Multi-State Tax Law Blog
Now more than ever Amazon has been a one stop shop for many consumers. Not only can you buy just about anything you can think of on the Amazon website, but you can also receive lightning fast delivery of whatever you buy. Over the past few years, Amazon has taken their company to the next level. Now, in addition to selling items, Amazon provides a fulfillment service to online retailers.
As Amazon puts it, their fulfillment business “helps you grow your online business by giving you access to Amazon’s world-class fulfillment resources and expertise.” Simply put, the online retailer sends their products to Amazon. Amazon stores the item at one of its distribution centers. Once the item is purchased, Amazon packs and ships your product to the customer. In addition, Amazon provides customer support. While it certainly charges a fee for its services, Amazon boasts that retailers’ sales significantly increase. However, from a state and local tax perspective, this can create a ticking time bomb for the online retailer.
Many in the state and local tax (“SALT”) community and online retailers alike, are familiar with the famous case, Quill v. North Dakota. Quill states that nexus arises if a company has “physical presence” in the taxing state. While it seems like a clear bright-line rule, whether an activity constitutes “physical presence” has proved to be a perplexing inquiry. However, if a company has inventory in a state, that satisfies the physical presence test and the company has nexus. Further, if a company has nexus then it has an obligation to charge, collect, and remit tax to customers in that state. Therefore, if a company has inventory at an Amazon distribution center, then it has an obligation to charge, collect, and remit tax in that state.
This comes as a surprise for many retailers. Taking it to the next level, if a state finds out that a company has nexus they can generally go back 3-4 years from the date in which a return was filed. However, if no return was filed the 3-4 year clock, known as the statute limitations never starts. In theory, a state could go back to the inception of business and slam a company with a hefty tax bill for tax it should have collected. This can be crippling and put a company out of business.
Complicating matters is the Amazon distribution center network. Amazon has distribution centers in some 20 states. Using the fulfillment program discussed above, a retailer’s inventory can be in any one of those states and they may or may not even know it. From A SALT perspective, this could mean that a company has nexus with 15-20 states without even knowing it. As such, sales made to customers in those states would require charging, collecting, and remitting tax to those states. Without ever filing a return a company could have years of exposure that could potentially put them out of business.
Rather than waiting for the preverbal time bomb to explode, it may be advisable to take the proactive approach. One alternative may be a program offered by most states, called a voluntary disclosure program. The power and beauty of the voluntary disclosure program is that it limits a company’s sales tax exposure to three to four years in most states. This often substantially reduces a company’s exposure for a potential nexus determination.
Now more than ever, states have detailed third party information about what a company is doing in a particular state. This makes it more difficult for an unsuspecting business to remain under the radar and avoid tax responsibilities. Further, the current economic climate has led states to be more and more aggressive in nexus determinations. Therefore, it may be wise to cut your or your client’s exposure to three years and enter into a voluntary disclosure. Further, if you are an online retailer using Amazon’s fulfillment, proceed cautiously.
About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email JerryDonnini@Floridasalestax.com or phone at 954-642-9390..