There is a new scheduled amnesty program that may help businesses correct overlooked tax obligations if they have been selling products and services in other states. Many companies engage in multi-state sales through an intermediary, like Amazon, eBay and similar organizations called “fulfillment services.” The fulfillment centers place a seller’s inventory in warehouses in multiple states to expedite shipping, but in the process, create nexus for the seller in those states. As such, the sellers have an obligation to collect sales tax and pay income tax. Unfortunately, unpaid taxes may incur penalties and interest. Now there may be a short time window to correct these errors and avoid interest and penalties.
On Monday, July 31, the nexus committee of the Multistate Tax Commission (MTC) approved the MTC to participate in a multistate sales tax amnesty program for third-party sellers whose only nexus with a state is the use of fulfillment services offered by third-party marketplaces. The MTC is an intergovernmental state tax agency working on behalf of states and taxpayers to facilitate the equitable and efficient administration of state tax laws that apply to multistate and multinational enterprises.
This amnesty program is open to all online marketplace sellers, not just fulfillment by Amazon (FBA) sellers. In this context, marketplace sellers are companies that use a marketplace provider like Amazon or eBay to fulfill orders on their behalf. This voluntary disclosure program offers online marketplace sellers a chance to come forward if they haven’t been collecting, and remitting taxes (sales/use and income/franchise tax) in states where they should.
Generally, having a physical presence, such as inventory, in a state triggers nexus, an obligation to collect sales and use tax on behalf of that state. And as these FBA type arrangements have expanded over recent years, more states have become focused on the myriad businesses that sell through third-party marketplaces. With more than a trillion dollars in annual marketplace sales up for grabs, states are keen to collect revenue from these transactions.
How this program works
This amnesty program is specific to online marketplace sellers and is being spearheaded by the Nexus Committee of the MTC.
The amnesty application period will be open from August 17 through October 17, 2017. This program is taking place soon, so companies who want to take advantage of this program should act quickly. To benefit from this program, companies with potentially outstanding tax liabilities must use the MTC’s voluntary disclosure agreement (VDA). States who participate in the program intend to forgive back sales taxes, with varying degrees of forgiveness of income taxes. The goal of this amnesty program is to help online sellers (FBA sellers) become sales and income tax compliant. Under this program, these sellers would not have to face the fines and penalties that they would otherwise face if coming forward any other time of the year.
The states that have currently committed to this program include: Alabama, Arkansas, Colorado, Connecticut, Idaho, Kansas, Kentucky, Louisiana, Nebraska, New Jersey, Oklahoma, South Dakota, Texas, Utah and Vermont. But stay tuned for updates to this list. If a company registers for a sales tax permit and becomes sales tax compliant in one of the above states during the amnesty period, the company will not be subject to a sales tax liability “look back,” or any associated fine and penalties.
Sounds Great- right?
Yes and no. Amnesty programs always sound wonderful on their face. And this one actually waives the taxes due, plus penalties and interest (in most cases).
However, if you participate, you will now need to begin collecting and remitting use tax (and paying income tax) in 20+ states. A quick analysis of a company’s prior sales and future anticipated sales might find that the actual liability exposure in some of those 20 states may be negligible. So entering into the amnesty may add a significant administrative burden on smaller companies.
What if I don’t Participate?
Companies engaging in fulfillment services may choose not to participate in the VDA program. What are their options?
- Carry on and continue to do nothing in certain states.
- Analyze the largest exposure states for your company, and engage directly in VDA with those states.
- Register retroactively and limit lookback only to when you began doing business.
- Register prospectively (and run some risk of a state auditing and finding retroactive exposure).
We Can Help
As we assist our clients, we always recommend an overall evaluation of a client’s individual fact pattern to determine the best next steps. Don’t do something quickly and in a vacuum. Right now, the right answer might be to participate in this program. Or it might be to do something else too!
In any case, time is of the essence, so give us a call soon if you think you have this issue, and we can help you evaluate your options!