FBA, Drop Shipments, Trailing Nexus Revisited
By Jason Watson, CPA
Posted Monday, October 18, 2021
Fulfillment By Amazon (FBA) and other fulfillment services add a new dimension to the nexus conversation. States are scrambling to figure it out so tax revenue can keep up with population growth and resource use.
Avalara is a consultation business who specializes in sales tax issues, and they re-printed a wonderful article on FBA and what it means to you. It was originally written by Michael Fleming of Peisner Johnson & Company and it is a bit outdated since it was the voice before Wayfair, but it provides excellent backdrop of the issues. We will attempt to paraphrase some of the concepts here, but if you want the full details use the following link-
The first concept is nexus, which we’ve beaten to death. But here is a different spin for those selling products online. There are four common nexus creating activities-
- Your Location
- Warehouse Use, and
- Fulfillment Services
The common theme to these four activities is Where is your stuff? More importantly, is your stuff in a state that ships within the state, and if so, does that state have a sales tax obligation? In other words, if a competitor located in the same state that you are selling your tangible personal property (TPP) through an online channel is collecting sales tax, then you probably have a similar obligation. Location. Location. Location.
There is guilt by association as well. If the distributor, warehouse, fulfillment center, storage facility, or whatever else you want to call it stores and ships your stuff, then you also have nexus by the fact of their physical presence. The essence of the facility argument for a state is that the facility is helping you create a marketplace for your goods.
There are some fine lines with who holds title and when does title transfer. For most online retailers and sellers, title arguments probably won’t do much good unless there is a lot at stake and you have a war chest to spend on attorney fees.
The next concern is materiality. If you’ve determined that you have nexus and are required to collect sales tax, is the obligation material? If you sold $200 worth of stuff to a Colorado Springs consumer, is the $16 in tax worth the headaches? Remember, if you do not collect sales tax from a consumer, he or she is still obligated to pay sales tax on his or her individual state income tax return. Unless, of course, your nexus and materiality tips the scale, and you have the responsibility to collect sales tax on behalf of the consumer.
States can spend some time on going after the head of snake, such a medium-sized online retailers or states can spend a lot of time going after the consumer. Drug user versus drug dealer.
There are voluntary disclosure initiatives to allow online sellers to come clean with their dirty sales tax deeds. Several states will waive the penalties and limit the lookback to only three years. You must weigh the chance of the hammer versus the certainty of a light tap. Peisner Johnson and co-hosted by TaxJar held a wonderful webinar in 2016 on the Multi-State Tax Commission amnesty program. You can see the slide deck from Michael Fleming here-
The issue of trailing nexus must be considered as well. For those familiar with Amazon and FBA services, you understand that your inventory is continuously being shifted to different states. Just because your inventory no longer exists in a state does not mean your nexus is instantly cutoff. This concept was broached in the beginning of this chapter, and is reiterated here to stress the importance of keeping up with the Kardashians and the location of your stuff, and who you owe an obligation to. Good luck.
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