Washington Rules that Nonresident Seller Using Fulfillment by Amazon has Nexus

July 12, 2022

By: Aspen Fairchild, SALT Senior Associate

At a glance

  • The main takeaway: A taxpayer utilizing the “Fulfillment by Amazon” selling service faced unanticipated tax consequences when its products were stored in a warehouse in Washington.  
  • Assess the impact: While Amazon and other selling platforms may now be collecting and remitting sales tax on sales occurring on their platforms, sellers utilizing these services may be responsible for other taxes in these states depending on how those arrangements are structured.  
  • Take the next step: Understanding your state tax responsibilities can be confusing. Aprio’s State and Local Tax (SALT) team can help you evaluate and remedy potential tax exposures to ensure your business remains in compliance.

Schedule a free consultation today to learn more!

The full story:

Businesses selling on Amazon using its  “Fulfillment by Amazon” (FBA) selling services (or selling via other marketplace platforms) may be faced with unanticipated tax consequences as illustrated by a recent State of Washington Board of Tax Appeals decision.[1]

The taxpayer in question is a New York-based company that sells consumer products through Amazon’s marketplace, participating in its FBA program. Under the FBA program, at Amazon’s direction, the taxpayer ships its inventory to an Amazon warehouse at its own cost. 

The FBA agreement provides that Amazon will store and track the seller’s inventory, may comingle the seller’s items with other goods and “may move Units among facilities.” The agreement states that “storing Units at fulfillment centers may create tax nexus for [the seller] in any country, state, province, or other localities in which [the seller’s] units are stored, and [the seller] will be solely responsible for any taxes owed as a result of such storage.” A taxpayer has the option to direct Amazon to collect sales taxes for the seller based on its inventory movement, however the taxpayer did not elect to do so in this case.[2]

Amazon stored some of the taxpayer’s products in Washington warehouses under the FBA program. Outside its inventory storage in the state, the taxpayer did not have any employees or stores located within the state of Washington. The state assessed the taxpayer for the period of May 16, 2013, through June 30, 2017, for $66,418. That total broke down as follows:

  • $2,303 was for the Washington Business & Occupation (B&O) tax based on the taxpayer’s gross retailing receipts for sales to Washington customers.
  • $44,959 was for retail sales tax on sales to Washington customers.
  • $19,201 was for interest and penalties.

The ruling explained

Washington statutes, during the period at issue, provide that a person making retail sales has substantial nexus with Washington if it had a physical presence in the state, which included having property in the state.[3] The taxpayer argued that it had no knowledge that Amazon stored its goods in Washington warehouses, and that it should not be held liable for this “inadvertent” nexus. 

The State of Washington Board of Tax Appeals ruled that the taxpayer is subject to Washington B&O tax and is responsible for uncollected retail sales tax because it had a physical presence within the state created by its inventory stored in Amazon’s Washington warehouses.

The decision noted that, “The Taxpayer made a deliberate decision to put its goods on Amazon’s site so that it could reach a national audience. Amazon’s contracts explicitly state that sellers (taxpayers) are responsible for their own taxes. Amazon’s contracts explicitly explain that putting inventory into the FBA system could lead to tax liabilities in other states.”

From a sales tax perspective today, it’s likely this decision has less of an impact for taxpayers selling via Amazon or another marketplace platform where the marketplace facilitator is collecting and remitting the sales tax under recent marketplace facilitator sales tax collection rules. However, if a business is selling via a platform that for whatever reason is not collecting sales tax, the presence of inventory in the state will likely give rise to a sales tax collection obligation by the selling business. Claims by the business that it didn’t know where its inventory was located or that it didn’t control where the inventory was stored are not likely to be successful.

The bottom line

In addition, outside of sales taxes, storing inventory in a state through these programs is also likely to create nexus for state income tax purposes and give rise to potential property tax obligations. Since these taxes are not covered by marketplace facilitator rules, businesses using these programs need to evaluate their potential state income and property tax obligations. 

Aprio’s SALT team has extensive experience with these types of nexus issues, and we can assist your business to evaluate and remedy any potential tax exposures as well as monitor these issues going forward to ensure that your business remains in compliance. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Aspen Fairchild, SALT Senior Associate at [email protected] or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at [email protected] for more information.

This article was featured in the June 2022 SALT Newsletter


[1] Jon Bargains Inc. v. State of Washington, State of Washington Board of Tax Appeals, Docket No. 19-078 (March 30, 2022).

[2] The assessment in this case covered a period prior to the establishment of marketplace facilitator sales tax collection obligations, which now generally require Amazon to collect applicable sales tax on behalf of Amazon sellers.

[3] The prior citation is Rev. Code Wash. § 82.04.067(6), which under today’s version of the statute can be found at Rev. Code Wash. § 82.04.067(3)(a).

Disclosure

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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About the Author

Jeff Glickman

Jeff Glickman is the partner-in-charge of Aprio, LLP’s State and Local Tax (SALT) practice. He has over 18 years of SALT consulting experience, advising domestic and international companies in all industries on minimizing their multistate liabilities and risks. He puts cash back into his clients’ businesses by identifying their eligibility for and assisting them in claiming various tax credits, including jobs/investment, retraining, and film/entertainment tax credits. Jeff also maintains a multistate administrative tax dispute and negotiations practice, including obtaining private letter rulings, preparing and negotiating voluntary disclosure agreements, pursuing refund claims, and assisting clients during audits.

(770) 353-4791