Amazon has agreed to disclose the identities of Fulfillment by Amazon (FBA) sellers with inventory in Massachusetts to the Massachusetts Department of Revenue by Jan. 26, 2018. This is the first known release of such data. It’s only a matter of time before Massachusetts shares the information it collects with other states.
In August 2017, the Massachusetts Department of Revenue (DOR) asked Amazon to identify marketplace sellers that store or have stored inventory in the state (read more about that here). The company initially refused, and on Sept. 25, 2017, the state Superior Court gave it 20 calendar days to comply with the request. There had been no further news until yesterday, when Amazon revealed its intention to complyin an email to affected Massachusetts sellers.
Due to a “valid and binding legal demand,” Amazon explained, it will share the following information with the DOR by Jan. 26, 2018:
- “Contact information (name, address, federal tax ID number, and phone number)
- Estimated value of the seller’s inventory in our Massachusetts fulfillment centers, calculated based on the seller’s selling prices in late 2016 and in 2017”
It concluded its brief message by encouraging sellers “to consult with a tax advisor.”
Why is Amazon giving Massachusetts this information now?
Amazon’s initial response to the DOR request for information was to say it “did not intend” to comply. There’s no way of knowing exactly why it changed course. However, referring to the request as a “valid and binding legal demand” likely means Amazon has been advised it would not win a legal challenge.
Massachusetts is legally entitled to obtain data that confirms the proper tax is being collected by companies doing business in the state, as Amazon is. According to Scott Peterson, Vice President of U.S. Tax Policy and Government Relations at Avalara, “State audit authority is long established and quite broad. Rightly or wrongly, in just about every state, and perhaps in every state, the ability to engage in business is conditioned upon compliance with the law. One of those laws is the ability for the government to evaluate (audit) compliance with the law.”
What is Massachusetts going to do with this information?
According to the legal brief Massachusetts filed with the state Superior Court last fall, the DOR intends to use the data to identify sellers who have inventory in Massachusetts, make sales in Massachusetts, and should be collecting and remitting sales and use tax in Massachusetts.
States collectively missed out on approximately $6.2 billion in sales tax revenue in 2017 because of untaxed marketplace sales. Massachusetts is looking to capture a portion of that revenue.
Will identified sellers have to collect Massachusetts tax?
Massachusetts cannot force a seller to collect and remit tax unless that seller has a substantial physical connection to the state, or nexus. The DOR will use the information Amazon provides to determine if the named sellers do, in fact, have nexus and an obligation to collect. If sellers challenge Massachusetts’ findings, the courts may have the final say.
The physical presence standard was upheld by the Supreme Court of the United States in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). On Jan. 12, 2018, the Supreme Court agreed to consider a case that challenges Quill. The decision, expected this June, should greatly inform the online sales tax debate. If the court rules in favor of the state, the physical presence factor could be removed.
How will this impact non-collecting sellers with products stored in other states?
It’s too soon to know for certain how this will impact FBA sellers in other states.
States presume that if a FBA seller has inventory stored in Amazon facilities in one state, it likely has inventory stored in Amazon facilities in other states. If Massachusetts shares this data with other states, the receiving state must do due diligence and find out if the third-party sellers have inventory in that state and an obligation to collect tax.
What’s the next step for non-collecting FBA sellers?
As Amazon suggests in its email to affected sellers, now would be a good time to talk with a tax specialist or accounting partner.
Massachusetts’ request for FBA identities may turn out to be extremely effective, but it’s just one of many strategies states have adopted to obtain tax revenue from non-collecting out-of-state sellers, and particularly third-party sellers. For example, Amazon and Etsy are complying with Washington’s new marketplace fairness tax law and collecting tax on their Washington marketplace sales as of Jan. 1, 2018. Similar laws will soon take effect in Pennsylvania and other states, and another is under consideration in New York.
For years, states have been stretching the definition of nexus to include affiliate relationships, referrals from in-state websites, and even economic presence. Indeed, the current challenge to Quill stems from South Dakota’s economic nexus law. No matter what happens in Massachusetts, states are unlikely to abandon their efforts to tax remote sales.
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If you make sales into multiple states and don’t collect tax everywhere you sell, you may be at risk. Contact your TaxOps Advisor for a taxability review.
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