Applying for a Sales Tax Permit in California? What Else is Required?
As an Amazon.com FBA seller, you will need to collect and remit sales tax in the states you have nexus (stock). Nexus laws changed after the 2018 Wayfair vs. South Dakota case. Now there is both economic and marketplace nexus and currently, Amazon, a marketplace facilitator, is collecting and remitting sales tax in 43 of the 45 states with sales tax. You may have had prior nexus to Amazon taking over collecting and remitting sales tax as of October 2019, if so, you will have a past sales tax responsibility.
You will likely manage your cash flow to determine when you want to “ring the bell” for sales tax compliance. You may be attempting to estimate the “costs” associated with “ringing the bell” for sales tax compliance. You may be just thinking, “I will be working with a sales tax remitting service, and they have a monthly fee for pulling my data and for filing sales tax returns.” But this is only one part of the process and not the real costs involved.
When you “ring the bell” for sales tax compliance, there are several components:
- Applying for the sales tax permit through the Department of Revenue in a state
- Potential requirement to pay an additional franchise tax fee upfront or file a nexus questionnaire (see California Nexus Questionnaire)
- A potential requirement for foreign qualify to do business in that state, through the Secretary of State (usually for entities only, even foreign). This involves several steps. Learn more here: http://www.nvinc.com/pdf/Foreign_Registration_Services.pdf Potential requirement to file an annual state tax return through the department of revenue.
As you can see, there is a lot more than just filing for a sales tax permit and remitting sales tax.
Important California updates:
Like other states, California has added additional steps after registering for a sales tax permit. This has become a moving target over the last couple of years. A big and maybe misunderstood update happened recently. Amazon announced on April 1st that they started to collect and remit sales tax in all 45 states on products they sell. That does NOT include 3rd party sellers – YOU.
There is a difference between collecting and remitting sales tax, filing a state corporate tax return, and having to register an entity (LLC or corporation, for example) as a foreign entity qualified to do business in the state. Each step means increased costs and compliance are required. The states see this as a revenue opportunity beyond just sales tax. They are communicating better between the department of revenue that handles sales tax and corporate returns and the Secretary of State that handles the corporate or LLC registrations.
We see that applying for a sales tax permit can trigger a corporate or franchise tax return requirement and foreign register in a state. At the moment, Colorado is the only state that requires foreign qualification into a state before you apply for a sales tax permit. Kentucky requires foreign qualification on a sales tax permit online, but not if you mail in your application. In short, foreign qualification is still required in Kentucky.
California has provided a sales tax permit and now, years later, requires a corporate or LLC state tax return to be filed along with a minimum $800 franchise tax fee. That is the part that sellers do not like, and we understand. This was not enforced in the past nor covered by the states. Now the states are looking closer at Amazon FBA sellers and collecting more revenue.
These fees do not apply to sole traders or sole proprietorships. You may be receiving a letter from the California Franchise Tax Board as many of our members have, requiring this $800 fee to be paid along with a return for past sales.
Yes, this even applies to foreign sellers who sell through an entity.
Overall, we see the costs of compliance going up for Amazon FBA sellers. The only good news is this may make it more difficult for some sellers to compete, which means as your business grows, you will have less competition.
If you are not selling on FBA and using a different shipping method, and not in California, you may want to consider closing out your California permit. As a Sales Tax System member, we have included training on “Canceling Your Sales Tax Permits,” which give you a general overview of the process.