Online Sales, the Amazon Effect

Sales tax applicability can be a complex issue, and forgoing registration when it is required can prove to be detrimental and costly to your business.  Typically sales tax applicability necessitates some sort of connection or presence within a state, frequently referred to as “nexus”.  If your business is subject to sales tax, registration and ongoing remittance requirements will apply.  For example, if a seller has a physical presence in a state and is selling to customers within that same state, a nexus is clearly established. A grey area exists when a seller has no physical presence in a state, but sells to customers in that state. Factors such as the presence of a salesperson or employee, or a warehouse may trigger nexus with a state. However, the nexus tests vary on a state-by-state basis.

Drop shipping is the process of having orders fulfilled by a third party. [1] Drop shipping can create sales tax liability in multiple states due to the varied presence of the seller, the shipper and the wholesaler. The liable party largely depends upon each state’s nexus requirements. Double charging for sales tax could be as much of a problem as mistakenly not charging when liable.  

Online retail giant Amazon maintains its own policy on drop shipping.  As of March 2017, Amazon has started collecting sales tax in all states. Online retailers previously only had to collect sales tax in states where they had a physical presence or sufficient “nexus.” [2] This cost states approximately $17 billion in lost sales tax revenue in 2016 alone. [2] Third party vendors still manage to escape the sales tax requirement, but states have caught on to the fact that what is being collected from Amazon in sales tax revenue is not nearly reflective of the sales being made. [2]

Many states have already passed an “Amazon law” or established a click-through nexus, which triggers a sales tax registration requirement for online retailers. More and more states are cashing in by passing similar legislation.  The connection for click-through nexus relates to a business’s “affiliates.”  For example, in 2008 New York expanded its sales tax nexus requirements to include websites based in the state that earn a referral fee for directing customers to an online retailer. [3] A number of states have followed suit. Creating even more of a nexus possibility are the FBA or “Fulfillment By Amazon” warehouse locations, by  which presence in any given state can potentially create a nexus for a seller. [4] Amazon provides a list of states wherein Sales Tax liability may be required by shipping items to customers located in these states. However, sales tax liability continues to be a source of confusion for many Amazon sellers and online retailers.

Requirements vary on a state-by-state basis, making compliance a daunting task for online sellers.  As the legislators are trending towards the expansion of taxation, LicenseLogix is keeping up with the changes.  We can provide same day sales tax registration [5].  For an evaluation of your sales tax registration needs, give LicenseLogix a call or request a quote online.   

[1] Amazon Drop Shipping Policy

[2] Amazon to start collecting state sales taxes everywhere

[3] Amazon Sues New York State to Void Sales Tax Rules

[4] Does Inventory Give FBA Sellers Sales Tax Nexus in Other States

[5] Subject to state processing times.