A beginner’s primer on nexus and sales tax in online marketplaces.
So, you’re using FBA (Fulfillment by Amazon) to start your own online business selling a mug sourced from South Korea with a custom design imprint that you curated. Did you know that both items, the mug and imprint, are considered tangible personal property and subject to sales tax? All states and the District of Columbia (which, much to its chagrin, is not a state!) charge sales tax except for five “NOMAD” states – Alaska, Delaware, Montana, New Hampshire and Oregon. Thus, that mug and imprint are subject to sales tax in 46 jurisdictions.
Also, under the FBA program, did you know that Amazon moves those mugs and imprints to its various warehouses all over the country at their discretion? Unfortunately, putting that inventory into a warehouse in any state is what is known as a traditional nexus creating activity, also known as physical presence. This means the taxpayer who owns the inventory item, in this case, the mugs and prints, that is housed in an out-of-state warehouse has goods creating an income source that is subject to sales tax and potentially tangible personal property tax filings in the state where the inventory is housed.
Furthermore, the presence of that inventory creates a state income tax filing requirement where the items are warehoused. This occurs even if the warehouse is managed by an online marketplace like Amazon, regardless of the length of time the items are warehoused—a day, a week or more—or the value of the inventory that is housed.
Surprised by all this? Read what follows, or download to read later, and learn more about managing tax exposure related to inventory and marketplace sales.
Expanding sales tax
When people throw around the term “Wayfair”, they are referring to the U.S. Supreme Court case that allowed states to stretch their sales tax requirements beyond physical presence to an “economic presence”, which is measured by transactions and dollar volume. The minimum threshold approved by the U.S. Supreme Court in Wayfair is 200 transactions or $100,000 in revenue. Since Wayfair was decided on June 21, 2018, almost every state with a sales tax has rolled out a Wayfair-type law with varying thresholds. Two holdout states, Florida and Missouri, have both approved both Wayfair and a Marketplace law with varying enforcement dates in 2021.
The Wayfair “economic presence” laws, however, are only applicable if a seller does not otherwise have a presence in a state (i.e., inventory in an Amazon warehouse, remote employees or traveling employees or third parties). Unfortunately, there is no universal de minimis threshold on inventory so a single item in inventory may be enough to constitute nexus and the related tax obligations. There are a few states that have specifically said that housing inventory in an Amazon warehouse is NOT a nexus creating activity, but that is not the majority. This makes it imperative that when inventory is placed in a jurisdiction, the seller knows the rules of the state where the goods are housed.
In addition to Wayfair laws, many states have marketplace facilitator laws that make sellers like Amazon responsible for collecting and remitting sales taxes on sales to customers in states with a sales tax. This arrangement relieves the seller of the duty to remit the tax, but not always the obligation to register as a vendor. At the time of this writing, marketplace facilitator laws were in place in all but five states: Florida, Kansas, Louisiana, Mississippi, and Missouri. Having FBA Amazon inventory and Amazon collecting sales taxes on sales through the marketplace does not relieve a seller of collecting sales tax on their own website sales or reporting the sales and tax collected by Amazon.
To understand the layering impact of Wayfair and marketplace facilitator laws on a seller, let’s assume a vendor selling through Amazon houses their goods with Amazon, who will collect from buyers in most states. FBA sellers could have a duty to file a traditional non-resident income tax return or entity income tax return due to physical presence related to inventory in the state, no matter how minimal. States, including California and Massachusetts, were already on the hunt for these sellers pre-pandemic and other states are expected to follow suit.
A seller without an FBA relationship, however, is solely responsible for the sales tax cost of doing business. Independent sellers carry the burden alone of tracking when nexus thresholds have been reached as well as fulfilling the sales tax obligation when nexus is triggered, including registering, collecting and remitting taxes.
One upside of forgoing a third-party online marketplace is the potential for claiming a state income tax exemption under federal protection from Public Law 86-272. This law shields certain pure-play internet sellers of tangible personal property from paying income taxes in a state.
Taxing warehouse goods
So, let’s recap. The presence of inventory alone creates income, sales and use, and property tax nexus filing requirements. Sellers using Amazon are likely to benefit by offloading most of the sales tax collection responsibilities in marketplace states where inventory is housed.
A seller, however, could have an income tax filing requirement and personal property tax due to inventory housed in the state. While the amount of tax due could be nominal, there is a duty to comply nonetheless, and the cost of noncompliance rises fast.
If a seller stops using Amazon or also sells direct through their own website, they will have to monitor the Wayfair thresholds in all 45 states that charge a sales tax, plus the District of Columbia. When exceeded, the taxpayer must register, collect and remit sales taxes in each jurisdiction but may have no income or property tax filings since the Wayfair thresholds are based on having an economic – and not physical – presence in the state.
Which seems worse? As they say, the devil is indeed in the details, and there are no “get rich quick” schemes that are entirely free of tax consequences. Pick the right tax advisor to help you make sense of state and local tax, one with a fiduciary duty to act in your best interest (hint, that is not a sales tax software company).
Confused? Don’t fret. Marketplace laws are tough to navigate.
Reach out to a Tax Advocate at TaxOps.com/contact or email@example.com with questions on your business situation.