Are States Auditing Amazon Sellers with Prior Nexus?
Amazon Sellers are relieved that several states are collecting and remitting sales tax on behalf of third-party sellers but are still unsure if the states will be auditing Amazon sellers with prior nexus.
In fact, there are 26 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 was saying 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.
The MTC.gov, in a 2018 workgroup with the states, did discuss all the burden 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 when they 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 for past sales tax liabilities due PRIOR to 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 which we did obtain, but that information is not able to be shared. The results and answers were similar with more detail.
“Have you audited or plan 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.”
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 either require a proper protest or dismiss the protest for failure to comply. If a protest is not filed in a timely manner, 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 email to [email protected]”
Ohio“Sales tax audits normally encompass the most current three years, unless the audit is for failure to remit sales tax collected – audit will include all periods unremitted. Sales tax is a trust tax; therefore, if a sales audit liability exists, a Concurrent Responsible Party assessment will also be generated. 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 prior to 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 the inventory they own being 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, then 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 prior to that point, they would still be responsible for that.”
Oklahoma “I have no idea if anyone audited anything. For sure, there are some formulas they use to figure out who’s going to 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, when emailed or called, do not commit to divulge any audit plans, which make sense.
The fact remains that most states are clear about the sales tax rules prior to 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.
You need to decide 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 are collecting and remitting sales tax on your behalf.