Ever since the Supreme Court’s Wayfair decision made it possible for states to collect sales tax from sellers with no physical nexus in their states, there has been concern that states would go after retroactive tax collection. Now California has become the first state to do so.
According to the LA Times, California is presenting Amazon Marketplace sellers with bills that could put them out of business. “For example, a 12-person company in Michigan that sells comfort shoes and orthotic inserts online is facing a $200,000 bill for three years of back taxes, penalties, and interest. A mom-and-pop kitchenware supplier is facing a bill for more than $100,000.”
Physical nexus is involved
Amazon has had a warehouse in San Bernardino, California, since 2012. Amazon had been collecting sales tax in California because it has had physical nexus. But the decision to collect sales tax or not was left up to the marketplace sellers. In many cases, these sellers use a “fulfilled by Amazon” option which puts them in the position of using Amazon as their fulfillment house. In fact, Amazon pushes this option among small sellers.
Since Amazon decides where to warehouse their goods and doesn’t even alert the marketplace sellers, the people facing the back tax bills typically didn’t even know that they had goods in the San Bernardino warehouse — or physical nexus in California.
Remote seller’s sales tax
California put its remote seller’s sales tax rules into place on April 1, 2019. It required sales tax compliance from companies with 200 transactions or $100,000 in revenue in California per year. Three weeks later it changed that threshold to $500,000.
The newest bill also requires “marketplace facilitators” to collect and remit sales tax. That means that Amazon is responsible, as of April 1, for sales tax compliance for its marketplace sellers in California. It also means that there is a space of seven years during which the marketplace sellers should have been collecting, filing, and remitting sales taxes in California.
So the gotcha tax on Amazon marketplace sellers isn’t actually a result of new post-Wayfair laws. Instead, it’s like the Colorado controversies. In that state, Colorado sellers had been failing to charge sales tax on internet orders from customers in Colorado. The new tax laws didn’t actually change their situation but rather brought their commitments to their attention. Suddenly, small businesses across the state knew that they should have been collecting sales tax. They suddenly realized that they had been out of compliance for years. And they complained that getting into compliance would put them out of business.
The controversy delayed Colorado’s remote seller laws for months. This is just one example of how the Wayfair decision is affecting people in unforeseen ways.
California’s crackdown on Amazon sellers began in December, as the new remote seller laws were introduced. Some legislators are questioning whether it makes sense to go after those back taxes. Maybe it would just be better to get everyone into compliance going forward, some say. On the other hand, it may be California’s last chance to go after the millions of dollars in revenue they missed between 2012 and 2019.
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