To begin with: (1) if you are an out-of-state seller using a Fulfillment by Amazon (FBA) Distribution Center located in Texas and (2) sell into Texas, then you have Sales Tax NEXUS. That is, you or your company is required to register for, collect and remit Texas Sales Tax. It should be noted that Texas Sales Tax Rule 3.286 clearly states that it an entity that maintains inventory in a distribution center located in this state creates nexus requiring the entity to collect and report sales tax on sales to Texas purchasers.
Let’s assume you have nexus but you have not registered in Texas for Sales Tax. And you also believe you are safely flying under the agency radar because it would be very unlikely the Texas Comptroller would know if you were using a Texas FBA distribution center and selling your taxable product or service in Texas. In this scenario you are still taking a chance at being found because your sales could always be identified during an audit of your Texas customer conducted by a Texas Comptroller Field Auditor. If this happens, you could be the target of what is called a spin-off audit lead. And if you are sent an audit notice the normal 4-year audit look-back period for permitted sellers is out the window (i.e., the audit can go back as far as you did any business in Texas via an FBA distribution center). If you do not respond, then the Texas Comptroller, after a few notices, can literally make up any estimate to assess tax, penalties and interest. If you don’t pay, then they have the option to ask the Texas Attorney General’s Office to sue you or your company.
What if Amazon Decided to Send All Your Company Information to the Texas Comptroller?
Now lets take it one large step further. What if Amazon, without your permission, decided to hand over specific company contact information (including Federal Tax ID number) as well as a detailed listing of all your Texas FBA inventories to the Texas Comptroller’s Office. And what if the Texas Comptroller used that inventory data incorrectly to estimate Sales Tax against your company or you personally.
Well, it is already happening in other States, but not yet in Texas. Let me explain. In late 2017, Amazon provided the Massachusetts Department of Revenue (DOR) detailed and potentially misleading data on ALL Out-of-State businesses who sell via FBA located in that State. That business data included:
- Business Contact information (name, address, federal tax ID number, and phone number).
- The Estimated DOLLAR VALUE of the products SOLD from the seller’s inventory in the Massachusetts fulfillment centers
In my opinion, Amazon is handing out potentially misleading information to the Massachusetts DOR in regards to the dollar value of products sold into Massachusetts. In particular, who knows what the accurate Estimated Dollar Value of the products sold really is? It is not fair for the Massachusetts DOR to assume that all FBA inventory held in the State by that seller was subject to Massachusetts sales tax. This would assume (incorrectly) that all inventory was sold into Massachusetts or that all of the inventory was actually sold.
For instance, what if that seller sold that FBA inventory to a buyer in a state other than Massachusetts or what if not all of the inventory was sold (i.e., the products were never sold, remained in inventory or else were moved to another state). It is even possible that some items sold (whether into Massachusetts or another State) were returned by the buyer for either a refund or else a replacement. If any of these scenarios occurred, then the Massachusetts DOR would be incorrectly assessing Massachusetts sales taxes.
It is CLEARLY not accurate for the Massachusetts DOR to employ what is termed a 100% Purchase Depletion Analysis Audit Method to assess sales tax to the out-of-state seller based on the faulty assumption that the company sold 100% of all inventory held in a Massachusetts FBA distribution center. Of course it could also be possible that an order for a Massachusetts buyer might be fulfilled by another Fulfillment Center located outside of Massachusetts (i.e., this would result in sales being underestimated). In conclusion, I would hope any State’s Administrative Hearings judges would throw out any audit estimation based on this clearly faulty audit methodology.
The point of this article is to warn all internet sellers selling products or taxable services into TEXAS about the potential tax consequences. It is obvious that more States will be following the lead of Massachusetts DOR. I am betting that, in the near future, the Texas Comptroller will eventually contact AMAZON and attempt to force them to provide the same company and inventory information described above. If this happens there could be many incorrectly estimated sales tax assessments based on the faulty inventory and selling revenue assumptions. Even if this does not happen the Texas Comptroller would likely expect any business to report all sales into Texas based on all inventory is kept in a Texas Amazon Fulfillment Center.
What About Texas Nexus for Franchise / Margin Tax (Business Tax)
FBA sellers into Texas can also POSSIBLY create nexus for Texas franchise / margin tax. However, each seller’s situation should be evaluated on a case by case basis to determine potential nexus for this tax type. In short, Texas is more of a physical presence state when it comes to nexus for franchise tax. However, if a company’s activity falls under any of the threshold activities found in Rule 3.586 – Franchise Tax Nexus, then they would be subject to the tax. Also, keep in mind that the Texas franchise / margin tax rules are modeled after the multi-state compact rules. So it is possible that certain non-physical presence activities could cause nexus for this tax.
I don’t want to cause a panic, but any out-of-state company selling into Texas using an FBA distribution center located in Texas should consider contacting Texas Tax Group or other qualified consultant for advice on both sales and/or franchise – margin tax regulations. If nexus is created for either tax type, then TEXAS does have a Voluntary Disclosure (VD) program which allows delinquent taxpayers to pay back taxes on an anonymous basis through a qualified taxpayer representative. It is also possible to limit the look back period to four years and waive ALL penalties and interest. Please contact Texas Tax Group for further information.