Are States Auditing Amazon Sellers with Prior Nexus?
Amazon Sellers are relieved that several states collect and remit sales tax on behalf of third-party sellers but are still unsure if the states will be auditing Amazon sellers with prior nexus.
Update: Florida, a recent marketplace facilitator state as of July 1st, 2021, is planning on going after past Amazon FBA sellers who had prior nexus in the state who did not register prior to October 1st, 2021. The audit division will audit those sellers who were collecting and not remitting first, then the sellers who has inventory but never registered prior to July 1st, 2021.
In fact, there are 47 marketplace facilitator states where Amazon is either starting or has plans to collect and remit sales tax for Amazon sellers. There have been two camps over the last three years when it comes to sales tax compliance.
One is those who listened to the SALT experts, who have clearly stated what creates sales tax nexus in a state (inventory as an example), and your responsibility to collect and remit. Another camp, which said it is unfair for small sellers to have this burden of responsibility in the marketplace, and Amazon (in this case), should do more than provide sales tax resources to contact, but do this on behalf of sellers.
In a 2018 workgroup with the states, MTC.gov did discuss all the burdens placed upon third-party sellers and made recommendations moving forward. It does appear the states have considered many of those recommendations, including having the marketplace (Amazon, eBay, Walmart, etc.) collect and remit sales tax on behalf of sellers.
This is great news, especially for new sellers coming on board, who may only need to register for sales tax and file returns in many states. Some states don’t even require you to register if you are only selling on a marketplace facilitator platform.
The bad news is for the latter group, who never came forward with compliance when they first had physical nexus or passed some of the newer economic nexus thresholds starting in 2018. The big question becomes when will marketplace facilitator states, who have seller information, move to audit past sales tax liabilities due before Amazon collecting and remitting sales tax?
We reached out to several states over the phone with this question in regards to auditing Amazon sellers, and here are a few responses:
Here was the question we asked over the phone to the states’ Departments of Revenue. It is recommended to receive an answer in writing from each state we did obtain, but that information cannot be shared. The results and answers were similar in more detail.
“Have you audited or planned to audit any sellers where Amazon is not collecting and remitting? Past sellers say they are not interested in coming forward because they know that Amazon is now collecting. Do you audit randomly? Do you know the start date when each seller first had inventory in your state? “
Iowa: “We depend on an auditing company. That is something we cannot divulge. Please see the Iowa Audit and Appeals process.”
Resource: Iowa Sales and Use Tax Guide | Iowa Department of Revenue
Iowa Audits and Appeals:
The Department may audit a return anytime within three years. However, the period for audit is unlimited if a return was filed falsely or fraudulently with the intent to evade tax or if no return was filed.
Permit holders have the right to contest an assessment, denial of a refund claim, or any other Department action, except licensing. Protests must be filed with the Department’s hearing officer within 60 days of the assessment notice date or denial of the refund claim. If a proper protest is not filed, the Department may require a proper protest or dismiss the protest for failure to comply. If a protest is not filed promptly, the Department assumes that the permit holder does not oppose the assessment.
All protests must be filed by certified mail (return receipt requested) or personal delivery to the Department during business hours.
Minnesota “Any business could potentially be audited. But you can send an email to salesuse.tax@state.mn.us.”
Resource: https://www.revenue.state.mn.us/remote-seller-faqs
Ohio“Sales tax audits normally encompass the most current three years, unless the audit is for failure to remit sales tax collected – the audit will include all periods unremitted. Sales tax is a trust tax; therefore, a Concurrent Responsible Party assessment will also be generated if a sales audit liability exists. Stiff penalties also apply to sales audits.”
South Dakota, “Any seller having a physical presence in South Dakota, is liable for sales tax on any sales made in South Dakota. This includes having a physical presence before March 1, 2019.”
Oklahoma “I’m sorry, I cannot tell you if the state plans to audit Amazon FBA sellers.”
Pennsylvania “The Department of Revenue’s Discovery operation routinely reviews and establishes accounts for taxpayers who have had physical presence or nexus in the state and failed to register, report, and pay business taxes. As you describe, FBA or ‘fulfilled by Amazon’ sellers have sales tax nexus through their inventory stored in Pennsylvania warehouses. Note that the same activity – inventory in warehouses – gives rise to a Pennsylvania income tax reporting obligation and that this is not addressed via Amazon collecting sales tax on behalf of its FBA sellers.”
South Dakota “I would not say that we would not look back as the company had nexus or had any activity. We’re not going to say, ‘No, we’re not going to look at that.’ If they had nexus, they were responsible for the tax for the point where they had nexus. It has nothing to do with the Wayfair case. If the seller had a responsibility in SD before that point, they would still be responsible for that.”
Oklahoma, “I have no idea if anyone audited anything. Certainly, there are some formulas they use to figure out who will be audited and for what reason. I don’t know that. Our auditors don’t have a direct line.”
“Your records may be audited to determine whether you have paid the correct amount of tax. The audit may determine that you owe tax, that you are entitled to a refund, or that you have paid the correct amount. In general, you may be audited in four-year intervals; thus, you are required to keep records for a minimum of four years.”
Overall, it is not surprising that the states do not commit to divulging any audit plans when emailed or called, which makes sense.
The fact remains that most states are clear about the sales tax rules before the marketplace facilitator laws and Amazon collecting and remitting in several states. The states have an advantage with no statute of limitations if you have not filed a sales tax return in these important states. Interest accumulates monthly.
It would help if you decided the level of risk of not registering and being subject to an audit when the states absolutely know you are selling on Amazon because they collect and remit sales tax on your behalf.
