Amazon third-party sellers may be forced to pay California sales tax even if they don’t operate in California

What you need to know and what you can do about it.

In a letter on Friday, March 8, 2019, California State Treasurer Fiona Ma urged California Governor Gavin Newsom to help Amazon third-party sellers against an unjustified sales tax burden by the California Department of Tax and Fee Administration (CDTFA).

Background of the issue

Third party sellers that use Amazon’s FBA, or Fulfillment by Amazon, service have been able to reach more customers and have helped many sellers simplify their logistics and inventory management. However, using FBA comes with the cost of losing control over customer information, direct marketing, shipping, and returns. Since Amazon handles all payment, inventory, and logistics, third-party sellers fundamentally do not have control over where the product is stored and how the product is processed. In addition, third-party sellers do not have the ability to calculate or collect sales tax.

Even with all control belonging to Amazon, the CDTFA has taken the argument that the third party seller is the party responsible for collecting and paying California sales tax, not Amazon. By the reasoning of the CDTFA, if a product was stored by Amazon in a California warehouse, the seller is responsible for collecting California sales tax, even if the seller operates in another state and has no control over which warehouse Amazon uses. This situation has led the CDTFA to claim that out of state sellers that fail to collect California sales tax are “guilty of a felony” with each offense carrying a fine of $5000 to $20,000 or “imprisonment for 16 months, two years, or three years, or both”. The CDTFA has further claimed that out of state FBA sellers that have used Amazon’s California warehouses “may be guilty of a misdemeanor” if operating without a permit.

The CDTFA has already sent notices demanding some out of state Amazon Marketplace sellers to comply with CA sales tax and permit laws. Some sellers have even been told to pay back taxes going as far back as 8 years, which have amounted to tens of thousands of dollars or more.

Ma further argues against the practicality of the enforcement by noting that 38% of FBA sellers are located in China, well out of the reach of enforcement. All the while, the American small business owners who are within reach might be forced into bankruptcy if required to pay decade old back taxes.

What you can do to help

The most direct action available is the call the office of Gavin Newsom and urge him to help third-party sellers and to voice your support for Treasurer Fiona Ma. You can also participate in letter writing campaigns such as the campaign organized by the Online Merchant’s Guild. More information on the campaign as well as a template letter can be found at their website here.