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FBA Sale Tax

Amazon offers warehouse and fulfillment services for its sellers via Amazon warehouse locations in many states. Amazon's service is called "Fulfilled By Amazon" or FBA. FBA Sellers ship inventory to Amazon which redistributes it to Amazon warehouses in CA, TX, WA, KY, PA, NJ, NY and other states. These FBA warehouses may create FBA sales tax nexus for the FBA Seller in most states.

Amazon Sales Tax Nexus for Amazon Warehouse locations

Many states' sales tax nexus laws include the use of warehouse(s) directly or indirectly which creates sales tax nexus for the Seller. An example is when the "Fulfilled By Amazon" (FBA) Seller utilizes a warehouse (self or third-party owned) in a state. The Amazon warehouse location would create Sales Tax Nexus for FBA Seller in such state, and the FBA Seller is required to register, collect and file sales tax returns for taxable goods sold or shipped into such state.

Consequences of Failure to File Sales Tax

If an FBA seller is selected for a sales tax audit, and the FBA Seller never registered or file any sales tax return, the state auditor can usually look back 6 to 8 years or even indefinitely in some states to assess owed tax. Since the FBA seller never collected any sales tax over many years, any tax assessment could be detrimental. In addition to the assessed sales tax, the auditor usually adds the interest and penalty. If the penalty is due to "fradulence" status, the amount is large. If due to "negligence", then the amount is relatively less but still significant.

If the FBA Seller has filed sales tax returns, then the auditor usually can look back about 3 or 4 years. If FBA sales tax was collected and filed accurately, then the audit may not be fruitful for auditor. Given states have different rules, sales tax forms, deadlines, tax rates, and other requirements, it can be overwhelming and tedious for an FBA Seller to maintain sales tax compliance.

Business Risk for FBA Seller

FBA Sales Tax Compliance is a necessity but adds cost to the FBA Seller's business. Its customers have to pay sales tax which is an added cost. It costs time and money to maintain sales tax compliance. Some FBA Sellers with low sales volume might take a risk and postpone their multistates sales tax registrations and filings until their sales amount increases. Other FBA Sellers might be unintentionally ignorant of the states sales tax nexus laws, while certain FBA sellers might be overconfident thinking that they have no nexus. Nevertheless, sales tax compliance is a legal requirement and a business decision that the FBA seller needs to seriously consider.

An Amazon seller can consider the following questions:

  • What are my chances of being audited?
  • Am I able to pay assessed sales tax, interest and penalty on X years worth of sales?
  • Can I afford to factor in sales tax compliance as a cost of doing business?
  • Is it worth the gamble to disregard sales tax registration and filing in hope of never encountering an audit?

FBA Sales Tax Filing: In-House?

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Each state form is different. There are thousands of tax rates imposed by thousands of jurisdictions. Some states require only filing on a state level. Some states require filing on a state level, county level and/or city level. The filing deadline dates are different. In-house employees are needed to understand the many sales tax jargons and processes. What is the difference between Sales Tax, Use Tax, Retailer Use Tax, Vendor Use Tax, Consumer Use Tax, Compensating Use Tax, and other jargons? Lack of such knowledge may lead to applying incorrect tax rate resulting in future sales tax audit assessments.

If an FBA Seller has in-house multistates sales tax experts, then there is a lesser chance of later discovering the use of incorrect filing methods in a costly audit.

Sales Tax Filing: Outsourced?

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If a "Fulfilled by Amazon" seller is overwhelmed with the intricate details of sales tax registration and filing, then FBA sales tax outsourcing may be considered. Most local CPA firms may be experts in income tax or bookkeeping but their expertise may break down when dealing with multistates sales tax.

Some firms sell sales tax software. This may require integration, IT maintenance and training costs. The user needs to validate if the software has errors. If any problem arises, the user needs to resolve with the states. The FBA seller might search for a company that provide multistates sales tax registration and filing services managed by former sales tax auditors. In this case, if there is any issue with any state, experts are available to resolve.