Some merchants that used Amazon's fulfillment service before the adoption of state marketplace facilitator laws were surprised to learn that they were exposed to thousands of dollars in sales and use tax liabilities.
Many of those third-party sellers, which include midsize independent businesses, small retailers with a few employees, and individuals who sold from their homes, only discovered the liability when states identified and pursued them for uncollected taxes.
“These people didn't know what they were stepping into" when they signed up to use Amazon's Fulfillment by Amazon (FBA) service, said Rex Halverson of Rex Halverson and Associates LLC, a Sacramento-based attorney who has represented sellers. "They had no idea what was going to happen as a result."
Although Amazon had made deals with many states to collect and remit tax on its own sales in the years leading up to the Supreme Court's 2018 decision in South Dakota v. Wayfair Inc., state officials began realizing that large amounts of sales and use taxes weren't being collected on third-party sales. Some states pursued those Amazon sellers they identified as having inventory in their states through the FBA service.
In 2017 a large group of states provided a one-time tax amnesty for sellers that registered, and the issue cooled when most states adopted marketplace facilitator laws after Wayfair. But the fallout for many FBA sellers has continued as they’ve hidden their businesses; paid or appealed their tax liability; or litigated against states, including California and Washington, both of which were particularly energetic in their pursuit of sellers.
Amazon encouraged sellers to use its fulfillment program, but documents in court cases, interviews with experts and attorneys, and letters by sellers obtained from California’s sales and use tax agency indicate the company made little effort to ensure that those sellers understood the tax exposure created through the program and the potential consequences.
Amazon’s fulfillment subsidiary moved sellers’ goods into its fulfillment centers all over the U.S. before sale, which ensured quick delivery but also created inventory nexus in those states, a concept that many sellers didn’t understand at the time. Using the FBA service created unprecedented new nexus for many businesses with no experience in complying with multistate sales and use tax obligations, and exposed them to other tax liabilities.
Before Wayfair, a business had to have a physical presence in a state to have sales and use tax nexus. Many sellers believed that meant their sales into other states weren’t subject to those jurisdictions’ sales and use taxes. While that was the case if a seller only shipped items to buyers from out of state, Amazon’s storage of those FBA sellers’ goods in its various warehouses before sale meant those states could then deem the seller to have physical presence there.
Amazon disclosed the tax risks to sellers in a services agreement that largely protected the company and that sellers often didn’t understand or read. The company provided a tool to show where it moved FBA sellers’ inventory and offered an optional service for a fee that would collect the amount of taxes owed and send it to the sellers, but still left the task of registering with multiple states to the sellers. It didn’t handle sales and use tax compliance for the facilitated sales.
The company didn’t answer Tax Notes‘ questions about the ways it communicated about the issue with FBA sellers. But many merchants didn’t know the significance of where their goods were being located and what their tax responsibilities were until it was too late.
Attorneys for sellers have argued that states should have required Amazon to handle use tax on FBA sales and that states lacked jurisdiction to demand taxes from FBA sellers. Experts say Amazon didn’t do enough to inform or help sellers, though the sellers were ultimately responsible for knowing their tax obligations.
In litigation, Amazon has argued that it followed states’ laws at the time and it wasn’t responsible for taxes on FBA sales. With the passage of states' marketplace facilitator laws, the company now collects and remits sales and use tax on all third-party sales.
However, some sources say they believe that the company made sure the FBA sellers were liable and didn’t really care if those sellers understood the tax exposure or remitted the taxes.
The way Amazon set up the FBA program “pretty much guaranteed” taxes wouldn’t be collected, Richard Cram of the Multistate Tax Commission told Tax Notes.
He said that despite the consequences for many sellers and states from untaxed FBA sales, the company largely came out on top. “Amazon won.”
California Cases
California was one of the most — if not the most — aggressive states pursuing sellers with inventory nexus. It sent letters to thousands of marketplace sellers, including FBA sellers, in different states and warned them of the potential for audits and criminal prosecution if they didn’t register and pay taxes owed to California. Those enforcement efforts spawned three separate lawsuits by FBA sellers and a California business owner, the final two of which failed in 2023.
Many FBA sellers that registered in response to California's demands subsequently faced use tax assessments and were contacted by the state Franchise Tax Board for minimum franchise tax payments. Some have paid, and a subset of those were likely able to reduce their use tax obligations through a 2019 limited amnesty or via offers in compromise. Many other sellers are lying low, according to Halverson. He said those sellers may have renamed their businesses or closed them and opened new ones to evade the California Department of Tax and Fee Administration (CDTFA), the state’s sales and use tax agency.
The CDTFA told Tax Notes in an October 2023 email that it will continue to pursue payment from a marketplace seller with liability for pre-2019 sales when it identifies them.
C.J. Rosenbaum of Rosenbaum & Segall PC, who has represented sellers in disputes with Amazon, said the untaxed sales also hurt Main Street businesses. “It’s like a double whammy,” he said. The state missed out on revenue, and brick-and-mortar businesses were disadvantaged because no one was paying use tax on FBA purchases, Rosenbaum added.
California policymakers didn’t act to ensure wide-scale use tax compliance on FBA sales until the passage of the state's marketplace facilitator law in 2019, which broadly requires marketplaces to collect and remit tax on all third-party sales, whether sellers have inventory nexus or not. Lawmakers in June 2011 passed legislation (A.B.X1-28) to require Amazon and other online retailers to collect on direct sales they made into the state of their own wares. The legislature then approved a delay on that law the same year to avoid a fight with Amazon, which agreed to begin collecting tax as of September 2012 and announced plans to invest and build fulfillment centers in the state. But the legislation didn’t address third-party sales.
Many states’ leaders at the time didn’t realize that third-party sales were “the part of the market that’s growing the most rapidly,” Cram said.
Letters to FBA sellers obtained by Tax Notes showed that the California State Board of Equalization, which administered sales and use taxes at the time, had initially told inquiring Amazon merchants who used the FBA service that because Amazon both possessed a seller’s goods in its fulfillment centers and could transfer title via its online store, it was a consignee and the retailer responsible for use taxes on merchants' FBA sales. But the company argued in a letter to the board that third-party sales were transacted online by one Amazon subsidiary and fulfilled by a different one, meaning neither individually met the criteria for being a consignee. The BOE agreed in a September 2012 opinion letter to the company, which was included as an exhibit in one of the California lawsuits. As a result, the state sought to collect use tax owed on FBA sales from the sellers.
According to the CDTFA, the BOE began reaching out to marketplace sellers with inventory nexus as it identified them beginning around 2014. FBA sellers were often contacted after they had already accumulated significant liability for uncollected use tax.
The CDTFA’s decision was challenged years later by attorneys for sellers in a lawsuit representing an in-state business owner, Grosz v. California Department of Tax and Fee Administration, which argued that the state should have deemed Amazon a retailer, because its subsidiaries collectively functioned like a consignee. The plaintiff argued that the CDTFA was legally obligated to pursue Amazon for the uncollected use taxes, instead of FBA sellers.
Aaron Block of the Block Firm LLC, one of the attorneys who represented sellers in separate litigation against California, said that by not requiring Amazon to collect tax on FBA sales, “either California totally mistakenly let hundreds of millions or billions walk out the door,” or tolerated it to curry favor or avoid a fight with the company.
The CDTFA has countered that it was within its authority to pursue FBA sellers, an argument that was upheld by the California Court of Appeal in Grosz in January 2023. Amazon has said it merely provided services to third-party sellers. The company also asserted in a brief in Grosz that California's 2019 marketplace facilitator law and tax amnesty for marketplace sellers meant “the Legislature recognized that the third-party sellers are the ‘retailers’ liable for paying taxes on sales” before those laws.
Sellers separately argued in federal court that because Amazon decided to move sellers’ goods into California and other states without their direction, states lacked jurisdiction to hold sellers liable for taxes. The California suits asserting that argument failed under the Tax Injunction Act.
Pursuing the Sellers
California State Treasurer Fiona Ma (D), a former member of the BOE and a critic of California’s pursuit of use taxes from FBA sellers, told Tax Notes in 2021 that she first became aware that the BOE was pursuing FBA sellers for unpaid use taxes in 2016, when she was still an elected member of the board (Ma served on the BOE between 2015 and January 2019). She said she disagreed with the policy, in part because it seemed unfair to smaller sellers.
Ma said she made a trip to Amazon’s Seattle headquarters in January 2017 to discuss the broad lack of use tax compliance on FBA sales. She said Amazon’s then-vice president of state tax told her that the company would collect and remit California use tax on the sales if the state asked or required it to. In an August 2017 letter, Ma urged the administration of then-Gov. Jerry Brown to make such a request, arguing that collecting from individual FBA sellers was inefficient and seeking collection by Amazon would net the state significant tax revenue.
Nothing came of Ma’s request. She told Tax Notes she thought the administration may have wanted to avoid demanding additional tax compliance from Amazon when California was courting the company's HQ2 expansion. Tax Notes unsuccessfully sought communications between the governor’s administration and the BOE and CDTFA during that period. The CDTFA said in a September 2023 email to Tax Notes that any suggestion that the BOE and CDTFA were "not pursuing collection of tax from Amazon due to their search for HQ2 is inaccurate.”
Identifying and contacting sellers individually appears to have been a slow process. The CDTFA — which by mid-2017 had been split off from the BOE — said in its September email that it “used available information to identify retailers with potential nexus and educate them about collecting and reporting use tax.” The agency said it didn’t track outreach to online sellers separately from other remote sellers with potential nexus until 2017, but it said in an April 2023 email that it sent outreach letters to 1,644 online marketplace sellers in September 2017 and to 1,840 sellers in January 2018. The state didn’t tally the FBA sellers it reached out to separately from other marketplace sellers, but FBA sellers would have been included in, and potentially represented most of, its outreach to marketplace sellers over the years.
In 2018 the state made a legal demand to force Amazon to provide the identities of sellers with potential nexus in the state in 2017 so it could pursue them. Amazon told sellers in an October 2018 letter — included as an exhibit in one of the suits — that it had received a “valid and binding” legal demand from the CDTFA requiring it to disclose sellers’ information to the state in November of that year. Then, in December, the CDTFA sent letters to 12,666 marketplace sellers. The agency didn’t provide numbers for its outreach after 2018.
The CDTFA said that as a result of the outreach efforts, 3,307 taxpayers registered and reported $1.4 billion in taxes.
FBA sellers contacted by the state said they were surprised. A seller in New York said in a 2020 statement in one of the federal suits against California, Online Merchants Guild v. Maduros, that he was shocked to get a letter from the CDTFA in 2018 telling him to register with the agency and that he had to retain legal counsel, spend thousands of dollars to reconstruct years of prior sales, and buy tax compliance software.
According to Cram, an increasing number of FBA sellers had realized by around 2017 that they could be held liable for unpaid taxes on years' worth of their sales, partly because of heightened activity by states like California and Washington to pursue those taxes. He said that when he notified sellers at a March 2017 Las Vegas trade show of their potential liability, many were incredulous and some told him afterward that they wanted to begin collecting and remitting taxes on their sales in different states, but only if they could get relief for past sales.
In response, Cram and the Multistate Tax Commission organized the 2017 multistate amnesty for marketplace sellers, through which sellers could register and comply with taxes going forward. Most of the 24 states that participated forgave previous unpaid taxes. The amnesty netted about 900 participants, he said, noting that Amazon didn’t promote the program to its sellers and seemed reluctant to be involved.
As the amnesty was ramping up, a former Amazon official who had worked on the FBA program, James Thomson, told Tax Notes that the company sought to avoid providing tax advice to sellers to limit its liability.
California didn’t participate in the MTC amnesty. Legislative authorization would have been required, and lawmakers didn’t act to approve any such law, according to the CDTFA. But the state created a limited amnesty of its own when Gov. Gavin Newsom (D) signed the state’s marketplace facilitator law in 2019. The amnesty waived penalties and limited the use tax lookback to sales made after April 2016, and was available to sellers that hadn’t registered with the state before December 2018. Sellers had to file returns by September 25, 2019, and if they paid using an installment agreement, they had to make final payment by the end of 2021.
Ma, who had argued for tax forgiveness for FBA sellers, said at the time that the state’s amnesty wasn’t the forgive-and-forget approach she had advocated. Paul Rafelson, the head of the Online Merchants Guild, told Tax Notes in 2019 that many sellers couldn’t afford the taxes owed over the lookback period. The amnesty netted “299 requests to participate,” and the taxes reported by participants were roughly $17.8 million, according to the CDTFA.
California’s approach was unproductive, according to Halverson, who observed that many of the taxpayers the state pursued didn’t have the money. He said he and a partner warned Newsom’s staff that the approach would force people into hiding.
Richard Pomp, a professor at the University of Connecticut’s School of Law, said Amazon was able to work out mutually beneficial deals with many states over the years to collect taxes on its sales in return for compliance and investment, but when states like California pursued FBA sellers for registration and taxes, those smaller merchants could “offer nothing . . . and they became fair game.”
Amazon’s Disclosure
Many merchants have claimed in litigation that they were unaware of the tax liability they could face. Some observers argue that the company didn’t properly emphasize the risk.
Amazon advertised its FBA service as a convenient option for small and medium-size businesses, particularly those selling over Amazon’s marketplace. The potential tax exposure wasn’t similarly highlighted.
The company’s main disclosure of the tax risk to sellers came in Amazon’s Business Solutions Agreement (BSA), a lengthy document that sought in part to shield the company from tax obligations that would be linked to sellers’ sales. A version of the agreement cited in the September 2012 BOE opinion said that “Amazon is not responsible to collect, report or remit any taxes arising from any transaction.” The BSA said the company would move FBA sellers’ goods around between Amazon’s fulfillment centers and track their movement. The BOE opinion and a 2013 BOE letter to an FBA seller also noted that the BSA said that movement of sellers’ goods into fulfillment centers could create tax nexus in multiple states. “You will be solely responsible for any taxes owed as a result,” it said.
According to Rosenbaum, most sellers didn’t read the BSA. Many of the sellers being courted were those that, along with their tax preparers, lacked a clear understanding of sales tax nexus in the pre-Wayfair era, sources said. Scott Peterson of Avalara said in June that during seminars with sellers over the years, he had frequently found them to be uninformed about inventory nexus.
FBA sellers also had little control over where Amazon created nexus for them, as was acknowledged by Judge Edmond E. Chang of the U.S. District Court for the Northern District of Illinois in his September 2021 opinion in Rubinas v. Maduros, one of the California suits. Chang noted that the plaintiff, who sold clothing from her home, shipped her products to Amazon, after which “Amazon can ship the clothing to other warehouses across the country, with no say-so in the matter” by the seller.
Thomson had told Tax Notes in 2017 that Amazon also didn’t prompt sellers to talk with their tax advisor when their goods were stored in a new state.
Cram said that sellers’ lack of awareness didn’t legally shield them from tax liability. And Michael Mazerov of the Center on Budget and Policy Priorities argued that third-party sellers were responsible for knowing their tax obligations “even if Amazon hadn’t warned them in the contract — and Amazon did warn them.” He further noted that many FBA sellers weren’t boutique sellers but “bona fide businesses.”
But Mazerov said some businesses were likely ill-advised by tax advisers who also didn’t understand sales and use tax nexus. “It certainly would have been preferable for Amazon to step up and do the right thing for these sellers,” he said. And Cram said his experience talking with sellers led him to believe many genuinely didn’t realize their tax exposure, noting they didn’t seek to know everywhere their inventory was because they didn’t realize the significance.
One seller, who spoke to Tax Notes on condition of anonymity to avoid being pursued for taxes, said that Amazon had been vague. Asked if the company had provided communications about tax obligations in other states, or encouraged him to reach out to tax professionals, he said there had been “a very general 'local laws apply' warning.” He also didn’t recall reading the BSA. The seller said a few CPAs and advisers on Facebook groups for Amazon sellers said the FBA service could create nexus, but that it was generally believed by CPAs and sellers that a seller had tax obligations only in the state where their business was located.
That seller also suggested that Amazon might not have stressed the need to comply with sales tax requirements to FBA sellers because — at least early on — few states were pursuing them, saying he doesn’t fully blame Amazon.
Tax Notes asked Amazon what warnings or notices it provided to sellers about their potential tax obligations under the FBA program, but the company didn’t provide an answer to those questions. Regarding questions relating to the FBA service and California, an Amazon spokesperson told Tax Notes that “California law determines who is required to collect and remit the state’s sales tax, and we work with the California Department of Tax and Fee Administration (CDTFA) to ensure we remain compliant with the law.”
Amazon didn’t answer other questions about its policies related to FBA sellers and what tax resources it provided them. However, when the company sent its letter to FBA sellers in 2018 informing them it had to turn over their information to California, it included a link to a directory of external tax-compliance providers and another to “optional services for calculating U.S. sales and use taxes.”
In court documents, Amazon argued that its role was to facilitate sales and that it was not, and never claimed to be, responsible for tax compliance on third-party sellers’ sales. The company is still involved in litigation with South Carolina over taxes on third-party sales made before the state’s marketplace seller law, in which South Carolina is demanding payment by arguing Amazon was the retailer. Notably, in a description of the BSA in a January 2020 brief in the South Carolina case, Amazon said, “Third parties who sell in the Amazon.com marketplace agree to the terms” of the agreement. It also said Amazon marketplace sellers “need not agree to use Amazon Fulfillment’s services; they may elect to use Amazon Fulfillment and, for those that do, elect to stop at any time.” It also noted that sellers could withdraw their goods from fulfillment centers at will.
But Cram said Amazon “should have done more” to inform sellers. “I’m sure Amazon would say, ‘We’ve done everything to make this information available to sellers, but we don’t think it’s our job to lead them by the hand to the tax department’s door,'” he said. But he added that “the way it’s set up is pretty much guaranteed for noncompliance. And [Amazon] wouldn’t get any FBA sellers to sign up if they said, ‘We’re going to spread out your inventory . . . and you're going to have to file in 20 states.' People would say ‘Forget it.’”
Even sellers who realized they could owe use tax in California because of their participation in the FBA program were sometimes confused. Some 47 responses by California to marketplace sellers’ inquiries between 2012 and late 2016, obtained by Tax Notes through a public records request, included questions by FBA sellers and their representatives seeking clarification as to their California use tax obligations. Some weren’t sure if inventory stored in Amazon’s California fulfillment centers obligated them to collect use tax or not; a few said they believed Amazon was responsible for tax compliance.
Although Amazon offered a sales and use tax collection service for a fee, sellers using it still faced tax compliance challenges, according to Peterson. The service would collect the tax owed on a sale in states specified by the seller, and send it to the seller to remit. But registering and filing in multiple states posed a significant challenge for businesses, he said, although companies like Avalara offered compliance services that would make it easier.
Sellers’ Legal Fights
Some sellers have turned to litigation. So far, most of their suits to block enforcement have failed.
In March 2022 Washington’s state tax appeals board found against sellers in Jenson Online Inc. v. Washington Department of Revenue, with the board determining that Amazon wasn’t a consignee responsible for tax collection on FBA sales under Washington law and that sellers would be liable for sales tax and other taxes regardless. The board also found that the state had jurisdiction to enforce the tax against sellers under the U.S. Constitution. That case is being appealed, with a decision expected soon.
Sellers have faced multiple defeats in their suits against California. For instance, Rubinas, a suit by an Illinois seller whose bank account was garnished by the state, was rejected by the federal district court on the grounds that it lacked jurisdiction to hear the case under the TIA.
Many of the lawsuits involve attorneys who have participated in suits by the Online Merchants Guild.
The final suit against California was also handled by the organization; Online Merchants Guild v. Maduros, argued that California’s pursuit of FBA sellers violates the U.S. Constitution, particularly the due process clause. That suit was also rejected for jurisdictional reasons under the TIA, without consideration of the merits, and the U.S. Supreme Court in late June declined to hear the case.
Pomp has argued that the rejection of sellers’ final federal suit against California because of the TIA “is about as unfair a case as you can get,” and could serve as an example of why legislative reform of the law is needed.
Despite the failure of the group’s constitutional arguments in California, the guild won against the Pennsylvania DOR last year in Online Merchants Guild v. Hassell. Since Amazon had moved the sellers' goods into Pennsylvania without their input, the court determined there was no purposeful availment by third-party sellers, and the state thus couldn’t require them to register.
Although the courts in the California cases have said that FBA sellers could pursue their arguments in tax appeals, further California litigation may be a long shot. For many sellers, the unpaid tax liability could be as much as $40,000 to $50,000, a substantial amount for small businesses but less than the cost of litigation, according to Rafelson.
Sources also said it's likely that California isn't prioritizing the pursuit of new FBA sellers for unpaid taxes — the CDTFA told Tax Notes that only a small number of appeals by marketplaces sellers are still pending.