Do you sell products on Amazon? Some 5 million third-party sellers do! Did you recently receive a notice from the California Department of Tax and Fee Administration (CDTFA) or are you concerned that you might get one? If so, you are not alone, and it is important to clear up any misconceptions of what this means and let you know that there are resources available to help you protect your business and become compliant with the state of California.
Watch the video below to see Rex’s recent appearance on Fox 40 discussing this issue.
What is the CDTFA notification about?
Late last year, the CDTFA requested that Amazon provide them with the names, addresses and seller permit numbers of all internet sellers using their service widely known as “Fulfillment by Amazon” or FBA. Amazon started this program on or about September 2012 to reduce their delivery charges and to speed up delivery times to customers. In brief, the FBA policy change led to Amazon requesting that certain internet sellers selling on Amazon ship their goods directly to Amazon warehouses or fulfillment centers located throughout the country. These fulfillment centers and warehouses are now in 32 states. Most of these internet sellers complied using Amazon carriers since they were the cheapest but virtually none of them realized that storing their goods/inventory in a warehouse in these states created sales tax “nexus”, which is a tax term meaning roughly – “sufficient contact with a state that mandates that you register, collect sales tax, file sales and use tax returns and remit applicable sales taxes” as soon as you have triggered it.
Why did the CDTFA request this information form Amazon?
The state taxing authorities requested this information to make sure that e-commerce sellers that were storing property or goods in a California warehouse or fulfillment center owned by Amazon were registered, filing returns, collecting sales or use tax, and remitting sales tax to the CDTFA for their online sales that shipped from this warehouse to customers.
What action has the CDTFA taken as a result of getting this information from Amazon?
Now that the CDTFA has third-party seller information from Amazon, the department can use the taxpayer identification numbers to see if sellers have been filing Annual or Quarterly California Sales and Use Tax Returns.
The CDTFA’s Out-of-State Compliance Division has already started requesting information from internet sellers regarding their business. Late last year, the CDTFA mailed out 30,000 letters to out-of-state internet sellers. This questionnaire had to be completed and returned within 30 days. The goal of this was two-fold:
- Get out-of-state internet sellers to register their businesses with the CDTFA and begin filing California Sales and Use Tax Returns and collecting and remitting California sales tax; and,
- Identify specifically when out-of-state sellers established nexus in California and take the necessary actions to collect back-taxes owed which might be as early as September 2012.
If you’ve received a questionnaire from the Out-of-State Compliance Division, this means that your business is already under scrutiny by the CDTFA. So, we would recommend that you consult with an experienced California sales and use tax attorney or professional to get help filling out the questionnaire.
Wasn’t Amazon paying sales tax on my behalf?
Some sellers mistakenly believed that Amazon was collecting and remitting sales and use tax on their behalf. However, Amazon did not collect and remit the tax for sellers on its platform unless expressly advised to do so by sellers using its platform and paying higher transaction fees.
What steps can I take to protect my business?
Understandably, there are many misconceptions and confusion surrounding the CDTFA’s notices and the actions that sellers can take to protect their business. Fortunately, there are constructive actions you can take to become compliant with the state, and a knowledgeable California tax attorney or professional could help you address the issue right away.
You don’t have to wait until the California takes action to collect the taxes that you owe. You can proactively take steps to come into compliance. While California has not offered Amazon FBA sellers a reprieve, you can take advantage of existing programs in the state. While not all sellers will qualify, you could take advantage of the following programs:
- Voluntary Disclosure Program – Limits the tax liability to a three-year lookback and forgives all penalties.
- Managed Audit Program – In a managed audit, the taxpayer and his tax preparer, CPA, or accountant prepare the back-tax returns. In exchange, the CDTFA forgives one-half of the interest that is normally due.
It is important to discuss your rights and options with a tax attorney or tax professional who understands the state’s position on e-commerce and sales tax. If you are an Amazon seller and you have not been paying sales tax in California, it is possible to protect yourself, but you should take action as soon as possible.
What is the Wayfair Case all about?
It is an interesting coincidence that earlier in the year, i.e., June 21, 2018, the U.S. Supreme Court in the case of South Dakota vs. Wayfair, Inc. overruled fifty-two years of precedent (National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967) and Quill Corp. v. North Dakota, 504 U.S. 298 (1992)) that required “physical presence” in a state in order to require a business to collect its sales tax. Instead, the Court held that the “physical presence” rule was unsound and incorrect and replaced it with “economic nexus”. Specifically, the Court ruled that South Dakota law, that required out-of-state sellers to collect and remit sales tax” as if they had a physical presence” was permissible. Such sellers were defined in South Dakota law as those that had on an annual basis, delivered more than $100,000 of goods or services into the state or engaged in 200 or more separate transactions for the delivery of goods or services into the state.
With this new U.S. Supreme Court decision, the floodgates opened for the 45 states with a sales and use tax. State taxing authorities were finally free to require out-of-state internet sellers to collect sales tax on sales made in their state so long as their activity within the state amounted to “substantial nexus with the taxing state”. At least 30 states plus the District of Columbia have already acted and experts predict every state to eventually get on board. Personally, I thought that I would never see this day during my life time as Congress has never been unified on this issue and I did not expect the U.S. Supreme Court to overrule two U.S. Supreme Court cases, i.e., Quill and National Bellas Hess. In addition, requiring out-of-state internet sellers to collect sales tax in every state with a sales tax (45 to be exact) will result in a compliance nightmare as only the largest of companies with the best sales tax software that money can buy and an army of sales tax compliance staff will be able to comply and survive audits by the various taxing agencies.
This landmark decision changed everything for the out-of-state internet seller and if the various state taxing authorities do not limit its application to prospective sales by sellers that do thousands of transactions in their states or have done transactions in excess of $100,000 in the last year, it will force many sellers to declare bankruptcy. Accordingly, the actions of the CDTFA are critical at this juncture. So far, the CDTFA has adopted rules that are consistent with the Wayfair decision. In December 2019, the CDTFA announced that effective April 1, 2019, any retailer registered or required to be registered with the CDTFA is responsible for collecting and paying state and local use taxes on its sales into California if during the preceding or current calendar year, the retailer’s sales for delivery into California exceed $100,000 or the retailer makes sales for delivery into California in 200 or more transactions.
More recently however, the California Legislature passed AB 147 (Burke) on April 8, 2019 and sent it to Governor Newsom for signature. That bill will revise the CDTFA rule currently in effect and beginning April 1, 2019 include any retailer that in the preceding calendar year or the current calendar year, has a cumulative sales price from the sale of tangible personal property for delivery in California that exceeds $500,000. In effect, this new language raises the bar from $100,000 of sales to $500,000 of sales and eliminates the alternative minimum of 200 or more transactions. Both of these critical improvements to California law will help out-of-state small businesses selling on the internet; and, hopefully other states will adopt this higher standard to protect small businesses in the future.
Contact Us For A Free Consultation
The tax professionals at Rex Halverson & Associates understand the stress and strain that goes along with receiving a CDTFA notice. We are here to help you deal with the nexus issue, discuss the consequences of Amazon’s FBA program if you were a participant, strategize on how to avoid nexus in the future, and what steps can be taken to minimize your sales and use tax exposure. We can also assist you with compliance. Contact us at (916) 444-0015 or via our contact form to schedule a free initial consultation.