When selling products through Amazon, understanding how inventory stored in Amazon’s warehouses impacts tax obligations is crucial. This article explains whether inventory stored in Amazon’s fulfillment centers creates a “physical presence” and contributes to tax Nexus, helping you in making informed decisions
What is Physical Presence for Tax Nexus?
A business establishes “physical presence” in a state if it has a location, employees, or inventory in that state. This presence can create tax Nexus, meaning the business may be required to collect and remit sales tax there.
Does Inventory in Amazon Warehouses Count as Physical Presence?
The answer depends on how the inventory is managed within Amazon’s fulfillment system. Here’s the breakdown:
1. Fulfilled by Seller (FBS)
If you store inventory in your own warehouse or a third-party location you control, this generally counts as physical presence for tax purposes.
If you use an Amazon warehouse but maintain control over the inventory, this could still count as presence, depending on state laws.
2. Fulfilled by Amazon (FBA)
If Amazon stores and ships your inventory through Fulfillment by Amazon (FBA), Amazon controls the inventory placement, not you.
Many sellers and tax professionals do not count FBA warehouses as establishing physical presence because the seller does not control where Amazon moves inventory.
However, some legal interpretations suggest that inventory in Amazon’s warehouses may still count as presence, so sellers must weigh the risks and consult with tax professionals.
Legal Interpretations: Why Might Amazon FBA Inventory Create Nexus?
Amazon FBA might still count as physical presence depending on how states define “physical presence” and how they apply tax laws to third-party logistics (3PL).
Some states argue that inventory stored in fulfillment centers, even if controlled by Amazon, creates a physical presence for the seller. The reasoning is based on:
State-Specific Tax Laws: Some states explicitly define inventory stored in a third-party warehouse as a form of Nexus.
Control vs. Ownership: While Amazon controls FBA inventory movement, sellers still own the inventory. Some states see this as enough to establish Nexus.
Marketplace Facilitator Law: Some states have laws requiring Amazon to collect and remit sales tax, but this does not necessarily relieve sellers from having Nexus. States may still consider the seller responsible for tax compliance.
Precedents and Audits: Some sellers have been audited or received notices from states tax authorities stating they had Nexus due to FBA inventory. This shows that states are willing to enforce this interpretation.
States Known for Counting Amazon FBA as Nexus
While tax laws change frequently, states that have been known to consider FBA inventory as creating tax Nexus include:
California
Washington
Texas
New York
Illinois
These states have sent tax notices to sellers with inventory stored in Amazon fulfillment centers.
What Should You Do?
Check state laws: Some states publish clear guidelines on whether FBA inventory counts toward Nexus.
Consider voluntary compliance: Some businesses proactively register in states where they have FBA inventory to avoid penalties.
Consult with us: As tax professionals, we can help you navigate these complexities and ensure compliance with state regulations.
Conclusion
For more sellers, FBA inventory does not automatically create physical presence, but there is some legal gray area. Understanding the distinction between Fulfilled by Seller (FBS) and Fulfilled by Amazon (FBA) is key to determining your tax Nexus obligations. When in doubt, reach out to us for expert guidance to ensure you remain compliant with evolving tax laws.