Amazon State Sales Tax Explained
For years, state governments and online retailers, such as Amazon, have battled it out over whether or not state and local governments should be able to collect sales tax on online purchases. Recently, the Supreme Court settled the debate in a 5-4 vote which ruled that states have far-reaching authority to collect sales taxes from online retailers.
Quill v. North Dakota
The roots of this recent Supreme Court ruling go back to a 1992 case, Quill v. North Dakota, in which North Dakota tried to tax Quill, a mail-order company based outside the state, on sales shipped into the state. The case made its way up to the Supreme Court which eventually ruled that states couldn’t charge sales taxes on a “vendor whose only contacts with the taxing State are by mail or common carrier.” Essentially, the Court set a precedent that states could only collect sales taxes from companies with a physical presence in the state.
South Dakota v. Wayfair
Now 26 years later, the Court faced a similar issue in the case of South Dakota v. Wayfair. The case began several years ago when South Dakota tried to pass a law requiring any business with $100,00 in sales or 200 transactions in the state to pay sales taxes, regardless of whether or not they had a physical presence in the state.
In response, Wayfair sued South Dakota and the South Dakota Supreme Court eventually found the law unconstitutional in 2015. Upon appeal, the case made its way to the Supreme Court of the United States. The 5-4 decision in favor of South Dakota overturned the 2015 ruling and extended state power to impose state sales tax not only to companies with a physical presence in the state but to those with an economic presence, as well.
Physical vs. Economic Nexus
With the recent SCOTUS ruling, the physical nexus standard established in Quill v. North Dakota remains unchanged. Sellers with a physical presence in the state in question may continue to be subject to states sales tax if:
- The business is physically located in the state in question
- The business’ inventory is stored and/or shipped from a warehouse owned by the company in the state in question
- The business’ inventory is stored and/or shipped from an Amazon FBA warehouse located in the state in question (specifically for Amazon sellers)
The big change for retailers comes in the Court’s ruling regarding economic nexus standards. A company is said to have economic nexus if it directs economic activity within a certain state or derives its income by selling to customers in that state. Where companies who had economic, but not physical nexus, in a state were previously exempt from state sales tax, now they are required to pay based on state law.
Sales Tax Economic Nexus Laws
For now, the Court has left it up to the states to define their own economic nexus laws. This means that each state is going to have to pass their own rules and requirements as to what constitutes taxable thresholds in that state. As of right now, 17 states have already addressed the issue, setting standards based on monetary or transaction thresholds.
North Dakota, Louisiana, Mississippi, Alabama, Kentucky, Ohio, Vermont and Maine have already passed active economic nexus laws that require online retailers to collect sales taxes in that state if the company meets specific sales thresholds. Currently, these sales thresholds range anywhere from $10,000 to $500,000 in sales and vary from state to state.
Notice and Report Laws
So far, Washington, Oklahoma, Pennsylvania and Rhode Island have passed what are known as “notice and report” laws. These are similar to sales tax economic nexus laws because they set standards based on revenue or transaction thresholds, but they differ in how qualifying sellers are required to comply. Sellers who meet the state’s defined threshold can respond in one of two ways:
- They can collect sales tax from buyers in that state
- They can report to both the buyer and the state how much sales tax the buyer would have paid if the company had collected sales tax
The biggest difference between notice and report laws and sales tax economic nexus laws is the date when each of these laws went into effect. While economic nexus laws didn’t go into effect until June 21, 2018, when the South Dakota v. Wayfair ruling was made, notice and report laws have been legally in place since July 1, 2017.
This discrepancy could make a world of difference for sellers who have not been sales tax compliant. Sellers just now learning about economic nexus laws still have time to become compliant, while those who may have been violating state notice and report laws may be subject to larger damages since these laws have been in effect for more than a year now.
Upcoming Legislation
There are several states whose sales tax economic nexus laws are still pending or have been passed but have not yet taken effect. States with pending legislation include:
- Wyoming
- South Dakota
- Indiana
- Tennessee
- Massachusetts
While these states are still waiting for their laws to pass, the following states have already passed nexus legislation and are just waiting for the laws to kick in.
- Iowa (Starting January 1, 2019)
- Wisconsin (Starting October 1, 2018)
- Illinois (Starting October 1, 2018)
- Georgia (Starting January 1, 2019)
- Connecticut (Starting December 1, 2018)
What does this mean for Amazon sellers?
There are still a lot of grey areas when it comes to taxing online merchants – and Amazon is no different. While the platform has already taken steps to help its sellers adapt to new sales tax economic nexus laws, action is still required on the part of Amazon sellers to ensure that they are fully complying with new state laws.
If you are selling in a state listed here, answer the following questions to determine whether or not you have a marketplace nexus and are required to pay sales tax.
- Is Amazon already collecting and remitting sales tax on your behalf? If so, you do not need to collect or remit taxes in this state.
- Is Amazon reporting your information to the state? If so, do you meet that state’s threshold for compliance? If Amazon is reporting on your behalf and you do not meet the threshold, you do not need to pay taxes in this state. If Amazon is reporting on your behalf and you do meet the threshold, you may need to pay taxes in this state.
If you are not selling in a state mentioned in the link above, you likely do not have to worry about collecting or remitting taxes in that state. Please keep in mind, this is just a general guide and, as always, you should consult with a tax professional before making any final decisions.
What to expect moving forward
In the Wild West of sales tax economic nexus laws, you can expect a lot to change as time passes. In the near future, it is likely that more states will continue to follow the economic nexus standard and enact marketplace nexus laws that will directly impact Amazon sellers.
As more states begin to expand their nexus criteria, it is possible that Congress will step in and establish uniform standards to help create a more streamlined process for sellers. By our best guess, this is something we can expect to see within the next year or two.
What should I do next?
While there are still a lot of unknowns surrounding nexus law, there are some tangible next steps you can take to help ensure you are complying with state laws, while still helping your business make a profit.
- First and foremost, make sure you are complying with sales tax law in states where you have physical nexus
- Continue to monitor nexus standards in states where you conduct business
- Constantly monitor your revenue and transaction by state
- If you realize that you’ve triggered economic nexus in a state, register in that state
- Keep an eye on notice and report laws and make sure you meet reporting requirements in all applicable states
- Look to automated sales tax compliance solutions to help you keep track of your requirements and compliance
- Moving forward, come up with some kind of protocol to constantly monitor each of the above factors
Above all, stay calm and don’t act rashly. This recent Supreme Court decision clearly isn’t ideal for online retailers, but it’s also not the end of the world. For most sellers, compliance with sales tax economic nexus laws is manageable and still profitable. If you’re making money in a given state, the costs of compliance are probably not high enough to warrant ceasing business in that state. The best thing you can do is monitor – monitor your sales, monitor state nexus laws and you should be fine.
