The Sales Tax Registration Scam
How Software Companies Peddle False Hope and Safety
Over the last year, sales tax registration has become a scary subject for eCommerce businesses, especially those businesses selling on Amazon FBA. The more we read about sales tax law, the more we desperately want to find a quick-fix solution that will let us sleep at night. Well, I hate to be the bearer of bad news: such a solution does not exist.
Work with a Tax Attorney Instead
A tax lawyer is the only person you should work with for sales tax consultation and registration assistance.
Marketing companies disguised as sales tax experts are peddling sales tax software for eCommerce businesses that is supposed to take all your worries away. But I assure you, it will not. In fact, you may find yourself in a bigger mess later on. As a lawyer, I often wonder why the leading voices in eCommerce are hiring these sales tax software companies and accountants with questionable credibility parading themselves around as multistate experts. Where are the lawyers? How many lawyers who specialize in state tax on a national level and understand how eCommerce businesses works are encouraging sellers to register in every state?
The fact is no lawyer would ever blindly suggest such a tax strategy without first knowing the ins and outs of your business because there is a lot of gray when it comes to whether or not sellers are required to register & collect sales tax. In fact, the area is so gray that I even wrote a Supreme Court brief in the Wayfair case, addressing the concerns of eCommerce marketplace sellers. And while the tax software companies characterize the Wayfair tax case was a loss, because everyone has to register, the fact remains that the case was anything but. There are still a lot of unknowns that the Court refused to address in Wayfair, because the Court lacked some of the facts that would have been needed in the case record to do so.
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The Issue of State Law
Then there is the matter of state law. Meaning, does it really matter if you have nexus if you aren’t the retailer under state law. In other words, Starbucks may have nexus in California, but if a pound of Starbucks coffee is sold inside a Walmart, it’s not Starbucks’s responsibility to collect the sales tax. That onus is on Walmart’s because they are the retailer under state law.
With that in mind, let’s look at a California law addressing what makes a person a retailer for sales tax purposes. This is an important question that the tax software companies like to leave out of their marketing material, but it’s an extremely important question for eCommerce sellers. According to Cal. Code Regs., tit. 18, § 1569:
A person who has possession of property owned by another, and also the power to cause title to that property to be transferred to a third person without any further action on the part of its owner, and who exercises such power, is a retailer when the party to whom title is transferred is a consumer. Tax applies to his gross receipts from such a sale.
Wow, doesn’t that sound like what Amazon does for FBA sellers? It certainly raises the question of whether sales tax & registration really is the seller’s responsibility in California. Now does this law mean case closed you don’t have to worry about sales tax or registering for it? Absolutely not! Remember, this is a blog post, not legal advice that you can rely on. But the reason I wanted to highlight this law was to demonstrate that tax is very much a gray issue even when sales tax eCommerce software companies claim things are black and white. The law may not be as settled as the tax software companies are saying, and you need to know that so you can make the best decision for your business.
Registration in Every State??
The issues don’t end with sales tax or registration. One thing the tax software companies like to gloss over is the income tax impact of registering in every state. That’s right, income tax. Have you considered what it would cost to file an income tax return for your business and for you personally in the state of Illinois, Connecticut, New York, and every other state Amazon has an FBA warehouse? I can tell you from my experience as tax counsel for companies like Microsoft, Walmart and GE, that the accounting fees add up. Before you know it, your total cost of tax compliance goes from the supposed “$19/month or even ‘Free’” to over $100,000.
They also don’t like to tell you about the fact that states will expect you to register with the secretary of state for sales tax registration. Failing to do so could be costly. In Connecticut, there is a $300 penalty per month for not being registered with the secretary of state. Do the tax software companies tell you that? Do they tell you what the cost is of filing a registration with the secretary of state, initially and annually?
How to Make an Informed Decision Before Registering for Sales Tax
Now, again, I’m not saying not to register. Remember this is a blog post and cannot be relied upon as legal advice. What I am saying is that there are a lot of considerations you need to be made aware of so that you can MAKE AN INFORMED DECISION about registering, so that you don’t end up in a worse situation down the line.
Where can you get this invaluable advice? From a lawyer, ideally a lawyer that specializes in eCommerce and sales tax registration, and one that understands the nuances of selling on Amazon. You wouldn’t go to a nurse for brain surgery. Why would you go to a software company for advice on an area of law as complex as multi-jurisdictional tax law, even one that claims to specialize in sales tax software for eCommerce?
Work with eCom Attorneys
Get the information and support you need when you contact eCom Attorneys and speak with a tax attorney.
About Paul S Rafelson
Paul S Rafelson has been litigating state tax cases for over 13 years. He’s been an in-house state tax litigator for Microsoft, Walmart, and GE. He has seen what the full burdens of multi-state tax look like at these large companies who have been doing multi-state tax for years. He’s a small business advocate who understands the serious threat these burdens create for anyone trying to grow an online business in America. And he’s a tough fighter who has faced state tax administrators and the Multistate Tax Commission (the amnesty organization) asserting bogus tax law interpretations in almost every state. In addition, Paul teaches a state tax constitutional law course at Pace University School of Law in New York.
Paul has a law degree and an MBA from Villanova University and a Masters of Law (LL.M.) in Taxation from New York University. Paul was also a retail arbitrage seller when he was in law school, long before FBA. Paul has been regularly featured in major media publications about eCommerce.