SEATTLE — Amazon and the tax man are back at it again.
For years, the company and state governments scuffled over Amazon’s resistance to charging state sales tax, which helped keep prices low on its e-commerce site and angered politicians and other retailers. Eventually, Amazon began adding the tax in states across the country.
But there was a loophole. Amazon added the tax only when the item came from its own inventory, not from the millions of independent merchants who sell products through Amazon’s website. Amazon left it up to those sellers — who account for half of all items sold on the site — to collect sales tax on their own. But, according to sellers, tax lawyers and accountants who work with them, most do not.
Now states, thirsty for the millions of dollars in unpaid sales taxes revenue, are coming for their money.
Amazon recently warned its sellers that the company, as of Jan. 1, would be collecting sales tax from merchants who ship orders to its home state, Washington, as it seeks to comply with a state law signed in July. That will be the first time Amazon has collected a state sales tax for the merchants known as marketplace sellers on its site.
It is a grudging concession by the online retail giant. In South Carolina, the company is fighting an effort by the state’s Department of Revenue to use existing laws to force Amazon to collect tax on marketplace sales. The state is arguing that Amazon owes it $57 million in such taxes from last year. A judge’s decision in the case is pending.
ADVERTISEMENT
Other states are going after Amazon’s sellers, a much less powerful target, for unpaid sales taxes. In Massachusetts, a judge in late September ordered Amazon to give the state information about merchants who stored goods in the state. Sellers have reported receiving letters from tax investigators in California, too.
Consumers may absorb much of the new costs. Depending on the state, sales tax can add 5 percent to nearly 10 percent to the cost of an order.
Jill Kerr, a spokeswoman for Amazon, declined to comment. In a recent filing with regulators, Amazon singled out South Carolina’s effort as a risk. “If South Carolina or other states were successfully to seek additional adjustments of a similar nature, we could be subject to significant additional tax liabilities,” Amazon said in the filing. “We intend to defend ourselves vigorously in this matter.”
Taxes remain a political sore spot for Amazon, even as it has become one of the most successful companies in the world. President Trump has even taken to criticizing the business on Twitter as a “no-tax monopoly,” attacks that often appear prompted by coverage of him in The Washington Post, which is personally owned by Jeff Bezos, Amazon’s chief executive.
Amazon pays hundreds of millions of dollars annually in income taxes and charges tax on the sale of its own goods in every state that has a sales tax. But because so many marketplace sellers do not collect sales tax, there is some legitimacy to the idea that Amazon is not doing everything it can to make sure the government gets its cut.
Caught in the middle are Amazon’s marketplace sellers, who run the gamut from small mom-and-pop operations to more sophisticated merchants boasting teams of employees.
On Amazon’s marketplace, sellers list their products for sale and determine the price. Many take advantage of an additional program, called Fulfillment by Amazon, through which their inventory is stored in Amazon’s warehouses and shipped by the company.
The sellers pay Amazon fees for those services, but the e-commerce giant leaves it up to them to collect sales tax where they are required to do so. The fees Amazon charges its marketplace sellers are a huge business for the company, totaling nearly $8 billion during its most recent quarter, up from $5.65 billion a year earlier.
Many of the merchants said they have received conflicting advice on their sales tax obligations from accountants and lawyers, according to interviews with several individual merchants and consultants who work with dozens of sellers each. Few want to charge sales tax without assurances that competing merchants on Amazon will do the same.
“There’s a lot of anxiety,” said Chris McCabe, who previously worked at Amazon and now provides consulting services to merchants. “There’s a lot of ambiguity here.”
Many Amazon sellers, Mr. McCabe said, live in fear of getting a letter or phone call from a state investigator that leads to a hefty bill for uncollected back sales taxes, which could also come with penalties and interest. The sellers interviewed for this article would speak only on the condition of anonymity, saying they feared attracting the notice of such an investigator.
Sales taxes on e-commerce are governed by a 1992 Supreme Court decision, Quill Corporation v. North Dakota, which established that states cannot collect taxes from companies that did not have a physical presence there.
In its early days, Amazon took advantage of that law by keeping its warehouses out of populous states like California. But as the company has grown and focused more on reducing delivery times, it reached deals with many states to set up warehouses inside their borders. As part of those agreements, Amazon typically agreed to begin charging sales taxes after a delay of a few years.
Sellers who sign up for Fulfillment by Amazon are probably the most exposed to the state income tax laws. As part of the program, their merchandise gets distributed to numerous Amazon warehouses. Most states take the position that having their inventory in a warehouse, even if the facility belongs to Amazon, creates a duty to charge sales tax on marketplace sales in those states.
Not all advisers agree. One electronics seller, who has millions of dollars in annual sales on Amazon, said he only collected sales taxes for orders delivered in his state, on the advice of his accountant.
Accountants are not in agreement on the issue either. Michael Fleming, an accountant of Peisner Johnson in Texas, said his firm’s business was booming with Amazon marketplace sellers. He advises them, he said, to charge sales tax wherever a state can argue it has a “nexus” — the term most used for a physical presence.
He said he believed the reason Amazon has been reluctant to step in and charge sales tax on marketplace orders is that it could assume a large additional liability for any mistakes the sellers make.
“Maybe the seller mislabels something, and tax that should be collected isn’t,” Mr. Fleming said. “Then Amazon gets audited. Amazon is paying tax out of their pocket when it’s really a mistake by an individual seller.”
Mr. Fleming said he has heard from clients that the states of Washington and California have been particularly aggressive in going after them for back taxes on Amazon marketplace sales.
But it could be that the states are simply focusing on a fast-growing part of retail.
“Given the volume of businesses that make retail sales through Amazon’s marketplace platform, it is likely that some of these businesses may have been contacted through the normal course of our tax discovery efforts,” said Beverly Crichfield, a spokeswoman for Washington’s Department of Revenue.
With concerns mounting among sellers, the Multistate Tax Commission, an intergovernmental state tax agency, recently offered an amnesty programthat frees marketplace sellers from back tax liabilities when they take steps to collect them on current sales. But some states, including New York, California and Washington, did not participate in the program. Only 852 sellers out of the hundreds of thousands estimated to be selling on Amazon applied for the program.
Paul Rafelson, an adjunct professor at Pace University’s law school and a lawyer who works with Amazon sellers, said he believed that some states were going after sellers for back taxes to avoid a face-off with the company.
He said the scramble by states and cities to woo Amazon as it seeks a place for its second headquarters — bidding has set off a huge competition — has made state governments even less inclined to go after Amazon.
“A lot of states,” he said, “have told me it’s too political to go after Amazon.”
