For Amazon sellers, a big tax bill is looming

During a March trade show, Richard Cram of the Multistate Tax Commission (MTC) had some unwelcome news for a group of sellers who use Amazon's (AMZN) e-commerce platform. Cram informed the sellers that they could potentially owe tens of thousands of dollars in back sales taxes to states where they had done little business. That news made some people so distraught that they broke down and cried.

"People were saying, 'I don't know what I am supposed to do,'" said James Thomson, a former Amazon executive and co-founder of the Prosper Show, which attracts many Amazon sellers that generate at least $1 million in annual sales.

As a result of the reaction to Cram's message, the MTC, which is an organization of about two dozen state tax officials, agreed to establish an amnesty program that began in August. It enables Amazon sellers who come clean to avoid paying back taxes and penalties. On a public conference call on Oct. 11, the commission voted 14-3, with two abstentions, to extend the deadline for the amnesty program by two weeks, to Nov. 1, because many merchants aren't familiar with it.

"There has never been an online reseller amnesty program like this before," Thomson said, adding that Amazon has refused to publicize the amnesty. "You have over 100,000 sellers in the US who are affected by a sizable unpaid sales tax liability. For many of them, they either don't know that they have this liability or they don't believe that the liability is theirs."

According to Thomson, Amazon sellers owe about $5 billion in sales taxes on an annual basis. Interest and penalties can add up quickly and in some cases can force merchants to close up shop. Tax specialists are getting bombarded by calls from web entrepreneurs wondering what they should do. But even the pros aren't sure.

"I've talked to a lot of CPAs here in the past two weeks," said Scott Peterson, a vice president with Avalara, a provider of sales tax collection software. "They're getting lots and lots of calls. ... This is a relatively complicated concept."

For years, Amazon argued that it didn't need to collect sales taxes because a 25-year-old Supreme Court case known as the Quill Decision found states could collect the levy only from companies with a physical presence in their jurisdiction. Brick-and-motor retailers and politicians argued that Amazon enjoyed an unfair advantage by not collecting sales taxes.

Amazon, however, began to collect sales taxes in April, having built an extensive nationwide network of fulfillment centers that process orders for both its own customers and those of its sellers, who account for about half of Amazon's $136 billion in annual sales. According to Amazon, the sellers are obligated to collect sales tax from their customers, though many of the merchants feel otherwise and made their voices heard on the MTC conference call.

"Even the experts can't agree on sellers' obligation since Quill says they don't have to. But some states have enacted legislation requiring out-of-state sellers to collect," said Ina Steiner, editor of Ecommercebytes.com, i n an email. "For small merchants, the complexity of compliance is overwhelming."

And the issue isn't going away.

Officials in Massachusetts recently won a court order requiring Amazon to divulge the names of all marketplace owners that have done business on the site since 2012. Other states have filed similar legal challenges. 

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    Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.