Does your company now, or has it in the past, taken advantage of Fulfillment by Amazon (“FBA”), and did you recently receive a letter stating you owe California taxes? This blog post explains why you cannot ignore this letter. Please contact us right away if you need help navigating your next steps!
Physical Presence Nexus and Fulfillment by Amazon
Back before Wayfair made headlines and the concept of economic nexus became a household term, essentially giving states the ability to pursue collection of sales tax from internet retailers, “physical presence” still established nexus within a state. A variety of factors determined physical presence nexus, such as employees located within a state, or owning or renting property within the state.
One such obvious physical presence item coming into play for a lot of companies that participate in FBA is inventory. If a company’s physical property (inventory) is held within a state (even if held in a third-party warehouse, like Amazon’s), it creates nexus, or taxable presence, for the company. That means that the company is then responsible for collecting and remitting the state’s sales/use tax and also filing income tax returns in the state.
In an effort to streamline the distribution of their products, many businesses engaged with FBA over the past several years. Through this program, Amazon placed companies’ inventory into its warehouses across the country to facilitate that distribution. Although the businesses often didn’t know or understand how or even where the inventory was housed, it created physical presence nexus for companies that now had inventory in those states.
Companies with Physical Presence Nexus & California Taxes
Unfortunately, because a physical presence nexus was established (often several years ago), the companies should have registered with the various states, including California, to collect and remit sales tax as soon as the nexus was created. Many did not.
As states realized these FBA sellers had established nexus and very few companies were collecting it, they pressured Amazon to release customer lists so the various Departments of Revenue could contact the companies. A little over a year ago, Amazon conceded, and shared its FBA customer lists with states like California. Frequent readers of our blog might recall the MTC’s amnesty program in the fall of 2018, which assisted online retailers in coming forward in many states.
Now California is reaching out to these out-of-state companies directly, expecting them to register currently and pay back tax liabilities, from the time physical presence nexus was established through their participation the FBA program.
Following are the steps in the communications many out-of-state companies have been part of (note that the State is currently on Step Two below):
- Amazon sent letters to its FBA sellers before sharing data with California. This gave those companies the opportunity to enter California’s Out-of-State Voluntary Disclosure Program, which would have limited the lookback period for paying the owed California taxes. Many companies did not know how to respond and/or ignored this communication.
- The California Department of Tax and Fee Administration (CDTFA) has recently sent letters to about 13,000 FBA sellers alerting them that filing, collecting and remitting is required AND that past taxes may be due. Unfortunately, since the recipient has now been “notified,” this letter disqualified companies from applying for the Voluntary Disclosure Program. However, if a business that received this letter enters into a Managed Audit Program (“MAP”) right away, they can receive a reduced interest rate (likely half) and a waiver of penalties on their California taxes owed. The State may also work with the company on a payment plan.
- The CDTFA will send out a final letter, which we understand is currently in the review and clearance process at the Department. This letter will remove the opportunity to apply for a MAP. So companies must act before they receive this letter!
Next Steps for FBA Sellers That Owe California Taxes
Unfortunately, when it comes to collecting and remitting these California taxes, there is no real “out.” Generally, the online retailers have sold to individual consumers – many of them years ago – and likely cannot go back to them and collect the tax. This leaves the businesses on the hook. We’ve had multiple companies reach out in the past few weeks (after getting the letter in step two) who believe they have significant liability for those back taxes. Many companies are in denial that these taxes are owed.
Fortunately, you’re not alone! We can help determine your liability and assist with MAP!
But please make sure you act quickly. As CDTFA explained, this window will close soon, so please contact us as soon as possible!
Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects. To learn more, contact us today at www.MilesConsultingGroup.com.
