The Problems with State Sales Taxes with Chris McCabe

January 19, 2018

If I go to a department store and buy a pair of shoes, who collects the sales tax? The department store, who runs the entire transaction? Or the brand of the shoe? In this case – it’s the department store. That’s the debate that’s happening in the Amazon world. Amazon is the department store, they handle the entire transaction, collect money and then disperse it to sellers. When it comes to collecting state sales tax Amazon says it’s up to the individual sellers. However, states are saying that sellers aren’t collecting it and aren’t sending states the money they’re owed, so they’ve started sending audits.

This is a frustrating situation for all. Amazon says it’s not their responsibility. Sellers say it’s difficult to figure out and states say we’re owed millions.

“If you haven’t had any audit letter yet, I don’t think it necessarily means you won’t receive one. They sort of seem to strike like lightning,” says former Amazonian Chris McCabe.

Chris used to work at Amazon and one of his jobs was to suspend and investigate sellers. Now he works on the flipside. He runs a company that helps sellers get reinstated. One of the biggest things he is asked about right now is state sales tax.

“There’s a lot of smaller sellers out there that might have whooping tax bills and might be pushed out of business if they capitulate it at this point,” Chris says.

The state sales tax issue stems from a US Supreme Court ruling from 1992, Quill Corp v. North Dakota. In the ruling, it was established that sellers would have to collect state sales tax only in the states that the seller has a presence in. This was in the early 90’s the internet was in its infancy and online shopping was still years away.

This particular case pertained to an office supply company in Delaware called Quill Corp and North Dakota wanted them to collect and pay state sales tax for orders shipped into the state. The Supreme Court ruled that states could only require state sales tax to be collected if a company had a presence in the state where the products are being shipped.

Fast forward 26 years, Amazon now collect state sales tax for every transaction, except for products sold by a third party. They’ve instead said that’s up to the sellers to collect and pay the state sales tax.

Well, guess what,  that takes a lot of work. As a seller, you have to register in every state then go to Amazon and set up in Seller Central to collect the sales tax then you pay the collected taxes to the state they are owed.

The Government Accountability Office estimates that state governments missed out on $13 billion last year because of uncollected sales tax.

Some states like Washington have legislated that sales automatically be collected by online retailers like Amazon. That law went into effect on January 1, 2018. It includes products sold by third-party sellers. So, that’s at least one state where this issue has been resolved.

South Carolina is pushing to resolve it too but they’re going a different route through the courts.

“South Carolina said we don’t want to talk about the third party seller part of this. We want Amazon to be responsible for it because they have the means and the wherewithal to collect these taxes and also Amazon’s the retailer,” Chris says.

South Carolina estimates they missed out on $57 million in 2016 because of uncollected sales tax.

The U. S. Supreme Court is also going to get involved later this year. They’ll be hearing a case where South Dakota is asking Wayfair to collect sales tax. It’s possible that this ruling could overturn or change the precedent set in 1992.

“I think things are moving in a particular direction, I’m not sure if it’s messier and murkier now, I think it’s just getting closer to the point where the courts are going to be involved in what happens next,” Chris says.

In the meantime, most states appear to be waiting this out, waiting on what the courts decide and waiting to see what other states do. Sellers are stuck waiting too, waiting while states continue to send out audits.

While you’re waiting for decisions to be made and waiting for a possible audit, it might be a good time to vet and find a good tax attorney or accountant in advance so you know how best to respond. This doesn’t just affect sellers in the United States, if you’re overseas and selling on the U. S. Marketplace, you’re also at risk of an audit. Some of the biggest states to watch out are California, Texas, New York and Florida. California is sending out a lot of audits to sellers and so is Washington.

“Until they have the incentive to send out fewer audit letters because other actions compelled them to change how they approach the work, I don’t see it stopping,” Chris says.

Until this is all sorted out, sellers really are stuck in the middle. The courts say if you have nexus in a state, that includes if your inventory is in an FBA center in a state,  then you have to collect and pay sales tax for orders shipped to that state. Amazon says it’s the seller’s responsibility to make sure that happens.

“It’s not fair because it’s also an undue burden for these small businesses to assume,” Chris says.  

It’s likely that state sales tax is going to be a big debate this year both on the legislative front and through the court system. It’s possible that the Supreme Court’s ruling later this year could be the end all. It’s also possible that a mix of court action and legislation could resolve this issue

“There’s a lot going on behind the scenes when it comes to this issue because there are so many billions of dollars at stake,” Chris says.

And when Chris says billions, it really is billions. Remember the government estimates at least $13 billion from just last year.  

You can find Chris McCabe at

Click here to add a comment

Leave a comment: