Remote Sellers Assessed Sales Tax for Pre-Wayfair Periods

In the wake of the U.S. Supreme Court’s 2018 decision in Wayfair, every state that imposes a general sales tax (except Florida and Missouri) now require remote sellers to administer sales taxes on sales shipped to customers in the destination state.[1] Many remote sellers have complied with the post-Wayfair world by beginning to collect and remit sales taxes in states where they ship goods.

What is catching some remote sellers by surprise is that California is issuing sales tax notices and assessments for pre-Wayfair periods. California apparently has identified these remote sellers because they use Amazon’s “Fulfillment by Amazon” (FBA) service.  With FBA, Amazon says “leave the shipping, returns, and customer service to us.”  What remote sellers may not be mindful of is the location(s) where Amazon may be warehousing the remote seller’s inventory.  Some state tax officials maintain that the in-state presence of inventory – even if held by a third-party – constitutes a sufficient in-state presence that triggers nexus.

For example, California’s Department of Tax and Fee Administration (CDTFA) is pursuing sales tax from remote sellers that had “inventory nexus” in California.  However, not all California government officials agree with CDTFA’s actions. California’s State Treasurer Fiona Ma sought for the CDTFA not to pursue sales taxes from those remote sellers for pre-Wayfair periods.  Treasurer Ma’s protests have been ignored. 

Many remote sellers, when registering for sales taxes prospectively in light of Wayfair, knew they had some physical presence in the destination state, but figured states would be overwhelmed with the influx of new taxpayers and would be satisfied with the new-found money and, as such, would not trouble the seller for sales taxes for pre-registration periods.  However, that’s not always the case.  Further, many remote sellers who did register for sales taxes because of Wayfair are finding out that, in many states, they are disqualified from coming clean for back periods (pre-Wayfair) via voluntary disclosure because they are already on the tax rolls.

To avoid unwanted notices and assessments, sellers and their advisors need to review the activities being performed in a state, for both past and present tax periods.  If potential exposures are uncovered, then next steps need to be discussed to limit notices and tax bills, before a state discovers the seller.  Because once a state discovers a seller on its own, then the state is in control of the situation.  And rather than the seller having the ability to be proactive and limit taxes owed and limit lookback periods, the seller is now playing defense.


Physical Nexus

The Wayfair Court reversed its prior decisions in Quill (1992) and National Bellas Hess (1967).  For the past 50-plus years, physical presence was required to establish a “sufficient nexus” or connection between a state and a retailer for sales tax purposes.  Wayfair now allows for another activity to establish sufficient nexus – economic presence.  Wayfair did not replace physical presence with economic presence.  Rather, it created an additional test for determining whether an out-of-state seller has nexus in state.  Even with economic nexus provisions, states are continuing to pursue sellers that performed other nexus-creating activities within their jurisdiction for periods before Wayfair.
As mentioned, California is pursuing back sales tax from remote sellers with “inventory nexus.”  The CDTFA’s notices and assessments are based on marketplaces, like Amazon, having possession of the remote seller’s inventory in California.  So, the remote sellers, perhaps unknowingly, had physical presence in California based on their inventory being located in California.
The concept of “inventory nexus” is controversial.  On one hand, the remote seller owns inventory in a state.  And marketplaces like Amazon, upon request, can provide to sellers reports that identify where the seller’s inventory is located.  The in-state physical presence of inventory likely created a substantial nexus under the Commerce Clauses of the U.S. Constitution under the pre-Wayfair rule of law.  However, the fact that the inventory is placed by a facilitator could invoke limits to state taxation under the Due Process Clause.   
Conversely, some, like California Treasurer Ma, argue that the CDTFA’s position on inventory nexus is wrong.  According to Ma, due to Amazon’s degree of control over the seller’s goods, the relationship is similar to that of a consignment store, which means that Amazon is the de facto retailer for sales tax purposes and Amazon (not the remote seller) should receive the sales tax notices. So far, Ma’s efforts, which included pleas to add protective language in Assembly Bill 147 (which was signed into law April 25, 2019) and letters to the Governor and CDTFA, have been unsuccessful. 
For now, however, remote marketplace sellers that sold through platforms like Amazon for periods before California’s marketplace facilitator laws became effective on October 1, 2019, should evaluate whether they may have had “inventory nexus” in California, and other states.  If so, consult with your advisor to determine the next course of action to prevent notices and assessments.  There are various ways that taxpayers can mitigate past tax exposures, like voluntary disclosure agreements, amnesty programs, taxpayer-initiated disclosures, and others, depending on the state.


Other Methods of Discovery

It is not sufficient to simply review a retailer’s annual summary of sales-by-state to determine whether the retailer has nexus in a jurisdiction.  Even in this post-Wayfair world of economic nexus provisions, physical presence continues to create nexus for sellers.  And, just as importantly, physical presence can  create nexus for tax periods prior to the enactment of a state’s economic nexus statutes.  Because of this, state agencies are finding creative solutions to discover out-of-state sellers that have, or have had, physical presence in their state.  
For example, states are actively working with the U.S. Customs Department to identify foreign commerce transactions coming into the states. Similarly, at least one state is working with their local Highway Patrol commercial vehicle inspection facilities to identify the delivery of goods through interstate commerce. Both of these agencies, in their normal course of business, have access to vendors shipping manifests or bill of ladings that will identify the customer, delivery location, quantity of goods and their insured value of the property entering in the state.
In addition to monitoring interstate and foreign commerce, the Federation of Tax Administrators has a working “Exchange of Information Agreement” in place, which provides a mechanism for state and local taxing agencies to exchange confidential information for the purpose of administering and enforcing their tax laws. This information sharing includes, but is not limited to, nexus information and questionnaires, tax returns and supporting working papers, audit reports, and research and revenue estimating materials.
If a seller did have some form of physical presence nexus in a state, and that seller did not file and pay sales taxes owed, then typically there is no a statute of limitations to prevent the state from assessing taxes to when the seller first established nexus.[2]  As a result, out-of-state sellers could have large, unknown sales tax liabilities that they are not aware of because they are only focused on complying with economic nexus provisions since the Supreme Court issued Wayfair in June of 2018.
Now is the time to be proactive and review an out-of-state seller’s activities, as well as sales, for current and previous tax periods.  Doing so could save an unexpected, and certainly unwanted, notice or assessment.

BDO Insights

  • When evaluating whether a seller has nexus in a state, it is not sufficient to review only whether the seller exceeded a state’s economic nexus thresholds.  Physical presence activities did, and will continue to, create nexus for unsuspecting sellers. 
  • Retailers and their advisors need to continue to delve into the retailers’ activities or fact patterns to determine whether they have a sufficient connection to the state to constitute nexus, other than just review sales amount and transactional thresholds.
  • Retailers cannot focus only on current and future sales to determine their sales tax nexus footprints.  States are attempting to collect unpaid sales tax from sellers that had some form of physical presence in the state for tax periods before Wayfair
  • Retailers and their advisors should review previous tax periods for outstanding sales tax liabilities and determine whether remediation efforts are required, such as voluntary disclosure agreements, amnesty programs, etc.



Have Questions? Contact Us


[1]  States commonly provide a safe harbor for small retailers, based on sales and/or transaction volumes.  However, Kansas is an exception; Kansas has no published safe harbor thresholds.
[2]  While the general rule is that there is no statute of limitations for assessment if no return was filed, some taxing jurisdictions do provide a statute of limitation for sales tax return non-filers.  See, e.g., California (8 years); Idaho (7 years); Nevada (8 years); North Dakota (6 years); Virginia (6 years); Chicago (6 years).