Francisco Grados, a Manager in MFR's Business Advisory practice, comments on Amazon, the mega-internet-retailer, and their recent large sales tax bill from the State of Texas.  While it seems that all will work out in Amazon's favor, it's important that all businesses consider the tax implications of their logistics. If you have questions about how these issues may affect you or your business, contact Francisco. He can be reached at (713)622-1120.

Sales Tax and Logistics: Have You Considered Your Tax Obligation?

States and local governments use tax incentives to attract businesses thus generating jobs and attracting revenue to communities.  When local budgets get squeezed, the situation changes.  State and local governments focus on whether or not they are getting their fair share of tax revenues.

Amazon, the mega-internet-retailer, can provide a significant benefit to a community if it opts to set up a delivery center in a local jurisdiction. But these positives do not insulate the business from all state and local tax exposures.  As an example, Amazon operates a distribution center in Irving, Texas.  Last year, Texas assessed Amazon $269 million for sales tax related to its online sales for the period 2005-2009. (Other states are also asserting similar claims.) 

Apparently, Amazon is claiming that its distribution center is owned by a Kentucky-based subsidiary.  Technically, the online seller is arguing that it has no obligation to collect sales tax because it has no physical presence in Texas.

This week, Amazon announced that it was leaving Texas over the issue and abandoning its plan to hire 1,000 new workers.  Governor Perry blamed the sales tax debacle on the Texas state controller, but he also charged the legislature with the task of changing the rules to accommodate Amazon.

Amazon offers vendors the option of selling their product through their Fulfillment Program, where goods are listed on the Amazon website and can also be warehoused, shipped, and billed by Amazon.  It can offer a valuable option to domestic and certain foreign businesses to enter into the internet marketplace and benefit from the logistics capabilities of Amazon.  But just like Amazon, participants in the Fulfillment Program need to consider the state and local tax issues that might arise.

The fundamental issue is whether the logistics arrangement creates a taxable presence (or nexus) in the state where the seller’s inventory is stored.   The agreement indicates that Amazon is not an agent of the seller, and Amazon takes the position that its activities will not be attributed to the sellers. According to Francisco Grados, “Clients must make that determination.  The seller is potentially storing its goods in a state where it does not conduct business.  Do sales within that state create a sales and income tax obligation?”

“Amazon will collect sales tax as directed by the seller, but,” according to Grados, “the seller remains responsible for its liability.  The danger is that participants in the Fulfillment Program will overlook their responsibility to ensure that the sales tax is collected by Amazon in all states that it has nexus.  Now that Amazon’s sales are being scrutinized, audits of Fulfillment Program participants will not be far behind.”

To read more about the Amazon situation, click here.