As more and more international businesses start to sell through Amazon, understanding the ins and outs of US tax law becomes increasingly important. Unfortunately, it’s not necessarily an easy task. With varying regulations in 50 states, and laws that are constantly changing and being challenged in the courts, getting your head around your responsibilities can be difficult.
Rhode Island is a good example of the complicated issues that can arise. In this state, Amazon sellers can’t technically be forced to register for sales tax, but they are being made to jump through a number of hoops if they don’t. This system is set to become more common throughout the US, as states look for ways to raise revenue from online sales.
We talked to Amazon tax expert Michael Fleming, of Michael J Fleming & Associates Sales Tax and More, to get a better understanding of how Rhode Island’s system works.
No warehouses doesn’t mean no sales tax
In many states, one of the criteria for sales tax is based on physical presence in the state – that is, either a company office or goods stored in a warehouse located in the state. Smaller companies who use FBA (Fulfilled By Amazon) meet this criterion when Amazon has a warehouse in the state. But there are no Amazon warehouses in Rhode Island, which leads many sellers to believe that they don’t need to register for or pay sales tax in the state.
Unfortunately, as Michael Fleming explains, this is not the case. Amazon tracks sales data in every state, and now passes on that information to tax authorities in some states, in some circumstances. Rhode Island is one of them.
Thresholds, notifications, and penalties
If you cross a certain threshold for sales – last year, the threshold was 200 transactions in the state – your business is required to either register for sales tax or notify customers that they are responsible for the tax.
The requirements for this process are arduous – sellers must have a notice on their website informing customers that they are not registered to collect tax in Rhode Island, so the customer is responsible for paying the tax as a consumer use tax. You must also notify the customer at the checkout, and send another notice within 48 hours. By January 31st of the following year, you must send a fourth notice to any buyer who spent over $100. Finally, by February 15th you must send an affidavit confirming that you have complied with the other requirements.
Not only are the requirements complicated and time consuming, but the potential penalties are harsh. The minimum fine is $10,000, which means a single missed notification could result in a serious cost to your business.
The only other option is to register as a seller in Rhode Island and pay sales tax yourself.
Getting around physical requirements
As Michael Fleming puts it, these systems are a way for states to ‘do an end-run’ around the requirement for a physical presence in the state. The idea is that if they make it very difficult for sellers to comply with sales tax notifications, sellers will be forced to register for sales tax in the state.
He also explains that while only six states are doing this now, many others may introduce similar rules soon, depending on the outcome of a case before the Supreme Court. This case, set to end in June, will rule on whether sellers need a physical presence in the state to register for sales tax. If the court decides that a physical presence is needed, more states will likely introduce similar rules to make sellers comply.
This will make things even more complicated for businesses selling in multiple states. It’s already fairly complicated, with a wide range of sales thresholds and penalties in different states – for example, Colorado has a $100,000 threshold, Louisiana’s is set at $50,000, and Pennsylvania is just $10,000. Penalties vary too – Pennsylvania’s start at $20,000, which means you could pay double your sales in penalties.
Advice from the experts
Basically, for a small to medium business, it makes more sense to simply register as a seller in Rhode Island and similar states, rather than run the risk of missing a transaction and facing huge fines. For larger sellers, like Amazon itself, the risks are less significant – they tend to have huge accounting teams, so are less likely to miss notifications, and more able to bear large fines.
If you’re a small seller, managing notifications, sales registrations, and tax declarations is complicated, and keeping up with constant changes to the law makes things even more difficult.
That’s why it’s a good idea to get advice and ongoing support from an expert – like Michael Flemming at Michael J Fleming & Associates Sales Tax and More.