re not - there’s a good chance you’ve heard about the recent development involving Amazon turning over specific information about its Amazon FBA sellers to the Massachusetts Department of Revenue (DOR). And if you're one of the FBA sellers whose information was provided to the DOR, then you likely received an email from the Fulfillment by Amazon team informing you that in response to a "valid and binding legal demand from the Massachusetts DOR," Amazon intended to provide the following information about sellers to the DOR by January 26th:
- Contact information (name, address, federal tax ID number, and phone number)
- Estimated value of the seller’s inventory in our Massachusetts fulfillment centers, calculated based on the seller’s selling prices in late 2016 and in 2017
So how did this all begin? Well, it started last August when the Massachusetts DOR issued an administrative summons to Amazon Retail LLC and certain affiliated entities, requiring Amazon to produce by September 21st, any and all documents identifying the names, addresses, and EINs, of any third party vendors who currently store or had at any time on or after January 1, 2012, stored tangible personal property (e.g., inventory) in any location owned or leased by Amazon Retail LLC or any corporate affiliated entity.
When Amazon failed to produce this information by the deadline, the DOR then proceeded, on September 25th, to file a petition in the Superior Court of Suffolk Country requesting an order to enforce its summonses. (On a technical note, there were four different Amazon legal entities to whom a summons was issued - Amazon Retail LLC, Amazon Fulfillment Services LLC, Amazon Pickup Points LLC and Amazon Technologies, Inc. – but to keep things easy, we’ll refer to all as Amazon.)
Now that I’ve covered some of the history of how this evolved, and since the DOR in now in posession of this information, here are 5 points that FBA sellers impacted by this development should consider.
1. What Will Massachusetts Do With the Information – and What Should Amazon Sellers Expect?
In its petition to the Court, the DOR clearly stated that the purposes of its original, administrative summons was to obtain information to “assist the Commissioner in the determination of certain vendors’ Massachusetts sales and/or use tax liability.” FBA sellers whose information was provided to the DOR can expect, at a minimum, to receive a communication from the DOR informing them they have a requirement to register for a Massachusetts sales tax permit and commence collecting, reporting and remitting Massachusetts sales tax. However, it is more likely that the DOR will ask sellers for more information, including asking about their nexus activity or to complete a questionnaire, or possibly inform them that the DOR has calculated an estimate of the seller’s Massachusetts sales tax liability based on information received from Amazon.
2. Inventory Value in Massachusetts Doesn’t Necessarily Equal Sales in Massachusetts
As I mentioned above, the DOR’s request to Amazon included providing the “estimated value of the seller’s inventory in Massachusetts fulfillment centers, calculated based on the seller’s selling prices in late 2016 and 2017.” The fact that Amazon provided a seller’s Massachusetts inventory values and sales prices to the DOR, as well as the DOR’s clear intent to use this information to help the DOR determine a third-party seller’s Massachsuetts tax liability, indicates the DOR could certainly attempt to use a seller's Massachusetts inventory values as a proxy for Massachusetts sales on which sales tax would be due. But here’s an extremely important point to note, while inventory in Massachusetts signals that the third-party seller has nexus for Massachusetts sales tax purposes, Massachusetts sales tax would only be owed on orders shipped TO a Massachusetts address. As someone who works with a significant number of Amazon FBA sellers and who reviews clients’ Amazon reports every month, I can tell you that very often, orders are shipped from fulfillment centers in states OTHER than the state the order is shipped TO – and this occurs even when there’s an Amazon fulfillment center located in the same state. This means that a seller's inventory in Massachusetts isn't always shipped to a Massachusetts customer, which in turn means that orders fulfilled from Massachusetts but shipped out of state would not be considered Massachusetts sales on which tax is due. A seller that is informed that their Massachusetts sales tax liability has been determined based on inventory values should know that the DOR's estimated liability may be quite different from their actual liability.
3. If the Massachusetts DOR Demands the Payment of Back Taxes, How Far Back Can They Go?
I also mentioned that the DOR demanded information from Amazon for as far back as January 1, 2012. However, for the great majority of FBA sellers whose information was disclosed to the DOR, their exposure will most likely not go back any earlier than October 1, 2016. This is because Amazon’s only full-scale Massachusetts fulfillment center (located in Fall River, Massachusetts) did not open until October of 2016 which means that for most sellers, their nexus – created by storing their product inventory in Massachusetts – most likely didn’t begin until October 2016 or later. While Amazon has had other facilities in Massachusetts for some time, such as a sortation center since 2014 (where already packaged shipments are simply sorted for "last mile" final delivery) and a fresh food and pantry distribution facility since 2015, for most sellers of consumer goods, their stock would not have been in Massachusetts until October 2016 or later. By the way, if you're an Amazon FBA seller and aren't sure if you have or had inventory in the Fall River, MA fulfillment center, I suggest running an Amazon fulfilled sales report for every month since October 2016. If you see orders were shipped from Fulfillment Center Code BOS7 on this report (column XT), this means your stock is or has been stored in and fulfilled from Massachusetts.
4. Massachusetts Sales Tax Is NOT the Only Issue – There’s Also Corporate Income Tax Nexus
FBA sellers are often surprised to find out that storing inventory in a state can also create nexus for state corporate income, franchise and other business taxes. Sellers should be aware that they could also be subject to the Massachusetts corporate excise tax (which includes both a tax on net income and a tax on property or net worth). Massachusetts is also one of several states that has adopted mandatory combined reporting for corporate income tax purposes. This may not be an issue for a smaller, single entity FBA seller, but could be a significant issue if the selling entity with Massachusetts nexus is part of a larger group of related companies since the total combined income of all related entities (including those that do not have income tax nexus in Massachusetts) would be subject to the Massachusetts corporate income tax under the combined reporting law. If this sounds complex, it is! The point here is that impacted sellers need to be aware that the Massachusetts DOR could very well seek to determine whether a seller might have corporate income tax nexus as well and this could have some significant implications.
5. Is It Too Late for a Voluntary Disclosure? Will Massachusetts Offer a Special Amnesty?
Massachusetts, like most states, has a Voluntary Disclosure (VD) program which allows delinquent taxpayers to come forward voluntarily and disclosure their prior period liabilities. One of the main benefits of the Massachusetts VD process is that a seller can request to participate in a VD on an “anonymous” basis through a taxpayer representative. Other benefits include a limited lookback period (generally 3 years for most out-of-state taxpayers) and a waiver of all penalties. However, a taxpayer who has already been contacted by the DOR regarding the tax they wish to disclose is no longer eligible to participate in a VD. For this reason, sellers concerned that their Massachusetts sales tax liability may be significant should consider applying for a VD as soon as possible since the DOR will likely send out communications soon. On whether the Massachusetts DOR might offer a special amnesty for impacted sellers, sellers shouldn’t wait to see if a special amnesty is announced. You see, even though the Massachusetts DOR has the responsibility of administering a tax amnesty, the Massachusetts legislature must first enact a law approving an amnesty which has not occurred.
Yes, a lot has been reported on the fact that Amazon turned over specific, Identifying information on its Amazon FBA sellers to the Massachusetts DOR. But what's more important now is for sellers to know what this means and what they might expect. It's important not to panic but to be proactive such as by seeking the advice of a state tax advisor who can guide them on what action to take - and preferably a Massachusetts based tax advisor who is well versed in the Massachusetts tax laws, such as your resident blogger here ;) (See my bio box below) Also know that this is significant because Amazon agreeing to comply with the DOR's request could motivate other states to take similar action. Which leads me to one final point. Remember that Amazon is both a retailer and a marketplace for third-party sellers. Now that Amazon collects sales tax on its own retail sales in every single state that imposes a sales tax, states are turning their focus on Amazon's third party sellers.
Other recent “Massachusetts (MA)” posts by Sylvia F. Dion, CPA:
- Massachusetts' Economic Nexus Reg to be Enforced Retroactively
- Amazon Exposes FBA Sellers in Massachusetts: 5 Key Considerations
- Massachusetts Expands Sales Tax Nexus Policy for Internet Vendors
- The Massachusetts DOR Website - A Great (Sales) Tax Resource
- MassTaxConnect - 5 Things Massachusetts Sales Tax Filers Should Know