Last year Amazon rolled out changes for sellers who use the FBA (Fulfillment by Amazon) service. A number of our clients were affected by these changes which raise issues on a number of topics such as shipping costs and delivery times. However the biggest issue we have to deal with has to do with sales and use tax nexus and the resulting tax collection responsibilities. People who sell using drop-shippers also have potential big sales and use tax issues to contend with.

Under this new FBA split-shipment policy, Amazon directs sellers to ship inventory to a number or warehouses in different places in the United States. Many companies are not aware that owning inventory in another state can be a nexus-creating activity. Once you have nexus in another state, then you have a sales tax collection obligation as well, provided the item sold is taxable and sold to a taxable person in the destination state. Also, the obligation to collect sales tax in that state applies to all sales in that state, not just the sales made through Amazon.

Amazon has distribution centers all over the U.S. Here are the locations according to Outright.com. For our clients, it has added another piece to the analysis of whether to use the FBA service. For one client, Amazon’s fulfillment charge represented a $14 per unit savings in costs. But the costs associated with sales and use tax compliance had to be considered against those savings. In this case, since the items being distributed are medical in nature, different sales tax rules apply. They would be exempt to the ultimate user but taxable to the distributor. If they end up going with Amazon FBA, all of the sudden, they have potential use tax obligations all over the U.S.

Sales and use taxes always muck up the analysis. But at least these clients are aware of them and making the issue part of the analysis. Better to understand the issues up front and deal with them while you can, than for them to come up later when it’s too late. The absolute worst time to find out you should have been collecting tax is when you are under audit.

By: Andrew Johnson