Amazon and California Sales Tax

The Good and Bad News for Amazon Sellers That Have Received CDTFA Notices

Amazon disclosed Amazon seller information to the California tax authorities in response to a legal demand letter it received late last month.

This post includes important information for Amazon sellers that have recently received the notice that the California Department of Tax and Fee Administration (CDTFA) has issued a formal legal demand to Amazon. Amazon intends to comply with that legal demand on November 6th.

Following the demand, Amazon sent an email to all of its sellers, notifying them of the demand. Since this email was sent, our law firm has spoken with a number of Amazon sellers, and we have found that there are some misconceptions and misinformation surrounding the demand and the potential collection process.

I want to take the opportunity to address some of those misconceptions because I think it is important to understand what the CDTFA is really after. My hope is that with clarity, people can take constructive actions to protect their businesses and come into compliance with the state of California.

Let us start with some good news. Coming into compliance with California is flexible, and it is something sellers can address proactively. If sellers act soon, they can protect their Amazon sales business. Our firm has handled about 50-to-60 cases involving Amazon sales tax issues, and all of these businesses, for the most part, survived.

Right now this may seem like an insurmountable problem. There is a lot of fear and panic surrounding this issue. I want to assure you that with some proper planning, you can address this problem head on.

But, the bad news is that ignorance of the law is not viewed as a valid reason for non-compliance. Once you are established having nexus with the State of California, there are consequences from a sales tax perspective and there are also consequences from a state income tax perspective. 

This is a big problem because a lot of people have been selling through Amazon and are not aware that they have been creating nexus with California.

A lot of sellers assumed improperly that Amazon was taking taxes and remitting taxes on their behalf. Amazon actually does not have an obligation, at least in California, to do that for its sellers. Through Amazon’s FBA platform, the company created a situation in which they established a nexus in California, obligating their sellers to state tax liability while failing to help them collect and remit those taxes.

California is unfortunately not offering a reprieve to Amazon sellers, but sellers can catch a break through the traditional programs that already exist. One is called the Voluntary Compliance Program and one is called the Managed Audit Program. 

The Voluntary Compliance Program generally has a three-year look-back window that would forgive all the penalties, and the Managed Audit Program will also forgive the penalties, but for a two-year window. Whether or not a seller qualifies for either program depends on the facts of their situation.

Another problem for Amazon sellers is that this problem is not limited to California. There have been a number of states that have put tremendous pressure on Amazon to remit taxes to account for business conducted in their borders.

This issue stems from a Supreme Court case, Wayfair v. South Dakota. The Supreme Court’s ruling in Wayfair blesses a broad definition of economic nexus, absent a judicial or a legislative intervention. From a judicial standpoint, there will likely be a number of companion cases that will craft the Court’s position. 

Unfortunately, there are not currently any companion cases that will help shape this issue for current Amazon sellers. This looks like it will remain a serious issue for Amazon sellers for the foreseeable future.

Amazon’s distribution of inventory through the FBA platform has created nexus for people in several states. Tax liability in those states really depends on what is being sold, the number of sales being made and where the customers are located. It is really important for sellers to understand that this problem is a problem that crosses state lines, even though they are just now being made aware of it through California’s legal demand. 

Amazon’s policy of putting inventory in various warehouses has essentially availed sellers to potential nexus in every state where Amazon has a warehouse.

If you are an Amazon seller that has not been remitting taxes to California, the good news is there are ways to protect yourself through proactive action. California already has your information, and it is only a matter of time before they run your EIN. 

Now is the time to take steps to minimize your exposure to tax liability for past Amazon sales while coming into compliance with California.

 Amazon Seller Disclosure to the California Tax and Fee Administration

Many Amazon sellers have received an email notification from Amazon with the subject “Disclosure to the California Department of Tax and Fee Administration,” stating that Amazon has been served with a legal demand from the California Department of Tax and Fee Administration (CDTFA), and that the company was required to turn over all Amazon seller information and any tax identification numbers associated with those sellers.

If you received an email from Amazon regarding the CDTFA demand, do not panic. We have helped a lot of clients through this exact situation. Even in cases where clients were in clear violation of California law and had not been remitting California sales tax, we have been able to find manageable solutions to help them move forward. The first thing you should do is contact a tax professional to determine a path forward.

What is Amazon Seller Nexus in California?

If you are an online seller, you may have heard about the decision regarding Wayfair where the court scrutinized South Dakota’s laws for allowing an economic nexus, as opposed to the traditional physical presence test. 

The decision in that case opened the door for California, and a number of other jurisdictions’ economic nexus laws, to move forward with sales tax enforcement efforts against out-of-state sellers.

The CDTFA legal demand sent to Amazon is part of a bigger sales tax trend in California. The state has become increasingly aggressive toward out-of-state Amazon sellers who are considered to have nexus in California for storing products in Amazon warehouses and using Amazon’s FBA system. 

In those cases, Amazon sellers may be facing not only a sales tax liability, but a state income tax liability as well.

What Will the CDTFA do With Amazon Seller Information?

After the CDTFA collects seller tax information disclosed by Amazon, the Department will likely use the taxpayer identification numbers and cross-reference those numbers in its taxpayer database to see which seller entities have been filing California sales tax returns, and which entities have not been filing California sales tax returns.

Once the CDTFA is able to verify the Amazon seller information, the CDTFA’s Out Of State Compliance Division will send a letter to seller entities requesting information about their businesses. This request will include a detailed questionnaire with instructions to return it to CDTFA compliance representatives within a specified period of time, usually 30 days.

The goal of the Out Of State Compliance Division is to get people who are outside of California to register their business with the state so that they can begin paying sales and use. The other goal is to determine when Amazon sellers might have established nexus with California and then assert a back filing requirement.

If you receive this questionnaire from the CDTFA’s Out Of State Compliance Division, understand that you are now under an examination by the CDTFA. This is what we will call “compliance examination.” 

The first thing you should do is reach out either to your CPA or to a qualified tax expert who can help you answer the CDTFA’s questionnaire. The most important thing at this point is to respond appropriately and control the scope of information that is provided to the state in respect to your business.

Amazon Seller CDTFA Compliance Requirements

To come into compliance with California’s state tax authorities, Amazon sellers will be required to file all of their back sales tax returns and pay interest and penalties associated with these filings. At that point, the CDTFA’s collections department will take control.

If you discover you owe taxes to the State of California, you need to understand what your sales tax liability is and how far back your sales tax liability extends. It is really important to carefully plot your next move, understand what the process is and then measure your response to California. 

No matter what stage of this you are in – whether you’re in compliance, or whether you get selected for audit, or whether you go through the collections process – there are a myriad of options that you can put into place that will help you and defend against these types of investigations.

Your California sales tax liability is not going to go away on its own. This is really just the first step California is taking to aggressively pursue out-of-state Amazon sellers.

Over the last few years, we have been helping Amazon sellers and other online sellers get into compliance with the myriad of state and local sales tax laws and state income tax laws that have affected sellers. 

If you have questions, you can contact our office and we will be happy to schedule a consultation to learn more about your company, what its California nexus exposure is and create a strategy to mitigate it.