Many Amazon sellers received an e-mail notification from Amazon this week 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 has until November 6th 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, don't panic. We've 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 news tax, we've 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.
If you are an online seller, you may have heard about the recent decision in Wayfair where the court scrutinizes 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.
You can learn more about nexus in California in this blog post, What Is Sales Tax Nexus And How Does It Affect My Business.
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.
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's really important to really plot your next move, understand what the process is and then measure your response to California. No matter what stage of this you're 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 isn't 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've 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. You can find more California Sales Tax resources on our blog, or download our free e-book.
If you have questions, you can call our office at (619) 378-3138 , and we'll 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.
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