Posted by Stephanie L. Chapman, CPA
Most small business owners are looking for new ways to drive profitability while reducing costs. Product-based companies have many cost drivers to consider including marketing, inventory storage, management, order fulfillment and shipping, to name a few. Amazon identified its unique position to act as the middleman for those smaller businesses by creating Fulfilled by Amazon (FBA). This service allows small businesses to leverage Amazon’s storage, ordering system and sales processes to sell their products. This is a savvy solution that provides small companies with needed infrastructure and processes for a fee. The service even permits order tracking, sales management and inventory management. Although it seems like a “no brainer,” what most don’t realize is that there is a significant and unexpected tax exposure that often arises. To help clients, prospects and others understand the risk, Belfint, Lyons & Shuman has provided a summary of the key issues below.
What is FBA?
FBA is a brilliant service offered by the online retail giant, Amazon.com. Amazon is a household name, which the service capitalizes on. For a “referral fee,” Amazon will offer to warehouse a retailer’s inventory and manage the sales through their website. They collect the order, send out the shipment from the nearest Amazon warehouse to the customer, and remit the net proceeds back to the seller.
It’s a quintessential win/win scenario. The customer gets access to Amazon’s customer service and product returns (so the seller doesn’t have to manage this tedious side of the business). The customer also benefits from Amazon’s services for gift wrapping and “Prime” shipping eligibility. The business owner simply registers online using Amazon’s “Easy 5-step Process.” Once up and running, the seller can monitor its inventory using Amazon’s sophisticated integrated online tracking, and will have access to analytical sales reports. According to the FBA website, “FBA sellers report sales increases – in a 2014 survey, 71% of FBA respondents reported that their unit sales increased on Amazon.com more than 20% since joining FBA.”
What’s the Risk?
The drawback is that a small seller is left open to a sudden naked exposure to state and local taxes. A seller’s goods are warehoused by Amazon, but the goods are not owned by Amazon; the ownership stays with the seller. Therefore, the seller’s inventory (and therefore the seller itself) is everywhere Amazon is. States interpret the presence of this “consigned inventory” in their beloved states to be sufficient to cross the nexus threshold, for physical presence of the seller, for collection of sales tax. This means that if the seller’s product is sold in a state with Amazon warehouses (and there are many, and growing), the seller owes sales tax for sales in that state. To add insult to injury, most states seem to also translate this to be taxable for state income taxes. Either through a physical presence standard (the inventory), or by having established an economic presence by selling goods to the state’s residents, the seller is doing business in that state.
What this presents to the seller, who may have been previously operating in only one state (or even abroad), is frequently an immediate responsibility to a dozen or more states to register for sales tax collection, income tax filings, franchise tax filings, quarterly estimates to consider, perhaps composite filings, or individual filings for pass-through owners.
What’s the Seller to do?
Amazon’s FBA site is not exactly forthcoming in detailing the sales tax exposure their service creates. It instead offers a solution (for another fee, of course) through their “Tax Collection Service.” Businesses that register for Amazon’s service will have the full amount of sales and use tax due on a sale collected by Amazon and remitted back to seller (not to the state). The seller is then responsible to report to the respective states the sales made and remit the taxes withheld (since Amazon cannot make any warranties about the tax collection, careful analysis of reports and withholdings is recommended).
Unsure how you are impacted? If your company is using the FBA service, it’s essential to conduct a full review of the inventory storage and other variables to determine your nexus and related tax filing requirements. For additional information please contact us at 302.225.0600, or click here. We look forward to speaking with you soon.