Amazon steps into tax collection with service that could help states collect billions in lost revenue

Key Points
  • Amazon introduced the Marketplace Tax Collection service to automatically collect and remit sales tax on behalf of third-party sellers.
  • Washington will be the first to use the service starting on Jan. 1, when a new internet sales tax law is enforced.
  • More states are putting pressure on third party-sellers to collect sales tax, with little help from Amazon.

is finally being forced to take a hands-on approach to tax collection.

Next year the company will begin collecting sales tax for its third-party merchants in its home state of Washington, according to an announcement made this week through an Amazon sellers forum.

Marketplace Tax Collection, the new service, will automatically "calculate, collect, and remit" sales tax for third-party merchants selling products to customers in certain states, Amazon said. Washington will be first because the state passed a law that goes into effect on Jan. 1, requiring all online marketplaces — like Amazon — to collect sales tax on behalf of its third-party sellers.

This is new territory for Amazon, which to date has charged sales tax on products it sells directly to consumers while leaving it up to sellers on the platform to handle their own tax collection. Those transactions only require a tax if the merchant has a physical presence in the state of the buyer.

Washington is removing that loophole and saying that all internet sales get taxed. Now, if an electronics retailer in Cleveland sells a TV to a customer in Seattle, Amazon will handle the relevant tax collection and payment, regardless of the location of the sender or the fulfillment center.

'Copycat this effort'

Other states are likely to follow, said James Thomson, a partner at BuyBox Experts and former Amazon head of services.

"With Amazon now agreeing to collect and remit sales taxes for Washington state, I expect every other state will aim to copycat this effort," Thomson said. It makes "it easier for states to collect sales tax for marketplace sales," he said.

States including Minnesota and Rhode Island will likely become eligible for the service once their laws kick into effect in the coming years. As of now, sellers in states other than Washington are still "responsible for their tax obligations," Amazon said.

As Amazon's influence grows, there's big money at stake. U.S. e-commerce sales are expected to reach $500 billion by 2018, according to Forrester. The Multistate Tax Commission estimates there's more than $2 billion in annual uncollected taxes on sales just from Amazon sellers that use the company's warehouses.

"This concept of a mass mall that exists out there in the cloud — it's taken the states a while to get their heads around it," said Scott Peterson, vice president of U.S. tax policy and government relations for tax software developer Avalara. "Momentum is building towards a lot of people collecting in the future that never collected before."

South Carolina slaps a $500 million price tag on Amazon's sales tax
South Carolina slaps a $500 million price tag on Amazon's sales tax

South Carolina is arguing that its existing laws already require Amazon to collect sales tax from third-party merchants because the company has fulfillment centers in the state and handles so much of the processing.

The state filed a lawsuit earlier this year, claiming Amazon owes an estimated $57 million in uncollected sales tax in 2016, and South Carolina sees an additional $500 million in tax obligations for the next five years.

Amazon said in its quarterly filing that it intends to defend itself "vigorously" in the case.

Some states have laid responsibility on individual sellers. Twenty-five states came together this year to offer a new for sellers on Amazon and other online marketplaces. Members would get to waive part of their back tax obligations in return for committing to collect sales tax going forward.

But without new laws enforcing internet sales taxes, the response has been meek with only 850 sellers signing up so far. It's too costly and laborious for sellers to do all the work on their own, Peterson said.

"Sellers do their best to do it right in their home state, but no one really wants to collect outside their home state," he said.