States Go After Third-Party Sellers on Amazon Marketplace

A chapter in Amazon.com’s long tax saga closed this spring when the online retailer began collecting sales tax on purchases in all 45 states that have one, long goal of the online retailer’s brick-and-mortar rivals.

But another chapter has opened, because while Amazon handles sales taxes on purchases from its own inventory, it’s up to third-party merchants selling on its marketplace to tally and send in their own sales-tax payments. Many aren’t doing it.

Now state lawmakers and tax regulators are going after the sellers in this last tax-free corner of Amazon.com, and lawsuits and legislation are entangling the company itself.

Amazon Marketplace, which rents space on Amazon’s website to independent merchants, is an increasingly important part of Amazon’s retail empire, accounting for half the company’s sales. The program has more than 2 million sellers and, Amazon says, thousands of small-business success stories.

But as consultants and tax-policy experts see it, the program has also generated unpaid tax bills that likely total billions of dollars a year.

A group of state tax authorities, the Multistate Tax Commission, is trying to nudge Amazon’s sellers to start paying. They’ve set up an amnesty program for sellers on Amazon and other online marketplaces that would wipe out their back taxes if they start to tax future sales.

Only about 700 of the 45,000 Amazon sellers that the tax commission estimates have significant tax liability signed up by the last Wednesday’s deadline, the group said.

Some sellers say the cost of registering with tax authorities and the paperwork required to remit taxes in dozens of states would wipe out their modest profits. They’re willing to take the risk of state tax audits to keep the status quo.

Others blame Amazon, contending that the company is the de facto seller and should be responsible for sales-tax bills.

Amazon, which declined to comment on the record for this article, has for years voiced support for national legislation that sets a uniform sales-tax regime on internet sales. The company likens its marketplace to a mall or farmers market, where individual stall operators are responsible for collecting and paying their own sales and income tax, and says its marketplace sellers’ agreement makes that clear.

Regardless of who is responsible for tax payments, consultants who advise Amazon sellers warn of a crackdown by authorities seeking to tax a bigger share of online sales.

That, they say, could push some sellers out of business, threatening the marketplace that Amazon CEO Jeff Bezos calls a pillar of the company’s business.

Taxes, and the competitive advantage of not paying them, have factored into Amazon’s thinking since the company was founded.

A 1992 Supreme Court decision related to mail-order catalog sellers determined that states could compel retailers to collect sales tax on purchases only if those sellers had a significant physical presence — or “nexus” — in the state.

The ruling was applied to internet sales, and it is part of the reason that Bezos moved to little Washington state to start what became Amazon.com. The company would have to pay sales tax only on sales within its home state, and Washington, with just 2 percent of U.S. residents, seemed ideal.

Amazon for years tried to preserve the online discount it had over sales-tax-bound brick-and-mortar booksellers, arguing that subsidiaries and distribution centers in the U.S. didn’t create a sales-tax nexus in those states.

As states sought more tax revenue after the financial crisis that began in 2007, and growing e-commerce sales became an appealing target, tax authorities fought back. The company eventually gave in, state by state, until this year, when Amazon began collecting sales tax nationwide on items purchased from its inventory.

Amazon benefits when its sellers do well. On top of fees to join the marketplace and use Amazon’s warehousing and delivery program, third-party sellers pay Amazon an 8 to 15 percent cut of their sales on most items.

If third-party sellers list their products tax-free, it gives them — and by extension, Amazon — a competitive edge over taxpaying brick-and-mortar retailers.

For small-time sellers with operations in a single state, complying with state sales-tax law seems to be simple.

The Multistate Tax Commission initially offered a two-month window to apply for the amnesty, but many sellers balked, saying that wasn’t enough time to make such a crucial business decision. The group voted last month to extend the application window by two weeks, to Nov. 1, but still, less than 2 percent of the sellers estimated to have significant tax liabilities signed up .