By Jennifer Clark of TaxJar
Selling
online, and specifically via Amazon FBA, has evolved from its
earliest stages to the overwhelming machine that exists today. Thanks to new
Supreme Court laws around economic nexus and marketplaces, Amazon sellers are
held to new sales tax requirements that can be cumbersome to navigate. Don’t
worry. We’ll break it all down for you here and tell you what you need to know
to handle the two most important sales tax laws affecting high-volume Amazon
sellers today.
First,
let’s revisit the evolution of eCommerce sales tax laws dating prior to June
2018. As an Amazon FBA seller, you were
once only required to collect sales tax if you had nexus in a state, which
meant a physical presence like a storefront, an employee, or inventory stored
in a warehouse in certain states. Today, the definition of nexus has been
expanded well beyond the physical realm and an additional concept of “economic
nexus” is now becoming mainstream in the sales tax world.
A Brief History of How We Got Here
In
1992, the Supreme Court originally ruled that the Quill Corporation (who sold
their goods via catalog, phone, and ad sales), didn’t have physical nexus and
ultimately weren’t responsible for collecting sales tax on their goods sold in
North Dakota. This didn’t sit well with the state, which then filed a
collective action seeking Quill to pay sales tax. Sadly for North Dakota, Quill
did not have to pay.
As
eCommerce sales began to explode, the states began to take notice of high
volumes of goods being shipped across state lines. Companies’ sales were
booming, yet many states were missing out on the sales tax for those orders and
they were hungry for that revenue.
Fast
forward to 2018; the state of South Dakota declared that having a certain level
of economic activity in their state meant that you now had nexus in their
state. Meaning that businesses are now required by law to comply with South
Dakota’s sales tax law even if they had no physical presence in that state.
They followed this up by taking action against a few large eCommerce retailers,
including Wayfair, and the case went all the way up to the US Supreme Court for
a decision.
Known
as South Dakota v. Wayfair, the June decision ruled in favor of South
Dakota, declaring that states can apply their own sales tax laws to
out-of-state retailers based on economic activity. This was a
landmark ruling as it was the first time that sales tax nexus had been legally
triggered by something besides a business’s ‘physical’ activity in a state.
First, it’s important to fully
understanding economic nexus
This
new presence, better known as economic nexus, was still somewhat
confusing. The Court’s decision has given each individual state all the power
to decide their economic thresholds. There’s no one-size-fits-all definition
for what economic activity is, leaving many eCommerce sellers to navigate
uncharted waters to determine if they must collect sales tax in multiple
states.
To
further clarify, South Dakota declared that economic nexus would be triggered
if a business conducted 200 or more individual transactions in a calendar year;
OR if gross revenue totaled more than $100,000 into South Dakota.
While
several states echo those same limits, it is still not unanimous across the
country. Some states have passed a threshold that requires a transaction amount
AND a gross revenue amount, some choose to keep the OR function, and even some
states have wildly different limits for their transaction volume or gross
revenue thresholds.
Most
recently, the state of California announced that they are following in South
Dakota’s footsteps. With such a low threshold of 200 transactions or $100,000
in gross revenue, this particular law affects much of the country because so
many online retailers sell into California and have substantial economic
activity there.
Second, Amazon sellers need to
understand Marketplace Facilitator Laws
Outside
of Wayfair, there is a second important set of sales tax laws that may affect
how and when you collect sales tax from your buyers called Marketplace Facilitator Laws. This
law all depends on the platform you use to sell. As an Amazon FBA seller, you need to
understand how these laws apply to your business to ensure that you’re
collecting and remitting correctly.
A Marketplace Facilitator is defined as an entity that
contracts with third-party sellers to promote their sale of physical property,
digital goods, and services through a marketplace. As a result, Amazon is
considered a marketplace facilitator for third-party sales facilitated through
the Amazon website.
Amazon is probably the first example that comes to mind
just because of its massive online presence, but there are several other
marketplace facilitators subject to these same laws (ie: eBay, Etsy, Walmart,
and more). If you’re wondering what to do now to stay in compliance with all of
the recent changes to sales tax and marketplace laws, keep reading.
The new marketplace facilitator legislation is composed of
a set of laws that shifts the sales tax collection and remittance from the
business entity to the marketplace facilitator. In the
case of Amazon, they have announced they will now be collecting sales tax on
behalf of the following states: Alabama, Connecticut, Iowa, Minnesota, New
Jersey, Oklahoma, Pennsylvania, South Dakota and Washington. (Note: State marketplace adoption is
changing rapidly. We recommend visiting the TaxJar blog for the
most up to date list of states with marketplace collection.)
So what does this mean
for you? Now that you have a marketplace facilitator collecting and remitting
sales tax on your behalf in a state, you don’t need to worry about sales tax
collection anymore, right? Unfortunately that’s not typically the case.
For most sellers, these
marketplace facilitator laws actually add an additional layer of complexity
when filing a sales tax return, rather than eliminating the dreaded sales tax
process all together.
If you sell solely on a
single channel that is a marketplace facilitator AND you fall beneath the
thresholds of economic nexus in every state, AND you don’t have physical nexus,
than yes, your sales tax obligations may have just become simpler. However, as
you can imagine, that’s not the case for most high-volume Amazon sellers today.
How to effectively
manage sales tax and stay compliant with these new laws
If you have nexus in
that state due to physical or economic activity, then you are still required to
remit and file sales tax returns for the sales your business makes outside of
the marketplace. For example, sales tax from orders on your Shopify store or at
a tradeshow will still need to be collected and remitted per usual, even if
Amazon is collecting for you in that same state. Amazon will only ever know
what sales you’re making using their platform, and so any sales outside will
remain your responsibility as a business owner.
To sum it up, nexus through one sales channel means you
have nexus as a business across all of your platforms or sales channels. So if
you’re selling through other marketplaces besides Amazon, you’ll want to make
sure your tax settings are setup correctly at the state level across all the
places you sell.
To stay compliant with
economic nexus, you’ll also need to monitor your sales on all platforms to
determine if you meet any state’s economic threshold, as sales tax is no longer
something to check-in on once a year. For example, If you end up selling 250
products into South Dakota this coming summer, you now may be surprised to
learn that you have economic nexus there since the last time you checked.
You can keep an eye on your economic nexus activity by
using the fully automated Sales & Transactions checker provided by
TaxJar. After connecting your sales channels to TaxJar, we’ll analyze your data
across all active economic nexus thresholds to tell you where you may have
economic nexus for your business. If you prefer, you can always do the research
yourself and cross-reference your gross revenue and transaction limits manually
for every state using the thresholds on our economic nexus blog. We know you’re
busy so save your time and let us do the heavy-lifting. The Sales & Transactions Checker is
completely free to use and it requires a free trial of TaxJar to get started.
Remember
to keep your sales tax certification current
Now that Amazon may be collecting sales tax on your
behalf, you’re off the hook right? Wrong. All too often sellers let their sales
tax license lapse because they assume the marketplace facilitator is collecting
for them, so they don’t renew their certification.
But, not all states have marketplace facilitator
legislation (yet), so if you have physical or economic nexus in the states
without marketplace facilitator laws, then you must still maintain your license
in order to be compliant in those states. This is most important in your home
state, where you always have physical nexus.
Because Amazon only collects sales tax in a few states,
you’ll still need your license for any other states you have physical or
economic nexus. And in some cases, there are other requirements that would
cause you to need to keep your license active such as the B&O filing
requirement in Washington which Amazon doesn’t complete for you.
Think about it this way: If you sell an item to a buyer in
a state where you have nexus with no marketplace facilitator laws active, you
would still be responsible for collecting sales tax on that transaction and
remitting it to the state. Anywhere you collect sales tax, you need a
valid sales tax permit or resale certificate in order to collect.
Wrapping it up
Now that you know the details behind these two important
sales tax laws, you’re prepared to make the best decision for managing sales
tax in the coming months. You can begin 2019 feeling more confident in managing
your requirements on your own, or choosing a technology partner like TaxJar to help guide you
through it. If you have questions about how TaxJar can save you hours on sales
tax, reach us anytime at support@taxjar.com
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