Beware of Sales Tax Registration Scams

Key Takeaways

• There is no quick-fix solution for multistate sales tax compliance, despite what software companies advertise.
• California’s tax regulation 18 § 1569 raises a real legal question about whether Amazon — not the FBA seller — is the retailer for sales tax purposes.
• Registering in every state can trigger income tax filings and secretary-of-state registration requirements, with hidden costs that can exceed $100,000 and penalties such as Connecticut’s $300/month for non-registration with the secretary of state.
• Multistate tax law is a complex area where a tax attorney — not a software company — should provide registration guidance.

Disclaimer: This post is for informational purposes only and is not legal advice. It cannot be relied upon as legal advice for your specific situation.

The Promise vs. The Reality

Sales tax registration has become a frightening subject for eCommerce businesses, especially Amazon FBA sellers. Marketing companies disguised as sales tax experts promise that their sales tax software will eliminate the worry — but it will not, and may put sellers in a worse position later.

A tax lawyer is the only person who should be advising on sales tax consultation and registration strategy.

Why “Register Everywhere” Is Not the Right Default Advice

No tax lawyer would blindly recommend registering in every state without first understanding the specifics of a business. The law in this area is highly gray.

The Wayfair Supreme Court case is often characterized by tax software companies as a definitive loss for sellers — but that case was anything but settled. The Supreme Court refused to address several questions because the case record lacked the necessary facts. (Paul Rafelson wrote a Supreme Court brief in the Wayfair case addressing the concerns of eCommerce marketplace sellers.)

The Question of State Law: Who Is the Retailer?

Whether a seller has nexus matters less if the seller is not the retailer under state law in the first place. An analogy: Starbucks may have nexus in California, but if a pound of Starbucks coffee is sold inside a Walmart, it is Walmart’s responsibility — not Starbucks’s — to collect the sales tax. Walmart is the retailer.

California’s regulation Cal. Code Regs., tit. 18, § 1569 defines a retailer for sales tax purposes:

A person who has possession of property owned by another, and also the power to cause title to that property to be transferred to a third person without any further action on the part of its owner, and who exercises such power, is a retailer when the party to whom title is transferred is a consumer. Tax applies to his gross receipts from such a sale.

That description fits exactly what Amazon does for FBA sellers. It raises a legitimate question about whether sales tax registration in California is actually the seller’s responsibility — or Amazon’s. This does not mean sellers can ignore sales tax obligations, but it does demonstrate that this is a gray area, contrary to how software companies present it.

The Hidden Costs of Registering Everywhere

Tax software companies focus on sales tax registration but rarely discuss what registering triggers:

Income Tax Filings

Registering in every state Amazon has an FBA warehouse means filing income tax returns for the business — and personally — in each of those states (Illinois, Connecticut, New York, and others). Accounting fees add up quickly. The total cost of tax compliance can go from the advertised “$19/month or even free” to over $100,000.

Secretary of State Registration

Many states require a separate registration with the Secretary of State alongside sales tax registration. Failing to do so can be costly. In Connecticut, the penalty for not registering with the Secretary of State is $300 per month.

Software companies generally do not disclose the cost of initial Secretary-of-State registration, the cost of annual filings, or the income tax exposure.

How to Make an Informed Decision

This post is not advising sellers to skip registration. It is advising that sellers be aware of the full picture before making the decision — so they don’t end up in a worse situation later.

The right source for this advice is a tax lawyer who specializes in eCommerce and sales tax registration and understands the nuances of selling on Amazon. As the post puts it: “You wouldn’t go to a nurse for brain surgery. Why would you go to a software company for advice on an area of law as complex as multi-jurisdictional tax law?”

About Paul S. Rafelson

Paul has been litigating state tax cases for over 13 years, including as in-house state tax litigator for Microsoft, Walmart, and General Electric. He has seen the full burden of multi-state tax compliance at companies that have managed it for decades, and is a small-business advocate who understands the threat these burdens pose to growing online businesses.

He has faced state tax administrators and the Multistate Tax Commission asserting tax law interpretations he believes to be incorrect, in nearly every state. Paul also teaches a state tax constitutional law course at Pace University School of Law in New York.

Credentials:

• J.D. and M.B.A. from Villanova University
• LL.M. in Taxation from New York University
• Was a retail arbitrage seller while in law school, before FBA existed

Paul has been featured regularly in major media publications about eCommerce.

Frequently Asked Questions

Do Amazon FBA sellers need to register for sales tax in every state?

Not necessarily. Multistate sales tax law is a gray area, and the answer depends on the specifics of the business. The fact that Amazon controls and ships the inventory raises legal questions about whether the seller — or Amazon — is the retailer under state law in some states.

Are sales tax software services like TaxJar and Avalara enough?

These services handle the mechanics of registration and filing, but they are not tax lawyers and do not assess whether a seller is legally required to register in a given state. Multistate tax law is complex enough that a tax attorney consultation is recommended before subscribing to a software solution.

What does it actually cost to register in every state?

Beyond the advertised software fee, sellers face state-by-state income tax filings, accounting fees, and Secretary-of-State registrations. Total compliance costs can exceed $100,000.

What happens if I don’t register with a state’s Secretary of State?

Penalties vary by state. Connecticut imposes a $300-per-month penalty for failing to register with the Secretary of State.

What was the Wayfair case really about?

The Wayfair Supreme Court case is often described as a definitive ruling that all online sellers must register everywhere. In reality, the Court declined to address several key questions because the case record lacked the necessary facts. Significant uncertainty remains.