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Selling goods through fulfillment services: Possible nexus effects

The biggest area of concern for many businesses receiving going back almost a decade, depending on when the inventory
nexus inquiry letters involves the state tax nexus consequences was first present.
of using a fulfillment service, such as Amazon’s Fulfillment by From a legal standpoint, having inventory in the state via a
Amazon, or FBA. These services operate by having businesses fulfillment service provider probably should not create nexus,
send inventory to fulfillment centers, and when customers order just as it should not create personal jurisdiction or venue
the business’s products, the fulfillment service handles packing, (see Sportpet Designs, Inc. v. Cat1st Corp., No. 17-CV-0554 (E.D.
shipping, customer service, and other aspects of filling the Wisc. 3/2/18); Wireless Environment, LLC v. HooToo.com, Inc., No.
orders. In these instances, the fulfillment service can (and does) 15CV1215 (N.D. Ohio 8/30/16)). Since this issue is just working
move the inventory of the business across the country — and its way through the courts in various states, however, it may
does so without the business’s knowledge. In response to taxing not be known for several years how the issue will be resolved
authorities’ requests, fulfillment service providers apparently in different states. As of this writing, there do not appear to
have been providing information to the states on whether a be any state court decisions directly on this issue. Because of
business has inventory in the state. Once the state receives this this uncertainty, businesses are regularly forced to litigate this
information from the fulfillment service provider, it may decide matter.
to investigate whether the company has nexus. Since most states now have statutes in place that require
The state will send out an audit notice or nexus inquiry letter “marketplace facilitators” such as Amazon to collect sales tax
to the business, whose owner may or may not know of the on behalf of sellers on the platform, the issue of sales tax nexus
inventory’s presence in the state. The state will take the position from inventory in fulfillment centers could diminish over time.
that because the inventory was moved into the state by the Time will tell how aggressively states will pursue this unsettled
fulfillment service provider, nexus existed from the moment the area of tax nexus now that their loss of sales tax revenue from
inventory was first present. This could lead to an assessment online marketplaces has mostly been corrected going forward.

information to the business under audit, forcing If the result of the appeal or protest is unfavor-
a company to challenge an assessment with no able, the last option is usually litigation. Litiga-
knowledge of what the state is basing the assess- tion can start with a hearing before some sort of
ment on. This arguably violates the company’s right informal or formal appeals tribunal or with a formal
to due process. case in a court. Usually, if certain requirements are
Businesses that believe they have been wrongly met, rulings by an appeals tribunal can be further
charged an assessment have several options avail- appealed to a court, and rulings by a court can be
able to dispute it, depending on where they are in further appealed to a higher court.
the audit process. One option may be to have a For many businesses, the biggest nexus issue
conference with the auditor and the auditor’s super- recently has been whether using a fulfillment
visor. These conferences rarely produce meaningful service, such as Amazon’s Fulfillment by Amazon
results; however, they are worthwhile because it is (FBA), creates tax nexus in states where inventory is
beneficial for a business to resolve as many issues in present because the fulfillment service has moved it
an audit as possible at the lowest level. there. For more on this topic, see the sidebar, “Sell-
The next step would be to file an appeal or ing Goods Through Fulfillment Services: Possible
protest of the assessment. The business usually has Nexus Effects.”
a limited time after receiving an assessment to file
some sort of written notice with the state that the CONSIDER MAKING A VOLUNTARY DISCLOSURE
business is appealing or protesting the assessment. There are ways to mitigate a business’s risk of
The written notice might be a required form or a potential tax liability, one of which is to file a
free-form letter disagreeing with the assessment. In voluntary disclosure with the state. A voluntary
any event, it is critical to file this appeal or protest disclosure allows the business to come clean in the
before the deadline. Missing the deadline can have state and get any past liabilities cleared up. More-
a number of ramifications for a business — includ- over, assuming there are no issues of tax collected
ing losing its ability to challenge an assessment but not remitted, the company can “cut off ” prior
altogether. liabilities so that the business only needs to worry

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