“Save time and help grow your business with FBA.”
This is what Fulfillment by Amazon uses as its major selling point for online sellers on its website. From a logistical perspective, having Amazon manage shipping, storage, packaging and returns of your eCommerce inventory seems like a perfect solution for small eCommerce businesses. Unfortunately, the “perfect solution” may come with unexpected state income tax consequences.
Ecommerce businesses and their CPAs are taking different positions regarding whether FBA presence in a state creates nexus, also known as a taxable presence. As an Amazon FBA seller, you will need to make a business decision for your 2020 taxes.
In this article, we will be outlining the considerations to help you understand the factors that could impact your decision.
Where do Amazon FBA Sellers have to file state income tax?
Let's start with the bottom line: There is uncertainty regarding how and if a state may impose income tax and/or filing requirements on a seller with no in-state physical activity aside from inventory stored in an FBA fulfillment center.
Ultimately, some Amazon FBA sellers choose to comply in states, specifically more aggressive states such as California, where they have a significant amount of inventory. Other sellers decide to take the risk and not file in states in which they have no in-state nexus aside from the FBA connection.
Some sellers who choose not to file feel that the states don’t have a strong argument to mandate filing, income allocation and potentially tax payment. Small sellers may feel that such a vast filing requirement is impractical and too costly at this stage and may reconsider when their sales reach a certain volume.
For example, in an extreme case, if a seller holds inventory of $60,000 that is managed by Amazon FBA, and inventory is moved between different FBA fulfillment centers in 20 different states, the seller could potentially be required to file in all 20 states.
There are also those sellers who have decided to withdraw from the Amazon FBA program and sell on Amazon as FBM (fulfilled by merchants) rather than continue to face the uncertainty of new tax bills from additional states. The path you choose for your business will depend on how you weigh the risks versus the potential costs of compliance (i.e., filing tax returns in multiple States is expensive and complex even if no actual tax is ultimately due).
It's important to do the research and make an educated decision because it seems like this issue will only get bigger if more states follow in California’s footstep, unless new legislation is enacted to alleviate this issue (e.g., like the marketplace laws for sales tax).
Let’s take a step back to understand what we are dealing with here from a tax perspective. Keep in mind that this article only covers state income tax and not state sales tax. State sales tax is another important topic, but is beyond the scope of this article.
What are the potential state income tax issues related to Amazon FBA sellers?
When using FBA, a company will send its inventory to one or several Amazon warehouse locations. But Amazon may move the inventory to other Amazon fulfillment centers.
On the positive side, what this arrangement could mean for eCommerce businesses (especially smaller ones) is enormous opportunities to expand their customer base without having to deal much with the back-end fulfillment responsibilities. On the negative side, this may also lead to a tax headache for state income tax compliance.
There seems to be many opinions over what FBA sellers should do as it relates to filing income tax returns in states. The opinion you get will largely depend on who you ask.
If you ask eCommerce accountants, they may tell you that based on the law, it is a real risk and some states may be more aggressive. If you ask small eCommerce business owners, they will likely tell you it’s impractical for a small business to file in tens of states, and that the states may not have a valid case to require filing.
Unfortunately, in this article we cannot provide you with a clear-cut answer, mostly because there isn't one that exists. Rather, we want to give you the facts so you, as an eCommerce business owner, can make an educated decision about the level of practical risk you are comfortable taking for your business, versus the potentially expensive cost of filing.
How do states tax income for an online seller?
The keyword to know here is Nexus. Nexus is a fancy word (probably created by lawmakers to sound super smart) that means a connection or a taxable presence. In other words, if your business has a taxable presence in a state, the state has the right to tax, at least a portion of, your income.
By using Amazon FBA you may have “connection” or nexus to any state in which an FBA fulfillment center stores your inventory. Every state has its own nexus standards and thresholds that could create a taxable presence for your business. The basic standards are called economic nexus and physical presence nexus.
What is economic nexus?
Economic nexus occurs when there is no physical connection to a state but a certain threshold of sales creates nexus, and therefore a filing requirement in that state.
That sounds pretty harsh but for many online sellers of tangible products (e.g., those that sell through Shopify, Etsy or Amazon but not Amazon FBA), there is good news called Public Law 86-272 (“P.L. 86-272”).
P.L. 86-272, for those of you who don’t enjoy reading legal jargon in your free time, says that eCommerce businesses that only sell tangible personal property in a state where they have no inventory or other physical presence should generally be protected from economic nexus for state net income tax purposes. This may NOT apply to states that impose gross receipts tax or franchise tax, but that is a topic for another time.
So does that mean your business is safe from state income tax? Well, no….not exactly. You can also be subject to state income tax if you have physical presence nexus.
What is physical presence nexus?
Physical presence nexus can include a variety of factors, including employees located in the state or owning or renting property (including inventory) in that state.
And now we get to the crux of the FBA tax issue - if you own the inventory physically located in any of Amazon’s warehouses, it can create nexus.
Beware of California
California, the Golden State - or as I like to think of them, the problem child of the state taxing authorities- is the trailblazer in going after FBA sellers for state income tax.
California imposes a franchise tax on the net income of every corporation:
- Doing business in California (to be defined below), or
- NOT doing business in California but which derives income from sources or activities carried on in the state.
You can find out more about California franchise tax here.
The relevant part for FBA sellers is that California considers having inventory above a certain threshold ($61,040 for 2020) in the state to mean “doing business” in California. Based on this logic, any Amazon seller or business who is “doing business” in California is subject to at least the state’s minimum $800 annual franchise tax fee.
If the seller is required to file a Franchise Tax return, they may also be required to register with California’s Secretary of State, to appoint a registered agent in California and prepare and file annual reports.
While California is the first state to go after Amazon FBA sellers for income tax, it is likely that it will not be the last.
Does this mean I need to file and pay income tax in an unlimited number of states?
Well, no. There are only 50 states after all. How bad can that be right? Just kidding (good ‘ol accounting humor).
Unfortunately, what this really means is that there is no black-and-white answer about how the state taxing authorities may treat an Amazon FBA seller. The letter-of-the law answer is that having inventory in a state over that state’s threshold can create taxable nexus.
Each state will have different thresholds (many of the thresholds are around $50,000) and have different approaches to how aggressive they may be with respect to FBA sellers.
In order to get an idea of where your inventory is being stored, you can download a list of fulfillment centers storing your inventory in your FBA account:
- Go to ‘Seller Central,’
- Select ‘Reports,’
- Select ‘Fulfillment’
- Under Inventory, select Inventory Event Detail report
- Download the report in Excel
- In the report, find column ‘Fulfillment-Center-ID.
Here you can see all the fulfillment centers in the country where your products have been stored listed by the nearest airport code. For example, if you see PHX3 listed then you know one of the fulfillment centers near Phoenix are on your list, giving you nexus in Arizona.
Fun fact: Amazon has fulfillment centers in Delaware and New Hampshire, which are two of the five states in the U.S that don’t have sales tax. If you see that your products are being stored in fulfillment centers in these states, you don’t have to worry about collecting sales tax there.
The most conservative approach is to file income tax returns in any states in which the thresholds are met. On the other hand, there are various arguments to be made against this approach.
One of the arguments is that for FBA sellers, Amazon chooses where they want the inventory. Each seller has no control in choosing the locations and no control over the property itself, therefore, they should not be considered to have a taxable nexus. In addition, many argue that it is impractical for FBA sellers, especially small sellers, to file in each of the states in which Amazon keeps their inventory.
Just remember- if you choose the latter argument and decide not to file in each state, there may be penalties assessed to you for not filing even if you don’t have a tax payment due.
In absence of clear guidance for this year, as an eCommerce business owner, it's important to understand the factors and make a decision that makes sense for your business.
Here are some of the articles and Amazon seller threads we found on this topic which can add color to your research:
Amazon Seller Forums
Other Helpful Reading
*The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers are advised to consult with their attorney or accountant with any questions or concerns.*