This is a guest post by Chris McCabe. The views expressed in this post are presented as a counter point to the Sales Tax Amnesty Program. Seller Labs is not a sales tax expert. We’re merely presenting different points of views in order to inform sellers about what’s available to them.
We’ve had a lot of great feedback and some interesting questions since we initially posted about our campaign to end the Sales Tax Amnesty Program offered by the MTC on behalf of state departments of revenue. Many sellers are struggling to learn enough about this topic before the deadline hits in mid-October.
As a non-expert in the sales tax area, I too have learned a lot in the space of only a few weeks, so I believe that sellers can, too. While few of us are tax experts, all of us make daily decisions in the best interests of our businesses. It’s important to understand these concepts as much as possible before casting a vote, just as you would in any election.
I asked state tax attorney Paul Rafelson the questions we’ve been asked most often. Please feel free to contact us if you have any questions. We are happy to elaborate and take any time needed to ensure that each seller understands the situation end to end. I’ll get right to the questions I asked Paul in order to help everyone understand this crucial material better.
Read Another Opinion: Amazon FBA Sellers Can Take Advantage of a New Sales Tax Amnesty
Chris: What if I already collected and paid some sales taxes?
Paul: If you’ve already started collecting and remitting sales tax on your Amazon sales, then I am not suggesting you stop at this time, even though you really shouldn’t be collecting. However, if you have paid back taxes, interest, and/or penalties on those sales, then you need to explore ASAP whether you have a right to a refund. Feel free to reach out to me at firstname.lastname@example.org and I can look at your facts and tell you whether you can pursue a refund claim.
Chris: So people probably know they can reach out to you via my site or the petition. What if they want to have their own company attorney or accountant advise them on this matter?
Paul: I would strongly advise that your company’s attorney gets educated by a state tax attorney. Good company attorneys usually know their limitations in terms of understanding the various segments of the legal profession. A company attorney that professes to know it all is a really dangerous thing. No attorney knows everything about all types of law. You don’t go to your family doctor for a cardiological exam. It’s the same with company attorneys. In-house lawyers are great for identifying issues and working with professionals to digest the information and convert it into layman’s terms for their client, but they should not be the advocates.
I remember a seller telling us something to the effect of “My lawyer says your argument that Amazon is like a consignment shop is BS because the Uniform Commercial Code Article 9 (which deals with security interests in property) says that consumer goods can’t be consignments.”
That’s really dangerous because of what is being referenced is irrelevant. Article 9 of the UCC only addresses whether a person has a security interest in a property. It has nothing to do with whether or not something is a legal consignment. It’s also dangerous because it’s only applying that stipulation for purposes of whether or not the UCC shall apply to the transaction. Consumer goods can and are often consigned, but such consignments are covered under other law. Plus, tax law really has nothing to do with the UCC anyway, so it’s not going to matter. These are dangerous legal conclusions made by people who don’t understand the tax law.
That’s why I’m disappointed that when this deal was negotiated on behalf of the sellers, the MTC didn’t suggest that the person negotiating seek representation.
Learn even more about the Sales Tax Amnesty
- The Multistate Tax Commission Voluntary Disclosure Agreement Program: Take It or Else
- Making Sense of the Upcoming Sales Tax Amnesty: A Diversity of Opinions Webinar Recap
- Amazon FBA Sellers Can Take Advantage of a New Sales Tax Amnesty
Chris: So sellers should be wary of lawyers and accountants selling certain services around this or advertising themselves as sudden tax experts?
Paul: While I can’t imagine a seasoned state tax attorney advocating that you should be collecting tax for your Amazon sales, it’s hard to say what people’s motives are. That’s why it’s so important for us to get support right now so that we can get the answers our community needs before this absurd deadline arrives.
Chris: Is Amazon really a retailer? How do we define the terms at play here, terms like “retailer, “nexus/physical presence”? Are there other concepts that need to be defined here to educate sellers?
Paul: Yes, Amazon is the retailer. They control the retail buying experience from A to Z, sellers are really just suppliers. People tell me things like “Amazon is the mall and I’m just a store within the mall.” Well, let’s say I buy something at the mall from a kiosk, and it turns out to be total garbage. And let’s say the kiosk has a no-refunds policy. Is the mall really going to force the kiosk to give me a refund? Does the mall dictate every aspect of the retail buying experience that I have with the kiosk? Do Amazon sellers really feel they are the kiosk in the mall, rather than suppliers when it comes to that ridiculous level of control Amazon has over your transactions?
I find the mall concept to be more compelling with regard to Walmart, as buyers are often linked to independent retailers like Wayfair, so it’s almost like Walmart is referring you to another retailer. What’s funny to me about that is that there are states on this amnesty list that I happen to know are going after Walmart and saying they are the retailer, not the sellers. Walmart doesn’t have FBA so there is no way to connect their sellers to the state via physical presence the way the states are attempting to do with Amazon. So the states are talking out of both sides.
South Carolina does a nice job of explaining the retail argument in their determination letter:
“The totality of the activities clearly demonstrates that [Amazon] is in the ‘business of selling tangible personal property at retail” . . . [Amazon] hosts the Taxpayer’s Website so its customers can select from a variety of items. [Amazon] controls to whom and to where the property is sent and affects the actual transfer of the property to its customers. [Amazon] accepts payment for said property and holds the funds in ‘escrow’ for later disbursement of a portion of the funds to third parties. Finally, [Amazon] exercises controls over transaction details such as customer service and returns. Therefore, [Amazon] is liable for sales and use tax as a South Carolina retailer.”
Chris: Which attorneys will argue this and do they know more than the MTC?
I’m interviewing attorneys right now. The key is making sure they don’t have conflicts like working for Amazon. These are people who are the top state tax attorneys in the country, who have litigated cases across the U.S., and many of these attorneys have 30 or more years of state tax litigation experience.
It’s never about knowing more than the MTC, it’s about where you want to come out on the law. When you read quotes like this that were in Amazon’s last SEC 10-Q, maybe you start to see why the MTC supported a policy of attacking small business and not Amazon:
“‘South Carolina is alleging that we should have collected sales and use taxes on transactions by our third-party sellers,’ Amazon Services said in its latest quarterly report filed with the Securities and Exchange Commission. ‘We believe the assessment is without merit,’ the report said. ‘If South Carolina or other states were successfully to seek additional adjustments of a similar nature, we could be subject to significant additional tax liabilities. We intend to defend ourselves vigorously in this matter.”
Amazon is so powerful they are actually scaring states. States don’t want to litigate, litigation is expensive and burdensome. States also don’t want to disrupt the one organization that is likely to be bringing lots of jobs to the states now. So, when they go after small business, it seems safer than going after Amazon. The MTC is wrong on a lot of things about state tax. What’s going on now isn’t unlike how we got a physical presence. Quill Corp. v. North Dakota, the Supreme Court case that gave us a physical presence, came about because the MTC was using North Dakota, and then-Commissioner/now-Senator Heidi Heitkamp, to target out-of-state catalog businesses that relied on a different version of the physical presence rule, one that the MTC felt wasn’t the law. They lost, badly, and the Supreme Court ruled that Physical Presence needed to be the rule for now unless Congress intervened. So the MTC is by no means a perfect organization, and we challenge their efforts all the time, and we win.
If you accept that the MTC’s position is the truth, then yeah, why not go out and sell everyone in the community tax services? It’s big business. So, it’s not that they know or don’t know, I just wouldn’t expect a sales tax compliance company that’s not a law firm to pose legal challenges.
Chris: What is Amazon’s interest in this? Why would the MTC want to make peace with or make life easier for Amazon, what do they stand to gain? Is this about lobbyists and lawyers of a large company that can define their own version of what “being a retailer” is?
That’s an interesting question and the answer can be once again seen in South Carolina. The MTC told me that they expect over the next year or two most of the states will be changing their laws to make it clear that Amazon should be collecting taxes as they do in Minnesota and Washington. So, income tax aside, why in the world does the MTC want hundreds of thousands of small businesses to go through this massive expense and burden of collecting sales tax if the states are likely going to switch to making Amazon do it anyway?
What you have to realize is that the “law change” that Washington and Minnesota did was smoke and mirrors, totally unnecessary. State law with respect to Amazon FBA and 3P already makes it clear that Amazon is the retailer. However, by pretending that there needed to be a law change and that this was always the seller’s mea culpa and not on Amazon is a really important distinction for Amazon. Why?
If it truly were Amazon’s responsibility all this time as the retailer, which it was, Amazon would owe back Sales & Use taxes in every state, plus interest and penalty. In South Carolina, they assessed $12 million in tax interest and penalty for just one year. What’s that number going to be in states like New York or California where they can go back more than one year and the amount of back-tax interest and penalty is much much bigger. Amazon needs the states to agree that this was always the seller’s burden because otherwise, it means it’s their burden, a burden they should have been bearing from the time they first conceded nexus in the state.
Chris: Is Amazon’s real concern about legal responsibility for the future, i.e. drawing a line in the sand now, or is it just plain money, namely the costs involved with administering all of this if they are considered a retailer?
Paul: I’ve been told by the MTC that the expectation is that most states will be changing their sales and use tax laws to put this burden on Amazon, even though it technically already is. The reason I mention it is because it just shows how absurd the states are being by trying to get sellers to go through this collection hassle now, just to have it go away in a few years. However, this is also about income tax. We need to be proactive now and make sure that the states understand that sellers are not subject to the income tax, otherwise, that will be a compliance issue and cost burden that will remain going forward.
Chris: What will this campaign or petition achieve? Is it realistic? Is there enough time? Should we focus on the deadline only right now and the larger effort or issues later?
Paul: First and foremost, the campaign is trying to stop the deadline and to extend the time sellers have to figure this out. That is attainable if we raise the money to hire the people who can help us make the noise legally and politically. Listen, in addition to money, if there are other things you can offer us, please let me know. If you are politically connected to a state, any state, and can get us an audience, that’s support too.
Email us at email@example.com. We want to do all we can. First, we’re focusing on extending or pausing the deadline so that we have time to challenge this without putting sellers in a position where they are forced to make tough decisions without the time to do the full research.
And, if you are a large seller and thinking of complying with the MTC and states, don’t! If you sign that VDA you probably lose your rights to claim a refund. Ultimately, the states are wrong and you don’t want to waste millions of dollars on back taxes you don’t owe.
Chris: Are people going to be afraid if it seems like they are going against Amazon? Have you seen people unwilling to participate in the campaign because Amazon is their main source of income and Amazon holds a lot of power in the seller relationship?
Paul: We’ve had some people unwilling to publicly promote the campaign (but contributing anonymously) for fear of retribution, possibly from Amazon, or the states. Remember, participation in our campaign is anonymous.
I just know that from a legal perspective this is totally a perversion of the law, with obvious motives. States are not being altruistic. I’m used to states not being altruistic, but I accept that when dealing with the large corporations who can drop a million or two to litigate something without blinking an eye. I don’t accept it when I see states going after small business. We started this campaign because we knew that if we did nothing, the tax burden would end up on 3P sellers; everyone else’s interests were being represented.
Chris’s commentary: Where do we go from here? First off, we need to make sure everyone’s interests are clearly defined. Our goal here is to clarify some of the lesser-known or harder-to-understand pieces and to put every seller in a position to evaluate the problem from all sides, instead of outsourcing the decision or handing it off to the “experts” who may not have your best interests and financial concerns at heart.
If 3P sellers are willing to join together to help the seller community (and themselves) by supporting our campaign, we can make sure that they aren’t taken advantage of due to lack of representation. One dollar today could save you thousands in taxes tomorrow. If you don’t want to collect sales and income tax in 24+ states, join us.
About the Author
Chris McCabe worked for years on Amazon performance-and-policy enforcement teams as well as Bezos escalations. He now uses his knowledge and experience to help sellers think like Amazon and protect their businesses. Get Your Listings Back!