International Companies Face a Tangled Web of Tax Rules
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Amazon’s massive online marketplace has been a boon to hundreds of thousands of merchants across the globe, offering immediate exposure to buyers in 180 countries.
Amazon rents space in more than 150 giant warehouses dotted across the globe, and offers “Fulfillment by Amazon” services that make it easier than ever for sellers to reach consumers worldwide.
That includes the 100 million people with Amazon Prime membership accounts, which offer perks like free shipping and access to movies, streaming video and e-books.
More than a quarter of all revenue for sellers globally was from cross-border transactions, Amazon Vice President Eric Broussard told Reuters in March. That was a 50 percent increase from the prior year, he said.
That amounts to between $50 billion and $75 billion for merchants selling to customers in another country, based on analysts’ estimates for Amazon’s total gross merchandise sales, Reuters said. Amazon does not break out sales on that basis.
Amazon’s fulfillment service lets merchants store inventory near customers so they don’t have the hassle of boxing up and exporting every order — Amazon does it for them.
But merchants have no control over which locations their products are stored in Amazon’s warehousing and fulfillment system, which can create online sales tax implications that they weren’t aware of until after the fact.
International companies that sell on Amazon, eBay, Etsy and other online marketplaces must understand the complex rules and tax laws in each jurisdiction in the U.S., then work with an expert to ensure they’re in compliance to avoid potential penalties and fines that they might not know exist.
“Many Europeans believe that it should be much easier than in Europe, but to understand and to set up really takes time,” said Klaus Forsthofer, co-owner and President of ACE Handels- und Entwicklungs GmbH, which is based in Germany and sells through Amazon into numerous states in America. Forsthofer is also co-founder of the Marketplace agency MarktPlatz1 based in Germany, Austria and Switzerland, which consults companies how to start and sell on Amazon.
ACE uses Fulfillment by Amazon services, and is registered, collects and remits sales taxes in about 17 states in America with more pending. Forsthofer also consults with other merchants about how to handle sales through Amazon in the U.S. market.
Foreign companies who sell through Amazon to consumers in the U.S. must follow the laws and regulations in each U.S. state as does any U.S. company. While there may be a relief of the complex federal tax rules under existing tax treaties, these treaties do not apply to the various kinds of taxation (income tax, property tax and sales tax) in the states these entities are doing business in.
In order to be compliant, foreign firms need to register for tax IDs and set up a filing system in each state they are doing business in. They quickly run into issues like not having a representative within the U.S. with a Social Security number, or the difficulties of opening a U.S. bank account.
Setting up a bank account in America took nearly 18 months and it costs $200-400 per month, Forsthofer said. In Europe, a business bank account can cost as little as 5 euros ($6) per month and rarely costs more than 30 euros ($35).
Another wrinkle is that several states in the U.S. now require Amazon to withhold and submit sales tax on behalf of foreign companies.
While that’s helpful to foreign firms on the surface, at this time the companies still need to file the sales tax returns themselves, reducing the compliance burden at this time only partially. Further, the sales tax filings can actually prompt the state to expect an income tax return and possibly property tax from the foreign company.
If the foreign company only has modest sales in the U.S. to begin with, the costs of opening a bank account, handling taxes and staying compliant can wipe out profits. If this is the case, selling through another distributor already established in the U.S. may be a more profitable way to go.
Since 1992, sales over the internet haven’t been subject to sales tax unless the merchant has a physical presence in the state of the customer.
But that is starting to change as some states pass legislation aimed at recouping lost taxes, and the patchwork of different laws at the federal, state and local level can be mind-boggling.
Here’s a link to Amazon’s online sales tax guidelines for sellers.
The amount of tax charged on an order depends on numerous factors such as the location of the seller, the type of item or service being purchased, the location of fulfillment and the delivery address of the order.
Those factors can change between the time an order is placed and when its delivery is completed, such as back ordered items that may be fulfilled from a different location than originally anticipated.
“Tax laws can be so different from state to state, and it would be very hard to keep track of each state’s requirements without an automated system like the one Amazon provides,” said Nina Tickaradze, Founder and CEO of NADI, LLC, an organic rosehip beverage company based in Atlanta.
NADI, which is made using an old family recipe that originated in the country of Georgia, is sold through Amazon and gets shipped to numerous states across the U.S.
Supreme Court Ruling
Some state and local jurisdictions have passed new laws that apply to purchases made through Amazon and other online merchants.
Pennsylvania recently passed a law mandating that online marketplace providers, such as Amazon, collect sales tax on sales made by third-party sellers through the online marketplace platform, so Amazon told third-party sellers that it will do so for all orders shipped to that state under a new service called “Marketplace Tax Collection” that automatically collects and remits sales tax.
Amazon also collects sales tax on sales made by third-party sellers in its home state of Washington, which enacted a law similar to Pennsylvania’s last year.
In late June, the U.S. Supreme Court ruled that states have the right to collect taxes on internet sales even if they don’t have a physical presence in the state, a move that overturns a 1992 ruling that limited tax collections on online transactions.
The ruling was viewed as unfavorable for e-commerce giants such as Amazon, Wayfair, Overstock and others, whose shares declined on the news. Shares of traditional bricks-and-mortar retailers such as Walmart, Target and Best Buy all rose.
“Retailers have been waiting for this day for more than two decades,” the National Retail Federation industry trade group said in a statement after the ruling. “This ruling clears the way for a fair and level playing field where all retailers compete under the same sales tax rules whether they sell merchandise online, in-store or both.”
What to Do
- Merchants who sell goods and services through Amazon, eBay, Etsy and other online marketplaces should work with a CPA to fully understand the implications of the different types of taxes and jurisdictions in which their sales may occur.
- Create a well-designed compliance mechanism that will protect your business for the long term. Closely monitor changes in state tax laws.
- Consider engaging a consultant who specializes in navigating the policies and programs of Amazon and other major online retailers.
ACE President Forsthofer consults with merchants in Europe who want to enter the U.S. market through Amazon, and he offers this counterintuitive in this age of e-commerce: Fly to the U.S. and meet in person with accountants, lawyers and prospective customers.
“Get a feeling for the business culture,” Forsthofer says. “You have to understand this market to address it right.”
Foreign companies that want to sell and fulfill orders in the U.S. through Amazon and other online merchants should work with a CPA to develop a compliance plan.
Ensure your business is properly registered in the right states, that it can open a U.S. bank account, and that you have a way to collect and remit sales tax and possibly income or property tax.
Services such as Fulfillment by Amazon can create online sales tax complications depending on where items are physically warehoused and fulfilled, and the merchant doesn’t always have visibility into that.
CPAs who specialize in international tax matters can make sure internet sales are a blessing, not a curse.