We have received a lot of calls over the past few months from out of state online retailers who were contacted by Washington’s Department of Revenue (DOR). DOR asserted that these retailers must start collecting Washington state sales tax (WSST) on their sales made to customers residing in Washington state if they owned inventory stored by Amazon in one of its FBA warehouses in Washington. Worse yet, DOR says the retailers would also owe back taxes for as long as 7 years, plus substantial penalties. We prepared this post because of those calls, but before we posted it Jeff Bezos announced that Amazon would start collecting WSST to comply with Washington’s Marketplace Fairness Act that takes effect January 1, 2018. See the Bezos announcement as discussed by CNBC online at: https://www.cnbc.com/2017/11/15/amazon-marketplace-tax-collection-comes-to-washington-in-2018.html. See also a good discussion of the history and efforts by states to compel online retailers to collect their sales tax in the New York Times at: https://www.nytimes.com/2017/11/15/technology/amazon-sales-tax.html .
It is likely to remain unclear whether Washington will continue to pursue FBA retailers for back taxes, or look only to Amazon’s decision to collect future taxes. For that reason we are going ahead and posting our thoughts because the nexus issue for FBA retailers may yet be of concern if they are contacted by Washington state.
Background re: FBA sellers and Washington State Nexus
Washington state takes the position that if inventory is stored in one of Amazon’s Washington warehouses, the retailer has a legal obligation to register and collect Washington’s sales tax. Unfortunately this means more than that that Washington expects the retailer to register and start collecting sales tax (which will presumably commence to be collected by Amazon): It also means that Washington may take the position that retailers owe sales tax (and the state’s B & O) for uncollected sales tax, plus substantial penalties, plus interest for up to 7 prior years. How many years depends on the history of storage in an Amazon Washington warehouse. These amounts would not be paid by Amazon.
This post will give a brief summary of the situation, and cover the alternatives that we have discussed with clients. The reason is that it remains to be seen whether the DOR will continue to pursue FBA retailers who have been making sales to Washington for periods before Amazon actually starts collecting WSST on those sales.
Washington has for years taken the position that if a business has real or personal property located in this state then the business has nexus. This is based on a U.S. Supreme Court case, Quill v. United States, that said an out of state had to have a “physical presence” in the state seeking to enforce collection of its sales tax. Washington, following other states, is saying that if Amazon stores inventory you ship to them in on of their Washington warehouses, then you have property in this state. That may or may not be correct because it can be argued that Quill intended that an out of state business purposefully established a physical presence in a state, and you do not have physical presence in Washington just because Amazon placed your inventory here to suit its own delivery plans. But that has been the DOR’s position, and it may be difficult (and expensive) to challenge it.
Our Analysis – if you have been or are contacted by DOR
1. Do your homework. Look at your Amazon inventory page and see what year Amazon started storing inventory in one of its Washington warehouses. Know what your annual sales to Washington residents are starting with the year inventory was stored there.
2. If you are contacted but have not been collecting sales tax, or have collected it but haven’s sent it in, you can register. But you may take a hit on past years because the state will assert you are not registering voluntarily and you will be assessed for as many as 7 years, if Amazon has stored inventory here for all of that time. Full penalties will apply. You can appeal and we have had some success in getting all or some of the penalties waived. Depends on the facts in your case.
3. You can tell them that you will not voluntarily register because you do not think you are legally required to. They can, however, register you anyway and if you have not given them your sales per year made in Washington they can make an estimated assessment if they do no know your actual sales amounts. But it would be expensive to litigate and it may not cost effective unless your tax hit is fairly large. Of course you are less likely to get sympathy on an administrative appeal, if you try that after an involuntary assessment, because you are stating your position as a fighter, not a retailer who tried to know the law but was overwhelmed by conflicting information.
4. You can ignore them, but they may not go away (see 3 above). Or they may – but again you are not going to look good if you have goods in an Amazon warehouse, and they assess you (3 above) and you appeal and try to get some waiver of penalty (3 above).
5. If you have not been contacted what you do depends on how you feel about gambling. The gamble is that if you are not contacted for long enough, and if you sales are not enormous, and if it would be administratively expensive to comply, then you might wish to wait and see what happens. If you lose the gamble then you are looking at the analysis laid out in 3 above.
As we have already said, whether or not the DOR will pursue a retailer it has or may yet contact given the apparent intention of Amazon to start collecting WSST remains to be seen. But it is enough of a commonsense position, given the risks we just discussed, that you might well consider all of the options laid out.
These are not great options, but without favorable Congressional action the tide appears to be rising and may be settled in Washington for Amazon third party sellers. If you wish to discuss your options please contact us or if you have issues with DOR.
Learn more about tax lawyer Martin Silver.