Since 2017, California’s Department of Tax and Finance Administration (CDFTA), formerly the Board of Equalization, has been bombarding businesses that use Amazon’s FBA services for sales tax liabilities. Many Amazon sellers received an email in October 2018 reminding them that California has their company’s name, address, and EIN.  Sellers that were already registered and collecting had little to fear, but if you recently began selling on Amazon and are not registered, it is likely a good idea to register and start sales tax collection in California and other states in which your inventory is housed.  If you have not received a letter from California, it is coming soon. 

In general, if a business has physical presence in a state, it arguably has nexus.  A physical presence is established by having a location, a salesman (employee or independent contractor), or even inventory in a state.  If your company uses Amazon’s fulfillment services, inventory warehoused in California is arguably nexus creating.  Depending on what service you use with Amazon, you may not even be aware that your inventory enters California. But once nexus is established, your company has an obligation to collect and remit sales tax in that state.  The failure to do so can result in past tax, interest, and penalties. 

As an aside, many states, such as California have created economic nexus statutes.  Economic nexus treats a company as having physical presence if it makes a certain number of sales into the state.  California recently announced it has enacted economic nexus, effective April 2019, that requires all companies who sell over $100,000 within a one year period to register and start collecting sales tax. 

If you or your client have been selling into California using FBA or any third-party marketplace, it is wise to explore voluntary disclosure or registration strategies to avoid that infamous nexus questionnaire or letter from CDFTA.  Now, if you already have received a questionnaire you have at least a few options:

  1. Do Nothing – Many companies have taken the position that they will not respond to CDFTA’s letter.  While this strategy has been successful in certain situations, California may begin collection activity within 30 days of a nonresponse.  While it has not been popularized, California might try to levy bank accounts, your Amazon account, or inventory in the state to collect on back taxes.  If no response is done, your company may have sacrificed important appeal deadlines to contest or resolve the issue. 
  • Attempt to Register Prospectively – While California has become more difficult to obtain reasonable sales tax solutions from for the unsuspecting FBA seller, businesses have been successful in negotiating a prospective collection policy in which the state forgives past due sales tax in exchange for the company collecting going forward.  It is also a possibility to attempt to resolve the issue through California’s voluntary disclosure program. 
  • Appeal the Assessment – If you have already responded and/or been assessed as a result of California’s FBA crusade, it is possible to appeal the assessment.  Often, cases are resolved through the appeals process of litigation.  Faced with the decision to pay or challenge the assessment, filing an appeal with the Franchise Tax Board or eventually the Office of Tax appeals may be the best way to get your issue resolved. 

THE FBA issue has been lingering for some time in California and other states are likely to jump on board.  Washington has also aggressively pursued FBA sellers for additional sales tax.  Many other states like Alabama, Connecticut, Iowa, Minnesota, New Jersey, Oklahoma, and Pennsylvania have or are in the process of enacting marketplace facilitator laws, which would put the onus on the marketplace, like Amazon, eBay, Etsy, and Walmart to handle the tax collection on behalf of its sellers.  If you receive a nexus questionnaire or a letter from a state, it is important to contact a competent state and local tax attorney to properly respond. 

Gerald “Jerry” Donnini II is a shareholder of the Law Offices of Moffa, Sutton, & Donnini, P.A. Mr. Donnini concentrates in the area of state and Federal tax matters, with a heavy emphasis on the tobacco, alcohol, motor fuel and related industries. He also handles a myriad of multi-state state and local tax issues. Mr. Donnini is a co-author for CCH’s Expert Treatise Library: State Sales and Use Tax and writes extensively on multi-state tax issues for SalesTaxSupport.com.  For more information please call us at 888-966-8216

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