Amazon to Turn Over Third-Party Seller Data to California Department of Tax and Fee Administration

This post is a guest post from Michael Fleming founder of Michael J Fleming & Associates.

This article is about the changing tax obligations of ecommerce sellers in the US and was correct at the time it was written. For more detailed information (no matter your platform) about how sales tax affects you, and where to get the most up-to-date advice, check out our blog here.

On the afternoon of October 23 2018 Amazon stated that it had received a “valid and binding legal demand” from the state of California to turn over third-party seller information.

This sent an immediate wave of shock and fear through the FBA community. Many sellers asked what does this mean? While many others assumed the worst - that California was coming after everyone.

Fear seemed to be the prevailing mood amongst sellers in both camps that I spoke to after the announcement. While I don’t have a crystal ball, I interact with tens of thousands of Amazon and other e-commerce sellers annually. I also have multiple contacts at the California Department of Tax and Fee Administration that I speak to regularly. With this experience as a backdrop, I would like to address this fear by sharing my thoughts on what is happening.

Registered vs. Non-Registered Sellers & My Predictions

First off, for those of you who are not currently registered and are selling through Amazon FBA, I think this is one of the last warning shots you will hear.

Amazon started the year out by turning over third-party information to Massachusetts and Rhode Island. They also turned over information to NY and PA, but this was much more limited in scope and pertained only to sellers who were collecting tax in those two states. It felt like NY and PA just wanted to make sure all tax being collected was being remitted.  

But now comes CA who is looking at all sellers, not just those collecting tax. This should be a giant flashing light for those sellers still waiting for Amazon to solve their problems. Not all states will pursue Amazon. There will be states that follow CA & MA who will pursue you with the begrudging help of Amazon, rather than going after Amazon itself.

In states like WA, Amazon collecting tax has made it more complicated for sellers already registered and more dangerous for sellers not registered. How long do you think it will be before WA asks Amazon for information and then pursues seller for the B&O tax and all sales tax, penalty and interest prior to 1/1/2018? Washington may look back 7 years and hit you with a 39% penalty.  

So for sellers not currently registered, both foreign and domestic, I ask what are you doing to protect yourself?

As a result of the June 21st Supreme Court ruling (aka, the “Wayfair decision”), states will become increasingly more active and aggressive in pursuing sellers for both the new and old types of nexus. It does not look like there will be any help from Congress and the states are moving full speed ahead.  

Some may call the points I have just made “fear-mongering”, but I say it’s just stating the obvious. Look at what’s happening all around you objectively. However, even as I paint bleak a picture, the sky is not falling. You still have time to make a plan and put it into action.

To the best of my knowledge, it took MA almost 9 months to start contacting sellers after they received the data. It may not take CA that long, but you still have time to act not only in CA but in the other states before they follow suit.  

To get back to what I think CA will do with the information, let’s look at what CA has been doing for the last 18 months or so. My sources in CA have told me that the state has been using some type of “web-crawling” software to scrape data off the Amazon website which they then turn over to a skip tracing company who provides them with as much contact information as they can find. CA then uses this information to send out letters or to make calls.

CA said that if that campaign was not successful they would follow MA and go after Amazon. Which looks like it happened. Now CA could have asked Amazon for a lot of information. They could have asked for sales data or warehouse data like other states have, but they did not. All they asked for was contact info and FEINs.

This leads me to believe that they will follow the same pattern they have been following which is sending out letters and questionnaires in groups of 5000 or so.  

The questionnaires to date have a section where, if you are already registered, you just provide your permit number and don’t have to complete the rest of the questionnaire. So if they follow the same process I expect to see more of the same.  

Now many sellers who have gotten these letters have ignored them. I have advised that states are slow to react, but in general they are not going away. We are starting to see sellers who got their first letter last September, who ignored them and all subsequent letters, now getting letters stating that they are being turned over to audit who will do an estimated assessment.

Estimated assessments are where the state makes up numbers. Made up numbers are often much worse than real numbers. And contrary to popular belief, the states have much more power when it comes to collections than believed.  

Anyway I digress, the bottom line is that we can’t predict with 100% clarity what CA will do, but if we look at the last 18 months of activity and the information they requested, it appears that CA will continue with their letter/questionnaire campaign. If they stay true to form they will be concentrating on the non-registered sellers. Registered sellers may still be allowed to not complete the questionnaire just by providing their sales tax number.  

These are my initial thoughts and opinions about six hours after the notices have gone out. As we learn more we will keep you updated.

For anyone who would like to learn more about us or talk about their situation, I suggest contacting John Haggerty at jhaggerty@salestaxandmore.com or by visiting our website at www.salestaxandmore.com.  

By Michael Fleming

Mike is the founder of Michael J. Fleming & Associates which operates as Sales Tax and More. Prior to beginning this new venture, Mike spent the better part of a decade as a Director with Peisner Johnson, an accounting firm that is focused entirely on solving state and local tax issues.

Mike’s state tax knowledge is well rounded, but he is one of the country’s leading authorities when it comes to eCommerce, nexus, and drop shipping. Mike is often quoted by the press, is a frequently requested speaker, and is a prolific writer. He welcomes questions and inquiries about both the US and Canadian taxing system and his firm offers solutions for all your tax needs.