Over the last several months, the retail industry has closely watched what the federal government would determine to be an appropriate sales tax collection approach for remote sellers. While several bills are still pending at the federal level, Amazon.com, the granddaddy of e-commerce, just made the jump to finalize the collection and remittance of sales and use taxes in all 45 U.S. states imposing such a tax as of April 1 of this year.
Amazon is inarguably the largest online retailer, and since it also serves as a platform for other online sellers through its Fulfillment by Amazon (FBA) program, the ripple effect of such a private-sector decision will most certainly lead to significant impacts on the online retail industry as a whole. So while the federal government lingers on its taxation decisions and those pending bills, retailers with an online presence should take note of Amazon’s decision and begin preparing their operations to ensure tax compliance with all states’ imposed tax requirements. To help online retailers understand how Amazon’s decision to voluntarily collect sales and use taxes could impact their operations, let’s discuss the potential ripple effects we might see ahead.
5 Out of 50 States Do Not Currently Tax
Will Amazon now taxing in all states that collect sales and use taxes be enough momentum to push the five states that do not tax — Alaska, Montana, New Hampshire, Delaware and Oregon — to adopt a sales taxes? Not likely. While the remote selling taxation issue has largely come about from states looking to increase their tax revenue collections in this era of e-commerce adoption, these non-taxed states haven't indicated a desire to revise their long-standing positions on sales taxes.
Retailers Using Amazon’s Fulfillment Platform
Amazon’s decision is in fact an agreement between the online retailer and the individual states, so this new protocol would apply to all products sold through Amazon directly. Retailers using Amazon's Fulfillment by Amazon (FBA) service will need to collect tax wherever their products are stored in an Amazon warehouse. However, part of Amazon’s strategy has been to open warehouses across the country to facilitate quicker delivery. This certainly impacts sellers using the FBA program, as some sales may be impacted by this new tax compliance requirement, which could incent buyers to look for nontaxed alternatives. Sellers using FBA have a new cost/benefit analysis to run: Is collecting tax in more locations a good tradeoff for faster delivery times? Will compliance with sales tax rules negatively impact their margins, or will faster delivery offset those costs?
The truth is that as Amazon continues to open warehouses across the country, retailers leveraging FBA will be affected by this change. They will be required to address the tax compliance issue very soon anyway, based on existing brick-and-mortar nexus rules.
As they look at this new equation, FBA partners should consider the following:
- Will the logistics and costs of changing to a new fulfillment model be worth the potential sales gained or lost?
- If changing the fulfillment process means slower delivery times, would that cause a loss of customers as well?
Retailers Using Multiple E-Commerce Platforms
Many online sellers leverage multiple platforms to manage their businesses, and for those primarily distributing in Amazon’s latest added states — Hawaii, Idaho, Maine and New Mexico — taxation will now get even trickier.
Retailers following this model should know they still need to collect sales taxes in all jurisdictions where they have a physical nexus. So while products and obligations on the FBA platform will be covered, retailers must ensure sales tax collections are “turned on” across any additional e-commerce platforms and marketplaces they’re using. These multiplatform retailers must ensure their products are properly identified so that the correct tax rules are being applied for those sales, and then information from sales across all platforms will need to be combined to report on one tax return for each jurisdiction.
Tax compliance obligations could quickly become more complex with additional processes of merging transactions from all various systems being utilized and reporting those taxes in one return.
E-Commerce Tax Reporting
In terms of tax reporting obligations, states now have more of a basis to push online retailers to begin collecting sales taxes. Their initial focus will likely be on large marketplaces and platforms similar to Amazon, since they have higher sales revenues, before moving down to other sellers in the online marketplace. However, the tax man might come beating on the e-tailer’s door sooner with the Amazon elephant out of the cage.
While Amazon’s decision to collect sales taxes signals that remote taxation is happening, pending federal legislation is still leaving a lot of unanswered questions as to when and how e-commerce sales taxes will be regulated. Online sellers should expect to start collecting in all 45 taxing states, and those leveraging multiple e-commerce channels and marketplaces should prepare for greater tax compliance obligations and additional processes to ensure proper collections on all channels in which their products are sold.
For those hoping to avoid collecting sales taxes a little longer, a tough decision remains: Are sales tax costs worth the risk of customers possibly waiting a bit longer to receive their items or even not finding you as a result of staying outside of the Amazon loop? Until remote sales taxation reaches a final decision at the federal level, individual retailers will continue to have to determine the best approach in meeting their customers’ needs.
Matthew Walsh oversees solutions for global indirect tax law compliance at Sovos Compliance.