Alex Knight interviews attorney Paul Rafelson about US sales tax for Amazon FBA sellers, and the MTC’s amnesty. Should you opt in?
As you may have seen, sales tax is a rather hot topic for Amazon sellers at the moment, following the Multistate Tax Commission’s decision to hold a US sales tax amnesty for online sellers.
With the October 17th deadline looming, there is much debate about whether Amazon sellers are even liable for sales tax, and whether they should make a voluntary disclosure under this amnesty. This week, I spoke to Paul Rafelson, a state and local tax attorney, to get his opinions on both of these topics.
What Paul said surprised me, as it was very different to the orthodox view of FBA and sales tax. Ultimately, he believes that Amazon sellers who fulfill their orders using FBA may not be liable for sales tax at all. His contention is that sales tax “nexus”, usually the key consideration for Amazon FBA sellers, is actually irrelevant, because Amazon itself is the “retailer” under sales tax law and should be responsible for collecting sales tax themselves.
We also talked about the MTC amnesty, which Paul believes Amazon sellers should not comply with because, in his opinion, it is a bad policy, based on a weak understanding of the realities of selling on Amazon. He also fears that if sellers comply, they could be hit with further taxes, such as income tax and franchise tax, and end up crippled by a huge compliance burden.
You can watch the full interview with Paul above, and we’ve also included a full transcript of the conversation.
Alex: So Paul, in your opinion, does selling through Amazon marketplace, and using FBA, create a sales tax liability for most states?
Paul: I absolutely do think it creates a sales tax liability in most states, it’s just about whose sales tax liability it is. In my opinion, if you look at the law, it’s Amazon’s responsibility, and not your responsibility as sellers.
Just to stop you there for a minute, Paul, it seems that your opinion of FBA and sales tax is quite different to the orthodox view.
Sure, and I certainly understand that sentiment, because I think from the orthodox point of view, people have been asking whether they have a physical presence because that’s sort of the rule about whether a state can force you to collect sales tax.
My point of view is that it’s not about physical presence, it’s not about nexus, it’s about who’s the retailer – who’s the “Walmart”. And, in this situation, Amazon is the same as Walmart, Amazon is the same as Target, Amazon is the same as Best Buy. They don’t get to be special. They have a nexus in the state, they’re a retailer and they collect tax, this doesn’t change whether they sell Amazon products or your products, it’s the same thing.
It’s not about physical presence, it’s not about nexus, it’s about who’s the retailer.
Think about it hypothetically: Coke and Walmart might both have nexus in Georgia, the same as third party sellers might have nexus with Amazon FBA. But, we know that there is no agreement that Coke and Walmart can execute that would ever allow Walmart to skirt its responsibilities on collecting tax on Coke sold at a Walmart.
It just isn’t allowed, they couldn’t decide that they’re now the “Walmart marketplace” in their Atlanta store and tell Coke, “you own your inventory in our store and you’re now the merchant of record and we’re going to do all this legal fiction”. And then, at the end of the day, when a person buys their Coke from a Walmart fridge, takes it to the register, and pays for the Coke, decide they’re not going to collect tax on it.
No state would ever allow Walmart to get away with that and so what states need to understand is that this is exactly what they are doing with Amazon, when they say Amazon isn’t responsible for collecting tax and you [sellers] are. They are basically falling for that sort of idea that you can contract your way out of basic sales tax collection responsibilities.
Amazon has nexus in every state that they collect in, so they [Amazon] are the ones that should be collecting the tax. So, whether or not you have nexus is really irrelevant for sales and use tax purposes.
So just to summarize that for our viewers, it’s your opinion that the common belief out there is wrong, and that selling through Amazon marketplace and having your orders fulfilled through FBA doesn’t create a sales tax nexus. So if we’re looking at the wider issue of the amnesty, what is the amnesty called, and what is it offering to sellers, Paul?
Okay, well before I get to the amnesty, let me just clarify something you said, because I hear that a lot – “you’re saying that they don’t have a sales tax nexus”. No, I’m saying that whilst I don’t think sellers have nexus, even if you did, you don’t have a sales tax collection responsibility. It’s not Coke’s responsibility to collect the tax in a Walmart – it’s Walmart’s.
Think of yourselves as suppliers and not retailers, which is what you are, and see Amazon as the retailer, who should be collecting the tax. So your nexus, whether or not you have it, is irrelevant for sales and use tax purpose.
Now, what is the amnesty? It’s the Multistate Tax Commission’s (MTC’s) online marketplace seller voluntary disclosure initiative. The MTC is sort of like a trade organization, it’s not the government, it’s an organization that represents the interests of state tax departments and state taxing authorities. It came about in 1967, at a time when states were worried about Federal legislation that would trump the ability of states to have their own tax laws. So the MTC and the multistate tax compact, which was sort of this uniform tax law, came about and that was supposed to send the signals to Congress that they didn’t need federal intervention.
I don’t know how successful that has been because a lot of states have decoupled at various points, but the MTC still exists and is designed to promote uniform tax law and compliance with taxes.
Anyway, the MTC were approached by some Amazon sellers organizations that gave them the impression that they were representing the entire Amazon community and said, “Hey, this amnesty is something we would like you to consider because we have a lot of sellers who are being audited by states, and those that are worried about being audited, that just want to come forward, come clean and get a clean bill”.
It’s just horrible that you only get 60 days to comply. We would never put up with that at Microsoft, GE or Walmart.
So, they negotiated this amnesty with a 60 day deadline, which for me, is just horrible that you only get 60 days to comply. We would never put up with that at Microsoft, GE or Walmart, we would always have at least a year to figure this stuff out. I mean 60 days is just crazy for companies that don’t have tax departments.
The reason they did it that way was because, in the MTC’s view, they are willing to waive the back taxes because they are going to be collecting during Christmas 2017, the busiest time of year. So, that’s why the timing was set that way.
My big problem with all of this is that no one from the state and local tax law community, not even a qualified state tax accountant from one of the big firms, who I think are very good, was there in this negotiation. So, however this was negotiated, it was based on the assumption that nexus is the issue, and that there is no question about who the retailer is. It is my belief that any state or local tax lawyer, who has been in this field for even five years, would have probably figured out that that’s not the right way to go, and that it’s a really bad way to handle it from a policy perspective.
How did they get here? I think this is partly because states just don’t understand the facts. They just think that selling on Amazon is the same as selling on Craigslist. They don’t understand what it’s like to be an Amazon seller and how different it is to selling on any other marketplace, they don’t understand how little control you have and how much control Amazon have. The MTC tells me that Amazon is a mall or a flea market, but I think we all know that’s not true.
States just don’t understand the facts. They don’t understand what it’s like to be an Amazon seller and how little control you have.
Amazon sellers aren’t the same as retailers at the mall. When I go to the mall and go to Bed, Bath & Beyond, they always take my name down, and send me 100 of those stupid 20% off cards every week. You aren’t allowed to do that on Amazon, it’s in the terms and conditions of your contract, you aren’t even allowed to get your own client list from this.
Also, I don’t pay the mall when I go, I pay my retailer, I pay the store that I’m buying things from. If I have a problem with something I buy, I don’t complain to the mall, I complain to the store. The mall is not going to stick up for me if I have problem – they probably don’t care!
Finally, the mall isn’t going to seize inventory. They aren’t going to seize Apple’s iPhones because of some issue, and they aren’t going to force Apple to give me a refund.
There are just things that malls and marketplaces don’t do that are indicative of the fact that Amazon is a retailer. And, because states don’t understand that, and because the MTC doesn’t understand that, they’ve been operating on the false assumption that Amazon sellers are just in this sort of open marketplace, and that’s just not true.
So should sellers comply with the amnesty?
I think sellers who are seriously thinking about complying with it, especially if they have a big liability, need to seek counsel. I mean if there is potential to clear a liability in Florida and you have no income tax in that state otherwise, because you’re structured appropriately, maybe it’s not a bad idea.
I think it’s bad policy and a path to major compliance burdens because if you set the tone that this is the law, then it sort of just becomes law.
For the most part, I don’t generally think that people should comply, but I can’t give you that specific advice without telling you to talk to your lawyer first and look at your own facts. Personally, I think it’s bad policy and a path to major compliance burdens because if you set the tone that this is okay, and that it’s the law, then it sort of just becomes law. This means you’ve then lost your opportunity to say, “wait a minute shouldn’t this have been Amazon’s burden the whole time?”, because that’s what the law really said.
So what ends up happening is that now mom and pop stores in Idaho have the same compliance burdens as Google, in terms of tax. This means that all of a sudden they’re spending $30 per return, in every state, every month, to file their sales tax returns. They are also now subject to income tax, franchise tax, and all these other taxes they’ve probably never heard of, which cost $500-$1000 annually. The next thing you know, they have a compliance burden of $50,000, $60,000 or $70,000 every year, and that is what this is a path towards, all because of a bad policy and bad application of the law, which has been based on a bad understanding of the facts.
So no, I don’t think this is the time to comply. You shouldn’t comply with something when the whole thing has been predicated on bad information. But everyone’s circumstances might be a little different and maybe there’s something you should do. For instance, if you’re selling on other marketplaces, maybe there’s something there. I don’t know, I’m not speaking for Etsy [for example], as I don’t know their facts, so it might be a different situation. But my big picture belief is that, for most people, it’s probably not a great idea to participate in this.
So essentially what you’re saying there Paul is it’s a bit of a wolf in sheep’s clothing situation. Sellers are coming along, they think it’s nice and gives them the opportunity to say ‘hands up I haven’t been paying my sales tax’, without getting penalized over and above what they owed, not realizing that what they are walking into could open a can of worms for sellers of further compliance to other, different types, of taxes.
Yeah, absolutely. I mean they are falsely accusing you of civil tax evasion and then forgiving you for it at the same time. They are essentially saying we aren’t going to make you pay back sales taxes, which you didn’t really owe them in the first place, but you do have to pay back income taxes, which you may or may not owe, because that is a nexus question.
If you look at what South Carolina are doing in their lawsuit against Amazon, you’ll see that there are questions about whether you even own your inventory, if it’s commingled or you use FBA. So there’s a lot of questions about whether you even have nexus, and by complying with the amnesty you’re sort of conceding all those points.
There’s a lot of unanswered questions, that are very good questions, which need to be figured out before you should be complying.
You also have to remember that when you’re in compliance, it’s very hard to get yourself out of it. So I wouldn’t be jumping into this right away because there’s a lot of unanswered questions, that are very good questions, which need to be figured out before you should be complying. You need to know the right answers, otherwise the cost might be too much and you’ll find out two, three, or four years from now that you should never have been doing it in the first place – and that’s bad news. I would rather people not do it, that would be my preference, but again everyone’s facts need to be checked by a lawyer.
If you’re under audit too, then definitely get a lawyer. I hear a lot of stories about people under audit and Washington State is apparently really aggressive. This is no surprise considering that it’s Amazon’s state, they aren’t about to go and tell Amazon to collect, and lose their competitive advantage in their home state.
So if you’re being audited I’d say lawyer up, and that doesn’t mean take this to the Supreme Court and incur $100,000 of legal fees. What I mean by “lawyer up”, is that states like Washington are just picking off people left and right, and everyone they send a letter to pretty much just pays. It’s the easiest money they’ve ever made, because they are just going after every one of you individually, like little fish. So if you’re the one fish, or ten fish, out of 100 that lawyer up and show that you actually understand Washington State law and how under it you aren’t responsible for the tax, there is a pretty good probability that the state is just gonna leave you alone, or dial back.
Why is this? Let’s say you’re one out of 100 that pushes back and they keep putting pressure on you and say, “we’ll fight it out in court”. So you got to court, or an administrative hearing, and let’s say that you get a ruling in your favor. They have now lost their chance to go and bother those 99 other fish. In other words, them fighting you might be more risk to them, on the downside, than winning against you is on the upside. If they win against you they might make a few thousand dollars, but if they lose, they lose their right to collect tens, hundreds, or even millions of dollars, from the other 99 fish.
So don’t assume that just because me, or someone else who knows state and local tax, says, “hire a lawyer”, that the lawyer is going to want to drive you to the Supreme Court, and that’s the strategy, because it’s not. The strategy is just to show a little bit of push back and, just by being a little more difficult than the next guy, you might find the state will just leave you alone.
There are clearly other points of view out there, but if a seller has come round to your point of view, other than take on a lawyer, what can your average Amazon seller do to stand up, make their mark, and say, “I don’t agree with this whole amnesty process”.
Sure, well we are asking people to sign our petition. It is anonymous and we are just trying to get a count of how many people are upset about the amnesty. Through the petition, you can make a contribution which helps us hire lawyers, public relations professionals, or whatever we need to help fight the fight, and work the fight behind the scenes.
I’m talking to states everyday and it’s an intense battle. In some states I’ve noticed there’s a political angle, and that’s a problem.
I’m talking to states everyday and it’s an intense battle. In some states I’ve noticed there’s a political angle, and that’s a problem, but for a lot of these states they were just misinformed by the MTC and are now really considering whether this a policy they want to continue with.
Basically all I’m trying to do is the same things I would do if it was happening and affecting companies like Microsoft or GE, as this is what we would do, and we would have the resources to do that. But Amazon sellers as individuals do not have those resources, so I’m trying to collectively bring everyone together. I wish I could do it in a more organized way but with the impending deadline, I’ve been trying to move quickly.
In order for us to keep doing this, we need support, because it’s not an easy, or cheap, battle to fight. If you don’t feel like supporting us financially, for whatever reason, we could also use your help just through connections. If you know somebody, if you have a media connection, if you have a local news contact, reach out to them. Don’t be afraid to tell them your story, and tell them what the states are trying to do. Tell them that your state is participating in this amnesty, and basically endorsing and acquiescing to states coming in and forcing you to comply with a massive burden that puts you out of business. Equally, if your state isn’t on the list of amnesty states, tell the local news outlets that your state isn’t doing enough to stick up for you, and is allowing other states to come in and put this burden on you.
Alternatively, talk to your congressman. This could be anonymously, as you don’t have to give them your name and information. You can just call them, say you’re a seller and explain what you do and what your state is doing to you.
As we get more attention, more people will start to realize that politicians are being shown as anti-small business, which will make politicians move faster to put pressure on the department of revenue, for each of those states, to stop this program.
But let me be clear, I don’t really want to stop this amnesty, I just don’t want it to apply to Amazon sellers, because their facts don’t fit. There might be people who need this program on other marketplaces, as I don’t know what Etsy [for example] is all about, and that’s fine, keep it for those people. But for Amazon sellers we need clarity, and we need an understanding from the states, that when they look at your facts, none of this applies to you.
Paul, thank you very much for your time.