Who does an Amazon seller pay State Income Tax to?

Factual Questions
1

For example, take an writer who independently writes and sells her stories and books via Amazon. Every so often they send her her cut of what the sales came to, probably by deposit to a bank account. Those sales are a conglomeration of sales of the books that were bought by people in any state (and no doubt some foreign sales, too) and shipped to a variety of those states/countries, too.

Obviously it counts as income…but where?

Let’s take a specific example. MarySue wrote an erotic novel during her covid layoff. At that time she lived in, oh, North Carolina. She had a house, car, bank accounts, paid utilities bills, went to church there, voted there, had lived there for 20+ years. Paid all the various state taxes and fees there dutifully.

She wrote the novel during 2020. She despaired of ever getting her job back, so in January 2021 she sold her house and car and closed her utility accounts, and became a nomad: she’s from a huge family, and various members of it, each in a different U.S. state, took turns hosting her for a month each in 2022 None of them charged her rent or had her pay utilities or anything beyond maybe doing some grocery shopping trips. At the start of this, she closed out her bank accounts at her old credit union and opened new ones with, say, Bank of America because she had no idea where she’d end up permanently, so wanted a bank with offices everywhere. She did nothing about officially changing her ‘residence’ beyond giving the Post Office a change of address to a mail box at one of those mail forwarding services.

Early in 2021 she did a final edit on “Mega Lust” and put it up for sale on Amazon. Improbably it became successful enough that Amazan sent her payments for that year that amounted to an even $50,000.

So…where did she earn that money for filing state taxes purposes? In NC, because that’s where she lived when she wrote it? And it’s apparently where she is still registered to vote, though she didn’t vote anywhere that year.

In whichever state she was in (lets say Oregon) when she finished the edit and uploaded it to Amazon?

In whatever state Amazon officially “lives in” because that’s who paid her?

But of course, the money came from buyers in all 50 U.S. states, exactly one thousand dollars from each state funnily enough. (We’ll ignore the foreign buyers, they can’t be that many.) Does she have to file a state tax form for one grand in each state? (I remember as a child my father still owned two houses from previous work stretches in two different states which he rented out. He cursed a lot each year as he filled out three sets of state tax forms.)

In each of the states she roomed in for whatever amount was paid her while she in that particular state?

Let’s assume she had no other income that year.

2

Except for sales tax (which Amazon collects and submits for her), the places her book is sent to or from has no bearing on state income tax. She pays state income tax (on her total income) to the state she decides to file her return in; probably the address she uses on her federal return which should be the same as the one Amazon has on file.

3

Okay…but does she just get to pick whichever state she chooses? The mail address she uses is that of the mail forwarding service, which happens to be Arizona, a state she has never so much as set a foot in. Would that fly?

Or, googling which states don’t have income taxes, aha, Tennessee! Where she did actually spend one of the months. Could she justify picking that based on having stayed with her aunt in Tennessee for August? It is, after all, one of the longest months. Would the IRS or whoever accept that as reasonable?

4

Digital nomads are advised to file in their “domicile state” - the state they lived in before starting their trek or the one they plan on eventually settling in. You can probably finagle the latter to choose a state with no income tax.

5

Generally you are taxed on all your income in the state that you are a resident of. Different states have different rules on how you obtain residency in that state as opposed to another one, which means you could theoretically be considered resident of more than one state at the same time, though in general most states are going to have rules about being resident in only the state that you are “most resident” in at any time. I don’t know every state’s laws though, so I can’t make a blanket statement on that. Note that you can change states of residency mid-year, which is always “fun” when it comes to apportioning investment income, which is taxed to the state of your residency at the time of realizing that income.*

You are also generally taxed by a state on any income that is generated by property in that state, or from business activity by an entity operating in that state. There are complex rules surrounding “nexus”, which means that you sometimes need to be careful just how much activity your business has in a certain state or else you might be on the hook to have a much more complicated tax situation. If you do have nexus in multiple states, you then need to be careful because the states might have different rules regarding how to apportion your income among the states you have nexus, which can lead to you paying state income tax on more than 100% of your federal taxable income. It could also lead you to paying less, most notably if you are active in a state without income tax of its own.

If all you’re doing is selling on Amazon, I believe that Amazon takes care of the sales tax issues for you, and you don’t have to worry about filing multiple state returns because you don’t have nexus in those other states that people are buying from, though Amazon does, which is why you pay sales tax on anything you buy from Amazon. How Amazon apportions its income from the cut it takes from you between where you live and where the buyer lives, I have no idea, and I have no desire to find out.

*California actually has a special rule for stock option income. If you are required to recognize ordinary income from the exercise of equity awards from your employer, you have to allocate some of that income to California based on your residency when you earned those awards, not when you exercise them. I don’t know if any other state has something similar.

6

You generally shouldn’t be picking states of residency after the fact. The facts should determine where you are a resident of at any point in time, though if a specific state’s revenue service proceeds with action against you, they clearly will do their best to prove you’re a resident of their state as opposed to others. As to how to use the facts to determine which state you’re a resident of, as I implied in my previous post, there could be effectively 50 sets of rules in use, though most of them are probably similar.

If you’re going to be a nomad, you should contemplate setting up your arrangements of what passes for your home base and your itinerary so that you are a resident of a state with no income tax, and that you don’t spend too much time in any one state that would make it a presumption that you’re a resident there according to that state’s rules. The best way of having residency set up in a state is to have some of your possessions stored at a place in that state, and have your permanent mailing address in that state. That might just mean stuff in self-storage in only one state, and a PO Box in that state as well, while you cruise around the rest of the country (or world) with no permanent place of abode. You don’t need to actually ever be in that state so long as the facts and circumstances are such that it’s the only place that can be said to be where you are going to eventually return to, should you ever have to stop wandering.

7

I should note that the latter means that you’re generally not taxed on by your resident state income that is apportioned to another state due to the source of that income. You also will likely get (at least in Michigan) a credit for tax paid to other states if there is more than one state that can tax the income because it doesn’t fall into the category of income that would be apportioned and was earned in one state while you’re a resident of a different state, though this will be limited to the tax that you’d pay on that income to the state giving the credit, which might be less than you actually paid.

There are also reciprocal state agreements, in which certain states agree to only have the wage income earned by residents of that state taxed by that state if it’s earned in the reciprocal state, just to simplify reporting.

That all is probably more than you ever wanted to know about multistate taxation and goes well beyond the specific question, but I hope to prevent people from coming up with “What about this?” in response and expect to get an answer. If you have any multistate taxation issues, I recommend talking to a CPA with experience in both states (if you can find one) and otherwise with one with experience in the one you’re not a resident of. I’m not going to be answering any more specific questions because I normally get paid for that kind of stuff.

8

By which I mean, “this is all I know off the top of my head, but generally when it comes to multistate taxation issues, I have to do some research, which means I’m not going to do it unless you’re a paying customer”. I don’t mean to sound rude or whatever, but this stuff is complicated, and I’m one of the people you’d pay to do the research for you, so that somewhat colors my response to any question about a specific situation.

9

No, you’re fine. And the answers you and Elmer J. Fudd gave are satisfying enough for me. I was just curious about how it works, because we have a relative who in fact is in pretty much the condition of the hypothetical. We’re not all that close (just close enough to give her a room/board for about three weeks) so I didn’t want to pry too much into her affairs.

In her case, another factor in her deciding to toss her old life out the window was a nasty divorce, and she didn’t really have any definite plans. She just wanted “to get away.” Turns out, she loves moving around, and is now talking of buying a motor home and making it a ‘permanent’ lifestyle. The first draft of “Mega Lust II” is finished (not the actual title, but a pretty actuate description) and she expects to be the new, um, Gabalden? is it? I’m thinking of the Outlander writer.

To me it sounds like a really chancy plan for life, the uncertainty would give me nightmares, but I hope everything turns out as well for her as for her heroines.

10

Which is why lawyers replying on these orts of boards specifically say “I am not your lawyer and this is not professional advice”, I assume. There’s a difference between advice “this is probably how this generally works” and “this is advice you can take to the bank” (literally). I totally understand the disclaimer - particularly when you know it would require work to ensure it’s exact, and you (and anyone) really don’t need to make that effort for a casual discussion.

I would assume that anyone who anticipates a windfall like that would automatically consider how to establish their tax-worthy residence in a no-tax state.

As a resident of Canada, I’d be curious too how it works for, say, a foreign author who sells through Amazon and makes a tidy bundle from selling all over the world. Would any sales by Amazon be considered income from USA where they are headquartered? What if I sold an article to Playboy (I hear they publish articles)?