Fulfillment by Amazon (FBA) is a service growing in popularity and breadth of transaction applicability. It permits online retailers to use Amazon’s storage facilities and fulfillment personnel to complete orders. Although this service provides retailers with an extended network and shorter distance to buyers, it complicates the vendor’s state sales and income tax filing requirements. In this article, we address some of the state tax issues that FBA vendors should understand.
Evaluating Nexus Triggered by Storage or Fulfillment Services
Using Amazon’s warehouse storage or fulfillment services can establish both sales and income tax nexus, based off each state’s interpretation of the business activity being conducted. “Nexus” is the connection to a state that makes an out-of-state vendor subject to tax in that jurisdiction. Generally, a “trivial” presence does not create nexus, whereas a more substantial presence will. Among many factors retailers should consider in evaluating nexus and state tax implications are the following:
- Is the product being sold generally subject to sales and use tax? For example, items such as food products are generally exempt, but taxation of clothing, accessories, and other items varies by state.
- Does the retailer have more than a slight physical presence?
- Does the value of the sales being made within the state make up a substantial or negligible portion of revenue?
- Is the inventory regularly kept in the state?
- Which fulfillment centers are used to store and/or fulfill orders for product? Amazon can typically provide details on warehouses where inventory is located.
Income and Sales & Use Tax Application When Nexus is Established
If the retailer has determined that its product is subject to sales and use tax because the item is taxable in a state, and that its use of Amazon’s storage or fulfillment services has created nexus, the following steps can guide the process of complying with sales and use and income taxes:
- Determine which states have sufficient activity to trigger nexus.
- Consider applying for “Voluntary Disclosure Agreements” in the event the retailer has already been an Amazon FBA vendor and has been engaged in activity that created state tax nexus in prior periods. These programs, offered by most states, can limit the lookback period and eliminate most, if not all, penalties.
- For states newly entered, or states where the prior exposure may not warrant applying for a Voluntary Disclosure Agreement, registration in each state is a potential option. Because Amazon frequently moves items from one fulfillment center to another, a proactive approach is to register for sales and use tax in each of the states in which there is both an Amazon fulfillment center and sales and use tax (45 states currently impose sales taxes). An alternative approach for online retailers is to register only in those states in which nexus has already been triggered (based upon the inventory reports provided by Amazon and the subjective determination as to whether the presence is substantial).
- Invoice customers for sales tax once registration or voluntary disclosure has been accepted. File periodic sales and use tax returns based on state requirements (i.e. monthly, quarterly, or annually). Remit sales tax payments to the states. These payments are generally due on an accrual basis—when the tax is billed, rather than when it is collected.
- File income tax returns in applicable jurisdictions. Members of pass-through entities, such as partnerships, LLCs, and S Corporations, may be entitled to credits on their resident state income tax returns for income taxes paid to these other states. Certain state taxes, such as Ohio’s Commercial Activity Tax, Texas’s Franchise/Margin Tax, or Washington’s Business & Occupation Tax, will generally not be allowed for resident credit purposes, however, as they are not taxes on net income.
The Fulfillment by Amazon program has many benefits for vendors, but it also has many state tax consequences. These include the additional complexity and cost of compliance with income and sales and use tax obligations.