Is Your Amazon FBA Inventory Subject to Seizure for Not Paying Sales Tax?
There have been a lot of changes with sales tax cases over the past year from the Amnesty period this past fall, to Amazon collecting sales tax in Washington and now Pennsylvania. It is very clear that as an Amazon FBA sellers, having stock in a third party Amazon FBA warehouse creates nexus. This means the third-party seller has to collect and remit sales tax. There is a large group of sellers who are taking the position that they don’t have nexus for a host of reasons, including Amazon owns the inventory…and there is no requirement to collect and remit sales tax or perhaps they feel strongly that Amazon should collect and remit and therefore third-party sellers should collect and remit. Even with the Massachusetts recent court case where they were able to obtain the list of Amazon FBA sellers to reach out to them for past sales tax due, many sellers, especially foreign sellers, are taking the position. The states are now going after sellers (obviously not true with the Massachusetts case), and the states have no leverage against foreign sellers who are outside the jurisdiction.
Your Information as an Amazon FBA Seller is Being Shared with Other States…
It is commonly understood that states share information with each other. States like California and Washington did not need to get the list of Amazon FBA sellers from Massachusetts, they already figured out their own method to determine who has stock in their state and, therefore, who to send a sales tax notice to for payment.
Before you take a look at the remedies available to the states to issue a sales tax lien and the devastating impact that may have to financially paralyze you, let’s take a look at how other countries have handled third-party sellers not collecting or remitting sales tax (or equivalents, VAT (Value Added Tax) in the EU, and GST (Goods and Services Tax) in Australia.
In the EU, it is been an issue that Chinese sellers (and others) are not collecting and remitting VAT. VAT ranges from 17% in Luxembourg to 27% in Hungary in 2018. This means if a seller is NOT collecting and remitting VAT (after meeting certain thresholds), they really have a 17-28% price advantage, which is a massive profit and price advantage.
Many countries are aware of this and their main solution to fight back was either to put pressure on Amazon, which occurred by the UK government, or directly go after FBA inventory, which has occurred in Germany (see https://www.channelnewsasia.com/news/business/german-tax-office-targets-chinese-online-retailers–handelsblatt-9833092). Because of this, it is very commonly known that if someone outside the UK wants to sell on Amazon.co.uk, registration for VAT is required (yes, there is a threshold that varies if you have a UK entity vs an out-of-country entity). In Australia, Amazon will charge 10% GST fees for Selling on Amazon after 1 July 2017 for Australian-based Amazon sellers, unless they are registered for GST.
Sellers who see this trend hope that they will be off the hook because Amazon.com has completed deals with both Washington and Pennsylvania to collect sales tax on behalf of third-party sellers. Even if this trend continues, the seller still has nexus, is responsible to register for a sales tax permit, file sales tax returns and comply with other selling requirements as a third party, independent seller, which may include state income tax or franchise tax returns.
In the meantime, the states want their money for past sellers. It is fairly easy for the states to get leverage against a U.S. seller with a sales tax notice, and eventually a sales tax lien (which lasts up to 10 years in California and may be carried across state lines to your home state and attached to bank accounts to seize the money owed.
Stop Giving the “Middle Finger” to the U.S. States in Regards to Sales Tax
The issue is with foreign sellers who continue to give the middle finger to the U.S. states in regards to sales tax, leaning on the federal tax treaty as a crutch as to why they don’t need to pay ANY U.S. taxes (which is absurd). Yes, may you find a couple of states that side with the federal tax laws, but by and large, state law is separate from federal law and sales tax is not covered by a federal tax treaty (sorry, we do that backwards here in the U.S.).
Basically, foreign sellers are continuing to “poke the bear,” the state’s department of revenue, and they will figure out they have one of three choices:
- Force Amazon to Collect and Remit Sales Tax on Your Behalf (Washington and Pennsylvania recent changes)
- Of course, all foreign sellers would prefer this option, but this does not get you off the hook for past sales and, in exchange with Amazon, you can guarantee each state will have your name as a previous seller, and a notice will be coming. You blow it off, the cycle continues. Does each state say, “Oh, well,” to millions in past uncollected sales tax and justify, “at least we will collect going forward and that is good enough,” or will they force Amazon to suspend your account moving forward? Or look to seize your inventory for past sales tax owed?
- Force Amazon to Suspend Your Seller Central Account if not in Compliance (as in the UK)
- Seize your FBA inventory (Germany situation).
- Most don’t look at the department of revenue in each state as a business, after all, our states and government seem to operate on the fact that debt is not an issue, and a balanced budget is not that big of a deal. With all that being said, the states do look at the cost (labor and hard costs) vs return on investment to get sellers to comply.
What is the Process for a State to Go After Past Sales Tax?
Let’s look at where you have your most sales and your biggest threat: California:
This is from an email reply from a Technical Advisor with the California Department of Tax and Fee Administration:
“For sales and use taxes, Revenue & Taxation Code (RTC) section 6796 provides the CDTFA with the authority to seize and sell property, both real and personal. This statute has existed for many years. Additionally, similar statutes provide the same authority for many of the other tax and fee programs administered by the CDTFA. Additionally, this is generally not the first action we would take to obtain compliance. We would first try to obtain voluntary compliance, then likely take other actions to prompt compliance prior to considering seizing and selling property. Worth mentioning, the CDTFA routinely contacts unregistered retailers to determine if they need to register and pay tax on their sales to California customers.”
A California Sales Tax Lien will Stay on the Books for up to 10 years!
You Don’t Want to be on this List…
A California sales tax lien will stay on the books for up to 10 years and the state is able to renew for up to 30 years. California even has a list of its Top 100 Tax Debors (a list you don’t want to be on). Here is a link to the California collection procedures for all taxes, including sales tax in their state. If you are a U.S. sellers and receive a sales tax lien from a state, this can have a devastating impact on your personal credit, which will affect everything from getting a job to insurance rates to any type of financing, a car, home, credit card, college… The biggest issue is that even if the lien is released, it may affect your credit for 7 years.
From the Publication 54 in California, it states the following: “The lien attaches to all your real property, such as your house or rental property. It is not our policy to seize and sell your primary residence, but we will enforce the lien on your residence if you sell or refinance your home. Once a lien is recorded, your credit rating will be negatively affected. Your ability to get a loan to buy a house or a car, get a new credit card, or sign a lease may be compromised. After we have recorded a lien, we can release it, as explained below. Please note: Even though a lien can be released, it remains on your credit history for seven years (unless the lien was filed in error).”
As a practical matter, is California going to go through all the steps to seize your inventory if you owe $5K in back sales taxes, plus penalties and interest? At this point, it is not likely, because there are labor costs and resources required to seize inventory. That does not mean that California won’t change their process or put more pressure on Amazon, similar to what the UK government was able to do for UK Amazon sellers.
Not Becoming Compliant with Sales Tax and Hoping Laws will Change in Your Favor is a HIGH-RISK game to Play
This is a year that is expected to bring more changes to sales tax rules for online sellers. The key to any changes is to be clear on the current rules and what you must do for compliance, and make changes as state or federal laws changes. What does not work, an approach which several sellers are taking is hoping the laws will change in your favor and somehow you will be 100% off the hook. That is very unlikely and a HIGH-RISK game to play.
For any seller currently selling on Amazon FBA (or other platforms), being in compliance with sales tax is strongly recommended. Let your customers pay sales tax and pay the fees to get into compliance and automate the process. Even if the fees dip into your profits, it is, after all, a cost of doing business. What you want to avoid is the landmine of surprises, over the next 3-5 years, with sales tax notices and potential sales tax liens showing up at the worst times, when you are about to close on your new home, obtain a home equity line of credit, finance or lease a car, or use your credit cards for more inventory (and you find the limit has been cut by 80% because your credit score plunged over 100 points or will it? See the updated inpact with liens to your personal credit)… the list goes on.
In the end, don’t force the states to seize sellers inventory as their only option, even if at a loss, to “prove a point” to millions of other sellers, or collectively put enough pressure on Amazon to suspend accounts if you are not in compliance. The better approach would be not to ‘ring this compliance bell’ and collectively get into compliance as sellers.