Calif. to Amazon sellers: We're coming for those sales taxes

Amazon.com will start collecting sales taxes for most, but not all, items it ships starting tomorrow. Calfornia's tax collectors tell CNET they have a plan to tax the rest.

Declan McCullagh/CNET

California's tax collectors are preparing to open a new front in their battle to collect sales taxes from Amazon.com customers.

A deal inked last year between Amazon and Sacramento means that, for most items shipped from the online retailer's warehouses, sales tax will be collected at checkout starting tomorrow. But, as CNET reported earlier this week , that doesn't apply to hundreds of thousands of items "fulfilled" by Amazon from its warehouses on behalf of other sellers.

That means a New York camera shop could have inventory located in an Amazon warehouse outside of San Francisco, and provide next-day -- or even same-day -- tax-free delivery to northern California customers.

"You can assume we'll have ways of finding out who's holding stocks of goods in California," a representative of the State Board of Equalization, which collects California sales taxes, told CNET. "We have enforcement authority to obtain information in a variety of ways. We'll be approaching them with respect to their tax obligations."

Translation: We can demand that the New York camera shop cough up sales taxes -- which in the Golden State top out at 9.75 percent -- even if Amazon never collected them at checkout on behalf of the camera store in the first place.

While California is the largest state to target fulfilled-by-Amazon orders, it isn't the first. Pennsylvania tax collectors say (PDF) the state's laws cover a business "engaging in any activity," including using a "warehouse" located within the state. Those out-of-state shippers, the department warned in guidance that took effect two weeks ago, must "collect and remit Pennsylvania sales tax."

Amazon did not respond to questions about its policies for third-party sellers shipping to California. Spokesman Scott Stanzel sent CNET a brief statement saying that for fulfillment sales, "sales tax collection depends on the tax obligations of the seller," not Amazon itself.

Pete Sepp, executive vice president of the National Taxpayers Union in Alexandria, Va., says that California's famously aggressive tax collectors are going too far.

"When tax administrators make policies like these, they're effectively saying 'we dare you' to the courts and victims of enforcement," Sepp says. "Unfortunately, not all of the victims have Amazon's resources to fight back. But even Amazon's legal strategies have fiscal limits -- governments often have far deeper pockets."

Roughly one-fifth to one-quarter of the items that Amazon offers to ship are "fulfilled by" products. It's a staggering selection, covering everything from Calphalon non-stick pans, iced tea, stereo speakers, video games, and even the PetZoom Pet Park Indoor Pet Potty.

Complicating the situation is how the Fulfilled by Amazon, or FBA, program works.

Even though sellers may send their new or used products to fulfillment centers in one state, Amazon reserves the right to shift them to centers in other states without prior notice. That happens routinely. Sellers also don't have a choice which fulfillment center they initially ship their items to: Amazon makes that decision and informs them of it.

This complex web of computer-driven inventory shifts was never contemplated by state politicians drafting tax laws decades or even centuries ago, and it's left some Amazon sellers worried about what might happen if Pennsylvania or California try to enforce their rule against small sellers too.

In one Amazon discussion forum, a seller wrote that:

Amazon has a habit of changing your warehouse on you at the drop of a hat. You can start the year with one warehouse (for standard items) and go through three of four in different states in one year. This is not including, video games, media and oversize, and oversize video games. It's also not unheard of for Amazon to move your inventory without even notifying you, so you will have to constantly monitor where your inventory is and sign up with each new state your inventory ends up in... I do not see having items in an FBA warehouse as having a material presence in that state. I am paying Amazon for services. One of those services is storing my inventory, but that's it.

In September 2011, Amazon agreed to drop its opposition to California's plan to force taxes on online sales. That deal also lets it build in-state fulfillment centers closer to California customers; ones are under construction in San Bernardino and Patterson, in addition to lockers in the San Francisco Bay area where customers can pick up items.

The justification for Sacramento's push was a reprise of arguments that state tax collectors, encouraged by companies like Wal-Mart and Best Buy, have made for at least a decade: they claim that Amazon, Overstock.com, Blue Nile, and other online retailers that don't collect taxes are unreasonably depriving states of revenue and that they enjoy an unfair competitive advantage over local retailers that must collect taxes.

On the other hand, a 1992 Supreme Court ruling says that, in general, retailers can't be forced to collect sales tax on out-of-state shipments unless they have offices in those states. The concept is called "nexus." And Amazon has pointed to analyses saying that, even with tax collection, it still offers better prices than traditional retailers. (The Supreme Court also said Congress had the power to change these rules, but it has yet to act.)

If "the out of state retailer holds title to the goods in California, then they're probably going to have nexus with California," a representative of the California State Board of Equalization, who did not want to be named, told CNET.

There is some irony in what The Los Angeles Times described as the deluge of orders from Californians intent on placing orders before this Saturday's tax collection deadline.

Online purchases from sites like Amazon and eBay may seem to arrive tax-free. But the law in California and other states actually requires shoppers to pay their own state's sales tax rate -- the concept is called a "use tax" -- and voluntarily cough up the exact amount owed each year at tax time. Few do.

 

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