The Good and Bad News for Amazon Sellers That Have Received CDTFA Notices
In 2019, the California Department of Tax and Fee Administration (CDTFA) sent Amazon a formal legal demand for seller information, kicking off a wave of enforcement actions against out-of-state Amazon and FBA sellers. This post breaks down what happened, what has changed since then – including California’s marketplace facilitator law – and what options are available if you’re an Amazon seller trying to get into compliance with California.
Key Takeaways
- In 2019, Amazon disclosed seller information to California tax authorities after being served with a legal demand letter from the CDTFA.
- This post explains the 2019 CDTFA enforcement action against Amazon sellers and what has changed since then.
- Since October 1, 2019, California’s Marketplace Facilitator Act has required Amazon to collect and remit sales tax on behalf of its third-party sellers, addressing part of the original problem described below.
Background: The 2019 CDTFA Demand and Amazon’s Disclosure
The CDTFA’s demand required Amazon to disclose seller information by a deadline in November 2019, and Amazon notified its sellers by email once it decided to comply. In the years since, we’ve talked with many Amazon sellers about this demand, and we’ve found a lot of confusion about what the CDTFA is actually after and how the resulting collection process works.
Here’s the short version: coming into compliance with California is flexible, and sellers who act now can address it on their own terms rather than waiting for the state to come to them. Our firm has been handling California sales tax audits for over 10 years and is well versed in how to handle them.
What This Means for Amazon Sellers Today
At the time, a lot of sellers assumed improperly that Amazon was collecting and remitting sales tax on their behalf. Historically, Amazon did not have an obligation, at least in California, to do that for its sellers, and through its FBA platform, the company created a situation in which sellers established nexus in California without help collecting or remitting the resulting tax. That has since changed: beginning October 1, 2019, California’s Marketplace Facilitator Act (AB 147) requires Amazon, as a marketplace facilitator, to collect, report, and remit California sales tax on behalf of its third-party sellers for sales made through its marketplace. As a result, most FBA sellers whose California sales go exclusively through Amazon are no longer required to separately collect and remit sales tax on those sales. Older unpaid liabilities from before October 2019, and other issues such as state income tax nexus, can still apply.
Voluntary Disclosure Program and Managed Audit Program Options
California is unfortunately not offering a reprieve to Amazon sellers, but sellers can catch a break through the traditional programs that already exist. One is called the Voluntary Disclosure Program (formerly known as the Voluntary Compliance Program) and one is called the Managed Audit Program.
The Voluntary Disclosure Program generally limits CDTFA’s look back period to three years and can provide penalty relief, but it is only available to sellers who have not already been contacted by CDTFA regarding their California activities — sellers who have received a CDTFA notice may no longer qualify. Under the Managed Audit Program (Rev. & Tax. Code § 7076 et seq.), a qualifying taxpayer self-reviews its own records under CDTFA’s direction, and upon completion, interest on any unpaid liability is computed at half the rate that would otherwise apply for the audit period. Whether or not a seller qualifies for either program depends on the facts of their situation.
Economic Nexus and the Wayfair Decision
This problem isn’t unique to California. A number of states have pressured Amazon and other marketplaces to account for sales conducted within their borders.
The turning point was Wayfair v. South Dakota. The Supreme Court upheld South Dakota’s economic nexus law – a sales-based standard – in place of the traditional physical-presence test. That decision opened the door for California and other states to pursue out-of-state sellers, including Amazon sellers, based on economic activity alone.
Under California’s current rule, an out-of-state seller with more than $500,000 in combined sales of tangible merchandise delivered into California in the preceding or current calendar year has economic nexus and may have a registration requirement, even without a physical presence in the state.
This remains a live issue for Amazon and FBA sellers: no court decision since Wayfair has narrowed the rule, and Amazon’s practice of spreading inventory across warehouses in many states has created potential nexus wherever those warehouses are located.
If you’re an Amazon seller who hasn’t been remitting California sales tax, there’s a path to fix this proactively — but the clock matters. California already has your information from Amazon’s disclosure, and it’s only a matter of time before the state runs your EIN against its records. Now is the time to minimize your exposure for past sales while coming into compliance.
Amazon Seller Disclosure to the California Department of Tax and Fee Administration
Many Amazon sellers have received an email notification from Amazon with the subject “Disclosure to the California Department of Tax and Fee Administration,” stating that Amazon has been served with a legal demand from the California Department of Tax and Fee Administration (CDTFA), and that the company was required to turn over all Amazon seller information and any tax identification numbers associated with those sellers.
If you received this email, the first move is not to panic and not to respond immediately. Even sellers who were clearly out of compliance and had not been remitting sales tax typically have manageable ways to resolve it. Talk to a tax professional before you respond to the CDTFA, so you understand what to disclose and what not to volunteer.
What Is Amazon Seller Nexus in California?
The CDTFA’s demand to Amazon is part of a broader trend: California has grown increasingly aggressive toward out-of-state Amazon sellers who created nexus simply by storing inventory in Amazon’s in-state fulfillment warehouses through the FBA program.
That exposure isn’t limited to sales tax. Once a seller has established nexus with California, there can also be state income tax consequences – a track that’s easy to overlook when a CDTFA notice only addresses sales tax. Ignorance of the nexus rules isn’t a valid defense, and a lot of sellers who moved products through Amazon’s FBA network don’t realize they created nexus with California in the process.
What Will the CDTFA Do With Amazon Seller Information?
After the CDTFA collects seller tax information disclosed by Amazon, the Department will likely use the taxpayer identification numbers and cross-reference those numbers in its taxpayer database to see which seller entities have been filing California sales tax returns, and which entities have not been filing California sales tax returns.
Once the CDTFA is able to verify the Amazon seller information, CDTFA compliance staff – such as its Out-of-State Office or its Statewide Compliance & Outreach Program (SCOP) – will send a letter to seller entities requesting information about their businesses. This request will include a detailed questionnaire with instructions to return it to CDTFA compliance representatives within a specified period of time, usually 30 days.
The goal of this outreach is to get people who are outside of California to register their business with the state so that they can begin paying sales and use tax. The other goal is to determine when Amazon sellers might have established nexus with California and then assert a back filing requirement.
If you receive this questionnaire from the CDTFA, understand that you are now under an examination by the CDTFA. This is what we will call “compliance examination.”
The first thing you should do is reach out either to your CPA or to a qualified tax expert who can help you answer the CDTFA’s questionnaire. The most important thing at this point is to respond appropriately and control the scope of information that is provided to the state in respect to your business.
Amazon Seller CDTFA Compliance Requirements
To come into compliance with California’s state tax authorities, Amazon sellers will be required to file all of their back sales tax returns and pay interest and penalties associated with these filings. At that point, the CDTFA’s collections department will take control.
If you discover you owe taxes to the State of California, you need to understand what your sales tax liability is and how far back it extends. Plotting your next move carefully – understanding the process before you respond to California – matters more than moving fast.
Whether you’re already in compliance, facing an audit, or already in collections, there are ways to manage your exposure and defend your position at each stage. The liability will not go away on its own, and this is likely just the first step in California’s broader push against out-of-state Amazon sellers.
We’ve spent years helping Amazon and other online sellers get into compliance with California’s sales tax and income tax rules. If you have questions, contact our office to schedule a consultation – we’ll look at your business, assess your California nexus exposure, and help you build a strategy to address it.
Facing a California Sales Tax Audit?
CDTFA audits can result in significant assessments – especially if records are incomplete. The direction of the audit is largely set by how you respond to the initial document request. If you’re at any stage of a sales tax audit, a brief review can clarify what you’re facing.
Discuss My Sales Tax Audit → Or call: (619) 378-3138
