State Sales Tax on Amazon

Sadie Keljikian, Stern Corporate Services Group

It seems the struggle between Amazon and state tax authorities isn’t over yet.

Earlier this year, Amazon was at the center of a state sales tax scandal: they weren’t collecting sales tax in accordance with the states to which goods were being sold/delivered. Based on the ruling of Quill Corporation v. North Dakota in 1992, ecommerce retailers are not required to pay state sales tax on goods sold to consumers in states where they had no physical presence. In the early days, when Amazon only had a few warehouses in its home state of Washington, they never had to worry about state sales taxes at their products’ destinations.

The sharp uptick in ecommerce shopping and consequent warehousing solutions, however, have changed matters significantly. Fulfillment by Amazon is a service through which third party sellers can distribute goods to Amazon’s warehouses nationwide, then Amazon takes over shipments to consumers.

Although Amazon has begun charging state sales tax on its own goods, the ecommerce giant doesn’t automatically add state sales tax to its third party vendors’ sales through the site. This means that third-party vendors, which make up about half of Amazon’s sales, are fully responsible for collecting state taxes on their sales through Amazon.

Most states agree that inventory in a warehouse (I.E. goods from a business using Amazon’s fulfillment service) constitutes a “physical presence” and thus require those businesses to pay state sales tax on goods sold through Amazon. Advisors and accountants, however, are divided on the issue. Some experts believe that states are going after independent sellers to avoid taking on Amazon directly, since they are undoubtedly a formidable legal opponent. Whatever the case, state officials and Amazon vendors are playing their cards carefully for the time being.