Episode 16 – Navigating Taxes on Amazon with Paul Rafelson
The notion of having to pay sales tax across the United States in each individual state has sent many sellers in an uproar. Many states have begun passing or attempting to pass legislation in tax reform to acclimate to e-commerce sales, and these new “Nexus” rules are making many of sellers nervous about being audited or penalized by state governments.
Paul Rafelson of the Online Merchants Guild is an attorney well-versed in state tax law and has joined in the fight to protect sellers from predatory tax tactics by local and state governments. States demanding tax money from Amazon sellers has become a hot-button issue, and Paul offers great insight into the nitty-gritty of the problem and how sellers can navigate this changing tax landscape.
In episode 16 of the Serious Sellers Podcast, Helium 10’s Success Manager Bradley Sutton and Paul Rafelson discuss:
- 00:46 – Paul’s Expertise in Taxes and Being a Seller on Amazon
- 01:52 – Misconceptions About Taxes
- 02:51 – What is Nexus in Relation to Taxes?
- 06:18 – Paying State Taxes as an Amazon Seller
- 08:26 – Collecting Sales Tax Outside Your Home State
- 12:02 – Does Amazon Collect State Taxes on Behalf of Sellers?
- 12:37 – Problems with the Tax Burden on Sellers From the States
- 15:45 – What Can Sellers Do Right Now to Avoid Tax Complications?
- 18:04 – Lessons Learned in Amazon Taxes
- 19:41 – What Irks Paul the Most About Taxing Amazon Sellers Today
- 22:55 – How to Contact Paul About Taxes on Amazon
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Bradley Sutton: What does Sales Tax Nexus mean? What about that letter I got from California saying I owe them state tax? We’re going to answer these questions and more all about taxes and Amazon in today’s episode.
Bradley Sutton: How’s it going, everybody? This is Bradley Sutton, and this is the Serious Sellers Podcast. We have an amazing episode for you today because this is a topic that is freaking out Amazon sellers around the United States, around the world, anybody who’s selling in America is freaking out about this topic. It is the t-word: taxes. So with me today, I have Paul from the Online Merchants Guild. Now Paul, first of all, why the heck should we care about your opinion or who the heck are you and why should we listen to you about taxes?
Paul Rafelson: That’s a good question. Yeah. So, I have a lot of experience. I used to work at H&R Block, and then I decided I was gonna help a bunch of sellers. I thought that was good. So, I’m just getting started. I’ve been practicing tax law for almost 10 years. And just to give a little background, before I went into law, I actually was a seller. I was a pre-FBA seller. So we’re talking, you know, ’02, ’03, ’04, I started retail arbitrage one Black Friday and realized that I can get wrapped in. A guy sold Seinfeld DVDs and flipped them for 40 bucks.
Bradley Sutton: ’02 and ’03. Wasn’t those days still only books or there’s already the private label market place there? Me, I hate accounting. I hate taxes. I hate all of that stuff. But I guess it takes like a special kind of person to really be able to stick with it.
Paul Rafelson: Oh no. Yeah, I mean I too, I just think it’s a misconception. People are saying, “What are you doing April 15th? I’m like “the same thing you are, just dreading my taxes.” Because my CPA is preparing it.
Bradley Sutton: Now, one word that you just said right there, this is like kind of triggered me right now because I think that is a big thing. Misconception. So we see a lot of misconceptions out there about taxes right now. I’m sure you see it as well. And that was why I wanted to make you one of the first episodes on the Serious Seller Podcast because there are serious sellers out there who are being misled, who have the wrong idea. So, let me just start this off, what are some of the things from a seller’s viewpoint, you know, I’m sure you’re active in Facebook groups or people ask you questions. So from a seller’s viewpoint, what are some of the things you have heard sellers say that they think is going on about taxes that is like definitely a misconception or definitely erroneous?
Paul Rafelson: Oh my God. How long is this podcast? No. I think, the one that I think is this idea, you know, some software company told me I had the Nexus and therefore I have to pay taxes and I didn’t pay taxes.
Bradley Sutton: Real briefly for those who don’t know what is Nexus mean? For the Star Trek fans, it was something in one of the Star Trek: The Next Generation movies. But for those of you Trekkies out there, that’s not what we’re talking about here. What is Nexus here when it comes to taxes?
Paul Rafelson: Yeah. So, Nexus is a jurisdictional and became a state tax, a standard sort of winning stake and asserts both jurisdictions and actually subjected to their tax regime. Whether that’s to pay their income taxes or whether they can deputize you as the tax collector for their retail sales tax that, you know, so that whenever a transaction that is subject to sales tax occurs, you’re–basically the state has the jurisdiction to say you are the collector, you shall collect the money, put it in trust and then turn it over to us at a set time depending on how much money there is collected for that period.
Bradley Sutton: Okay. So what’s the main thing regarding Nexus that you think sellers are confused about?
Paul Rafelson: Sure. So this sort of general thing has been around since the 50’s; this notion of physical presence, and we saw that most recently, we refer to the Quill decision and Quill being overturned by this recent Supreme Court case called Wayfair. And that, you know, physical presence equals Nexus, equals your host. You know, and it’s just a very big misconception and there’s a lot of, you know, accountants and software companies out there that are sort of peddling this notion of, you know, you have physical presence be it the FBA warehouse and therefore you’re in deep trouble. Wayfair only confirms that. Well first of all, the states were already after a lot of sellers prior to Wayfair for the very reason that you had this, you know, they claimed you have physical presence due to a warehouse for that physical presence somehow created Nexus, or that it was constitutionally not a burden for them to impose a sales tax burden on you as a result of that supposed physical presence. The point being is with all of that happening, the fact that this–the economic nexus, this new concept of okay, 200 transactions or $100,000, whichever comes first as if we don’t know, it’s always going to be 200 transactions. You have Nexus in a state and it’s sort of, you know, wait a minute, why are you now scaring us with economic Nexus? We were already being scared by the States before Wayfair because they were claiming a physical presence Nexus. Technically, that’s not even applicable to us. So there’s just sort of this confusion, but I think where people really forget to look at is just sort of the common sense facts. Like are you a retailer? Are you actually the retailer in an Amazon transaction. And I think that surprises people that they don’t even think about that. Yeah, you can have Nexus. I can be in a state, and if I am doing business. So like I said, I don’t necessarily think there’s a Nexus here. There’s a lot of questions under our process. Plus I’m getting a little technical, but you know, I do have a Facebook group, Amazon Sellers Sales Tax Lawyer. It’s free, the discussion is great. It’s amazing. 1600 people talking about sales taxes. It’s crazy.
Bradley Sutton: Oh, that sounds like a thrill a minute right there.
Paul Rafelson: You would think so. Because there’s no reason 1600 people should be on Facebook group talking about a tax burden that was meant for the Fortune 500, not for kitchen table enterprise.
Bradley Sutton: Okay. So, in your opinion then or with, you know, what, you know, we’ve established that you’re very knowledgeable as far as tax, constitutional law, all that wonderful stuff. So like I’m Joe Seller, I’m based out of California, let’s say. Obviously, I’ve got to pay California sales tax now. I think so. I mean–right?
Paul Rafelson: So interesting point because that’s always the question. And I know that a lot of sellers do collect sales tax in their home state. And I would never probably advise someone stop doing what they’re already accustomed to doing. Just know that to make sure you’re doing all that you were supposed to do. But actually, it’s like I said, you know, if you think it–take two companies, take Starbucks and take Walmart, right? And think, okay, if you buy a bag of coffee inside of Starbucks store, right? Starbucks has to collect sales tax on that. right? Starbucks has Nexus. When you buy that same bag of coffee. Let’s say you buy the same coffee inside Walmart. Well, Starbucks has nexus in California, we have already established that, but it’s not Starbucks responsibility anymore to collect that tax. It’s Walmart’s. And when you have a situation wherein Amazon land, you’re sort of–they’re sort of aiming their terms or conditions to say, you know, there is a retailer in every which way, except for sales tax purposes. I mean, those types of arguments don’t usually hold water in states like California. But again, it’s a very intellectual company. But we, you know, at the end of the day, I mean, there’s even regulations in California: regulation 1569. If you’re listening to this, Google tax regulation, California tax regulation 1569. It’s two sentences and will probably make you angry. Publication 109 under consignment, right under California law, you’re basically, it’s like your virtual consignment store. Basically, you’re consigning the inventory, the retail to Amazon who provides the retail front and experience to the consumer. So I think, again, that Nexus; it’s another area that people aren’t focusing on.
Bradley Sutton: So, even that is a gray area then for sure. I mean in your opinion, another situation would be, I’m in California, I’ve been paying California sales tax. So I’m going to keep doing that, but I send products to the, let me try and think of, uh, you know, the Ohio DC, right? And then in the Ohio DC ships out a product to a customer in Ohio. Now does that mean that for that order, I should be responsible for collecting sales tax for the state of Ohio?
Paul Rafelson: So from an extra–so a couple of things we have to establish, there’s a lot of ways to attack this, right? So we’ve talked about what I call the state statutory, what I’ll call the state statutory reason, which is are you a retailer under state law? And I actually have this picture show and I’m happy to send you a link. You can post it on with the show so people can watch and see it, but it just sort of all the ways actually used it. I had an appeals hearing today for a seller in the state of Washington and I actually used it, and the hearing officer 100% agreed. He was laughing at some parts of it because it’s so obvious this is avoidance, and that should never have been given any credibility, but you know, it’s a power company. But my point is that you got the state statutory reason. You’re not able retailer under the state law. That’s one scenario. The Nexus question: do you have Nexus? In other words, does the state have the right to subject you to their jurisdiction is a two-part question? The physical presence test was the prior rule, and in many ways, you could say, well, because of Wayfair, physical presence is no longer a factor. You know, and that has a two-way street. So everyone said just that slight presence of FBA may not actually be nexus and may not have ever been, because it was just not significant enough. And then the third factor is what we call the unconstitutional burden on interstate commerce. And that’s serious. And that’s where I really get ticked off. And that’s where I really say sellers, you don’t realize your constitutional rights are being trampled on because you’re being forced into this system that you can’t possibly afford to comply with. If you’re making $70,000 a year on a million of sales, which I see a lot, you can’t afford to comply with all the sales taxes, only income taxes, which they don’t tell you about, that if Amazon fulfillment centers are in a state, they expect you to pay income tax too. And it’s not the tax is the fact that you’re going to have to find an accountant in Mississippi, you live in Washington, you’re going to pay some accountant to do it, you know, $2,000 tax return for your business, for your personnel. And what to report $250, you know it’s a nightmare. And then you’ve got to register the secretary of state, which some of these tax companies don’t tell you. So like the seller that came to me the other day and registered in Connecticut because some software company sold and that’s what they needed to do two years ago. And then they got a bill from Connecticut saying you owe $200 a month because you never registered with the secretary of state. So my whole thing with sellers is just known some sellers listen, they risk tolerance. They believe it’s a risk not to comply with all the states but just know what that risk is. Go back to that third thing. What I just described is an undue burden on interstate commerce. Especially the sales tax. Why do I say that? Because there’s an obvious alternative. Amazon collects as a marketplace and that just started happening this year or 2018 with Washington, with Pennsylvania, with Minnesota, Oklahoma, and New Jersey, Connecticut. I’m sure we’re forgetting a few.
Bradley Sutton: So, for those what that is, if I understand it correctly, where Amazon actually collects the sales tax for, you know, that money never actually hits your account. They collect it and then they remit it to those states on their own. And then for those states, there’s for sure you don’t have to file yourself or report anything because Amazon is taking care of that for you. Is that correct?
Paul Rafelson: Yes and no. We’re going to see more, you know, the state of Washington is going to still want you to file the complicated tax return and then take your credit to the taxes Amazon supposedly collects on your behalf.
Bradley Sutton: That sounds ridiculous.
Paul Rafelson: Yeah. And then you have to pay the state called the Business and Occupation tax, which–so I have a law partner who was an Amazon seller. His name is Jack Schitt, he’s a multimillion-dollar seller and that’s why I love having him as a partner because he understands a whole other level of Amazon I don’t because he still has an active business. And he was telling me that, you know, he had registered with all the states long before he went to law school. He was listening to the same advice that everyone else was the time I wasn’t doing it. Ah, and he said he paid–he was showed me. He said he paid like $500 total fees to one of these tax software firms for the year. And he was showing me there were months where he was paying 42 cents of this tax to the state of Washington and all in, I think he paid like $7 or $12 bucks, $500 for one state. I mean, it’s ridiculous. But that’s, you know, and I don’t think people realize it’s not just the 45 states with the sales tax jurisdiction. Colorado almost passed a law, almost started telling sellers that they had to comply with all of their local jurisdictions. There are hundreds of local towns in Colorado that have their own sales tax form and system. They’re not just on the same form. They have their own system, and you have to file, they wanted sellers to file on the states. Louisiana has this. Alabama–they call it the “home rule” jurisdiction. So people understand that. But, yeah, so Washington, even with marketplace fluxions still hasn’t fully eliminated the burden. And so it comes down to what I would say, it’s the new coil clashes. It’s Pipe VS Bruce Church, it’s a 1970 case, which says, you know, listen: the states have two options. Option A and option B. Option A is the biggest burden in the history of interstate commerce. Trying to enforce the tax log. It’s 4 million or 5 million sellers, 38% of whom are in China. We’ll never ever care about tax compliance. And potentially put a lot of businesses out of business. And oh, by the way, I think it was Cynthia Stine told me, she refers Amazon from women owned business perspective as the great equalizer for women on businesses. Let’s shut that whole thing down. Or, and by the way, there’s 3% effective at best. Or the alternative is zero burdens under state commerce at 100% compliance by the state. They get all the money they want. All we’re saying is sellers, do that. Do B. And the constitution of the United States and Pipe VS Bruce Church would say “Absolutely, you have to do that.” That’s not even a question, but the Supreme Court’s Wayfair decision was delivered, deliberately brought in such a way to avoid that question. I did write as a free core brief for our online merchant skill. In that case, to sort of offer that perspective. And from what my colleagues in my little state tax nerds space that I grew up in or if you’d gotten were effective, but really they designed the Wayfair case to avoid that. And so that they could misconstrue it and take the case that was about a billion dollar company, collect sales tax and turn it into this assault on small businesses across the country.
Bradley Sutton: Is there something that sellers need to do ASAP in your opinion?
Paul Rafelson: The sellers that I’ve been working with last year and a half, the ones that tend to reach out to me first were just happy to find me on. Some women aren’t–reach out to me and retain me as counsel and said, you know, “What do I do about this fire? Did we go and fight it? Do you go in and litigate?” Absolutely not! It’s a half a million to $1 million to litigate a case in California. You can’t afford it. I would be a total idiot if I was going to tell you were going to fight it in court. Are you crazy? So what we do is we strategically–we look out, we make sure it’s the right letter. We want to make sure that we’re not boring the letter that may force you to take some action, uh, device and time. You know, and that letter would be very specific. It would have some number on it, like an amount you owe and would say in a set amount of time you need to respond or else we’re going to go and get a judgment against you. Right? This letter, you know, this letter is a “comply or else.” But I have to disclose something. Typically as you cooperate with California, they would limit their look back to four years instead of six. I have been told this, some people have been told is out that it’s three years just to kind of get more people to come in. So yes, some sellers think that’s big, you know, that’s important. I mean, again, the law is not–the law is totally not on your side. There’s a lot of sellers. So again, why we want our merchant skills to take off is because of enough sellers got together, right? If 50,000 sellers came up with $100. We would be over this, the PR, the legal, we would be done. The states would look ridiculous, but it’s hard to get that. But in the meantime, yeah, well you know, three years is better than six years. It’s a hundred, 200,000. I know sellers who have spent over a million dollars on backpacks in California. And I’ll tell you something, I’m going to, I want those cases cause I’m going to get their money back. I really do. I think this is disgusting. This is a bullying tactic in my opinion. This is my personal opinion. Again, there’s a lot that goes into advising a business. So I have to be very clear. I am not taking your advice. I don’t know what to think about your business and there’s a lot of reasons why you might want to actually get involved with California. Most of the time, I tend to–we tend not to go there, but I mean there are considerations and so without knowing that this claim, yeah.
Bradley Sutton: Yeah, of course.
Paul Rafelson: This is my–I do teach a lot of course on this stuff. So if you were sitting in my classroom when I was teaching the class, this issue came up or this was a question, this would be the discussion we’ll be having. This is informative. Yeah. I mean this is total nonsense and you’re basically being threatened with an “or else” statement. So yeah, you can come in and comply, but back to my original point: the sellers who seem to be doing the best are the ones that just like I said, strategically ignore it. Right. Look for that letter. You know, is this the right one? You know, learning what letters to look to for that tell you that you’ve got to do something versus ones with this sort of maybe language. So, if you may get assessed. My favorite was a seller–two sellers contacted me because they got language saying they were committing a felony. Guys, you’re not committing a felony. This isn’t California. They’re not. This isn’t like the government’s peanut grand jury. This isn’t a criminal matter. California is a creditor. Right? If somebody said to you, they went to you and they said, “Hey, you owe me $100,000 because I shipped $100,000 inventory to you and you never paid for it and you knew it was BS. Are you going to cry and, you know, do I take it? No, you’re going to say, “Absolutely not. Prove it. Put your money where your mouth is. Go call a lawyer. Send me a letter.” It’s so ridiculous. I don’t mean to belittle what you guys are going through because I can only imagine because I’m so pissed about criminal language because this is again, as somebody who actually studies this area of constitutional law, this is one of the biggest, outside of civil rights, this is one of the biggest, most massive violations of constitutional rights. This country was founded on tax tyranny and, here it is.
Bradley Sutton: Yeah. So. What would you say is that we only got time for one more question. So like what would you say is the thing that irks you most? Like not from a seller’s viewpoint, but you see other “tax professionals,” or somebody spreading misinformation. What would you, I know there’s probably, you could probably go on for an hour talking about it, but what is the number one thing that really gets under your skin?
Paul Rafelson: There’s a number of those who read, you know, blog-level stuff about physical presence and Nexus–you guys can read it too, and they are not offering anything profound. They are out of their element. They should not be doing what they’re doing, not realizing that you’re just not qualified. You’re not a state tax litigator. You’re not even a lawyer. And some of you are not even CPAs. You should not be advising. Certainly, don’t come challenging me. I do talk to litigators like I’m a 15-year person. I have 30-year lawyers that taught me what I know do good for them and make sure that I’m not as overly emotional biases as I sound. I do want to check myself because it’s a rookie mistake for a lawyer not to do that. Secondly, that they’d say things like, “I talked to an auditor and the auditor told me this is not going away.” Like I care what an auditor said. You know, auditors are wrong all the time. I mean, that was me, I mean, if auditors weren’t wrong a lot, I wouldn’t have job security when I was in the big corporate world. There wouldn’t be a whole arm, you know, a market of just these types of tax lawyers just like me who litigate. Auditors are being told what to say by Nick Maduros, the head of the CCFA, so of course, they’re gonna say it’s not going away. And also these people out there who are selling their so-called services, you know, it’s a joke. What are they going to do for you? They’re gonna register you then get you to California, you’re going to get assessed six years of back taxes and go bankrupt trying to pay them? And then what happens when the next day comes and you have no money left and that’s their best advice? And I’ll take a couple of months off. So instead of owing $20 million or whatever–instead of owing a million, which, or even half a million, $400,000, or $450,000. I mean, for a lot of sellers, that’s the end. And then what’re they going to do for you going forward, they’re going to register you. They’re gonna register you now, you got to spend $100,000 on all these things you’ve got to do you they didn’t tell you about, because they don’t practice income tax. They don’t know the law. So they just, all they do is practice sales tax form filing and then they don’t tell you all about the rest of the crap you’re gonna have to deal with. And it’s like, it just never ends. I’m so frustrated. It’s like I said to somebody, it’s like you want to go to a webinar and debates something, or a webinar, or an actual conference of business people, you know, it’s like being a neurologist with 15 years of experience and I’m debating the concussional water people and they’re better met. Their message is getting out there because they have marketing and I’m just like a person who does what I do, who trained in this. I teach it. I went to NYU, as a tax law–you know, advanced tax law. I know Native American State Tax Law, 10 people in the country probably know how to state taxation of Native American works, and I got to compete with Mr. Concussional water people over here spreading nonsense that is designed to get you to do stuff that is bad for your business. These things will hurt your business. It will hurt you personally.
Bradley Sutton: If people, I mean most of our listeners have, you know, Amazon businesses and I’m sure you know, there’s not enough information or not enough time obviously today to talk about everything. So yeah, there are tons of people who are going to have some questions. How do they reach you to get these questions answered or how can they find more information about how you’re helping sellers get to the bottom of this, all these tax issues? How can they find you?
Paul Rafelson: Sure. First of all, join my Facebook group. I closed it. Just for–cause I’m told I was supposed to do that to keep spammers out and you’re in. It’s called Amazon Seller Sales Tax Lawyer. I have another Facebook group called the Seller Central Something Legal which is for the non-tax legal questions. But for tax stuff, I created a separate group. We have about 1600 people so it’s big. Amazon Seller Sales Tax Lawyer. The discussion–it’s amazing how smart the people. That’s the part that impressed me. The level of discussion we’re having about the commerce clause. It’s so weird that like non-lawyers are having very intelligent discussions about common supplies and defending, you know, it’s interesting. The other way is by the law firm is Francissen Rafelson Schick, or the easy that’s gonna get to us is ecomattorneys.com. And then, of course, you know, if any, if nothing else, you know, join the Online Merchant Guild. You know, we have our levels, we hope people understand that you know, the reason why he might be asking the seller for $10,000 is because they probably have $1 million to lose and they’re facing a quarter million to half a million dollar litigation bill. $10,000 probably a bargain. But at the end of the day, we just want you to join and if you join at a hundred or you don’t have to like, I will never know. We don’t want to deal with. I make a point not to ever–people say, “Oh, did my friend join?” I don’t know. Because your privacy is so paramount. I never want to look at the list of who joined. I just used the mail, the mass mailing list. I never want to know, and that makes sure I don’t ever ask them to say something. Oh yeah, you referred to a person. Thanks for that. I say thanks for that. I never admitted–
Bradley Sutton: So, what’s the website again for that?
Paul Rafelson: Onlinemerchantsguild.org. Please join that and nothing else. It is a volunteer organization and we have some great California lawyers working with us right now on the ground. And I just retained a lobbying firm because now that marketplace legislations are in play in California, we need to go in for the first time ever have our voice heard and lobby so that the language that is included in that marketplace legislation sends an exemption for sellers. We’re just sort of, it says that retroactivity includes FBA sellers and we have the treasurer of California and used to be the head of sales tax on our side. I was able to bring Fiona into this because I know Fiona from my corporate days. She has a fair and very business focused person and she’s now become the treasurer moving on from the sales tax department in California and she is very, very pro seller. And does not want to see our community get hurt and understands who we are. So we’ve got a lot of great stuff going on. Onlinemerchantsskills.org. Join, check it out. We have an FAQ that talks about all the tax stuff. That’d be just talking up way more detail. And that, and yeah, please do.
Bradley Sutton: All right, well thank you very much, Paul, for joining us. This is very timely information for sellers as this is on their mind and hopefully, if they have more questions, they’ll be able to contact you through one of those websites. Thank you again for coming on and if something big happens in the future that we’re going to need your help on, for sure we’re going to reach out to you so that you can come back on. But thank you for your time. And we’ll see you in your Facebook group or in the Online Merchant Guild. Thanks a lot, Paul, we’ll see you later.
Have more questions regarding state taxes on Amazon sellers and the notion of Nexus? Let us know in the comments below!