For a long time, ecommerce marketplaces have had issues regarding tax collection. Countless merchants from all around the world have been able to sell their products online without paying sale taxes.
Amazon, the biggest ecommerce marketplace, is an excellent example of what I’m talking about.
The company works with hundreds of thousands of third-party sellers from all around the world to sell products in its gigantic marketplace.
These third-party merchants are such a big part of Amazon that in 2017, they constituted more than 50% of the retailer’s paid units, generating billions of dollars every month.
And yet, most of them don’t pay taxes.
Regulating and enforcing tax payment from thousands of third-party merchants is not an easy task. And since the ecommerce world is a relatively new thing, previous laws haven’t been able to keep things under control.
However, the economic impact of online retailers is growing by the day. And thus legislative forces have fewer reasons to disregard the issue.
In 2017, the global share of ecommerce retail sales hit 10.7%. And by 2021, Statista estimates it’ll grow up to 17.5%.
source: Shopify with data from Statista
It’s no surprise that the political relevance of the topic has noticeably increased in the past few years.
Truckloads of money would go to governments if these taxes were paid,
hence why many states have resorted to the enactment of new tax laws in recent years.
Are you an online merchant?
Staying up to date and making sure you do taxes right is your responsibility. Not doing so properly means you might have to face legal consequences that have broken many businesses.
In this post, I’ll tell you what you, and every other ecommerce merchant, should know about this topic.
Let’s dive right in!
Amazon’s tax fight
When speaking about ecommerce tax problems, Amazon is one of the first things that come to mind. It’s common knowledge amongst people involved in the ecommerce industry that Amazon has skirted taxes for quite a long time.
And we’re not talking about a few dollars. We’re talking about billions. Amazon’s sheer size is no joke, and the amount of tax revenue it can generate for governments is considerably high.
After all, Amazon’s share of the ecommerce market in the US is nearly 50%.
Think about that.
Amazon alone takes almost as much as every other ecommerce marketplace combined.
The impact of this business is so powerful that states have taken legislative action just because of it, creating tax laws commonly referred to as “Amazon” laws.
All because the gigantic store found a way to pay fewer taxes.
States can’t force retailers to collect sale taxes if the retailer doesn’t have nexus in that state. (having nexus means having a physical presence in that state) And since Amazon is an online retailer, it doesn’t need to have a physical presence to sell its products.
Which means that legally speaking, Amazon couldn’t be forced to collect taxes in most of the country.
Instead, customers were supposed to pay an equivalent “use” tax. But states have always had difficulties collecting use taxes.
And many states obviously didn’t like that, so some responded by creating the “Amazon” laws I just mentioned.
Thanks to these new laws, state agreements, and the establishment of new Amazon facilities, the company now collects taxes on the majority of the US.
As of January 2014, the company collected taxes on only 17 states. Now, they do so nationwide with the exception of a few places.
source: ilsr.com
Unfortunately, that’s not where the tax problem ends.
Even though Amazon collects taxes for its own products, it takes no responsibility for what it's third-party merchants do.
This poses a new set of problems that states have to deal with.
Most third-party merchants aren’t paying the taxes they’re due. Not only because it’s bothersome, complicated, and negatively affects sales, but because many sellers aren’t even aware of their tax liabilities.
Collecting taxes from hundreds of thousands of sellers is nearly impossible, and as I said before, the use tax alternative isn’t effective as well.
This leaves states with one clear choice:
Make Amazon responsible for the sale taxes of all of its merchants.
The price difference that Amazon offers thanks to tax skirting is enough for customers to pick it over other brick-and-mortar retailers like Walmart.
Amazon executives know this, and they’re willing to do what they can to prevent these laws from taking place.
The fight is on.
On one side of the ring, we’ve got Amazon, its third-party merchants, and other ecommerce stores doing the same tricks.
On the other side, governmental entities and brick-and-mortar retailers.
For now, third-party sellers and customers are responsible for tax collection in most of the country. But in the next few years, we might see the conditions turning around and retailers becoming responsible.
So far, only Washington, Pennsylvania, and Oklahoma require Amazon to collect third-party merchant’s taxes. But we’ll probably see more states doing the same in the next few years.
If Amazon is to lose the fight, it will surely make it’s best to prolong it as much as it can. So that it can, at least, benefit from its current condition for longer.
A message for ecommerce merchants
What all of this means for you as a merchant is that you should be informed about the tax policies that apply to your case.
Since laws vary from state to state and from country to country, your responsibilities can be unexpected.
It can’t be pleasant to have a lawyer coming at you for things you weren’t even aware of. And you can prevent that now by knowing about your fiscal burdens.
Are you prepared?
Do you know whether it’s you, the customer, or the retailer the one who’s responsible for collecting taxes?
Getting a tax attorney can help you figure this out along with all of the other questions you might have. And, you’ll make sure that an expert is helping you and you won’t make any mistakes.
Mistakes that can be expensive enough to break your business.
What do you think? Should third-party sellers have tax liabilities?
Let us know in the comments down below.
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