The Multistate Tax Commission (MTC) National Nexus Program is sponsoring the Online Marketplace
Seller Voluntary Disclosure Initiative. This initiative gives online sellers an opportunity to get relief from
back sales and income taxes. Currently 24 states are participating in the initiative and tax relief is
available in most of the participating states.
Important: There is a short window to apply. The MTC is accepting disclosure applications only
between August 17, 2017 and October 17, 2017. Be aware that in some cases states can take 4-8 weeks
to process your application so we recommend applying as early as possible.
This Voluntary Disclosure Initiative was created in response to concerns raised by many online sellers,
especially Amazon fba (fulfillment by amazon) sellers, over what they believe to be unfair state sales and
income tax rules. Of major concern is the rule that requires certain online sellers to register and collect
sales tax in states where they may be using a third-party fulfillment center but do not have any physical
presence, in the classical sense. Use of a third-party fulfillment center is considered to create nexus and
opens these sellers up to state sales and income tax liability.
Determining the best course of action as it relates to this initiative may not be as simple as it first
appears as there are many factors to consider. These factors include which states you sell into, how
nexus is determined in those states, the dollar volume of your sales in each state and more. As soon as
the program was announced we began receiving questions and inquiries. To help clarify the program
and answer your questions, I am providing the following thoughts and industry best practice advice
around sales tax and this amnesty program as it applies to online sellers.
Sales tax strategy – In general, it pays to be conservative when considering your potential state sales tax
exposure. The cost of sales tax compliance is relatively low vs. the potential high cost of noncompliance.
The exception is if you are being auditing by the state. In that case you want to take a more aggressive
position to mitigate your potential back sales tax liability. But this is really a last resort since you have
very few options at this point.
Example. Let’s say you were supposed to collect 8% in California sales tax on $100,000 in sales
over a 4-year period and you are being audited. You would owe the state $8k x 4 years =
$32,000 not including penalties and interest. Most likely you would have to pay this out of your
own pocket since it would be highly unlikely you could go back to your customers and ask them
to pay the sales tax you never collected. If you add penalties and interest on top of the back
taxes you could be looking at $40k – $60k in total owed, typically due in one lump sum. If you
multiple this by the number of additional states that you sell into you can see very quickly that
your tax liability could be huge. Additionally, this liability attaches personally to directors,
officers and potential members of your business. So even if you claim bankruptcy, the sales tax
liability would still be owed. Also, if you don’t file sales tax returns in a particular state there is
no statute of limitations. This means the state can come after you for back taxes indefinitely.
Contrast this with collecting the sales tax from the beginning. Your customers would have paid
the sales tax up front and you would only have to remit the taxes. Your expenses would be
limited to the cost of filing sales tax returns and other compliance related costs – which are
relatively small compared to paying the back sales taxes plus penalties and interest. Back sales
tax liability can easily put a company out of business so tread with caution here. In the case of
My Pillow they settled with state of New York for $1.1M in back sales taxes and penalties.
The tide has turned and now is potentially a great time to get compliant. States are losing out on sales
tax revenue as more and more commerce is done online. States are quickly catching on that they need
to be aggressive in collecting sales taxes from online sellers if they want to stay afloat. Just 3 years ago
state sales tax audits for Amazon fba sellers were virtually unheard of. Today, states are starting to audit
online sellers more and more and we believe this will only continue.
The most aggressive states – Washington, California, Pennsylvania
In many cases these states are finding noncompliant online sellers by making a purchase on Amazon and
checking to see if the seller is collecting state tax in their shopping cart. If they are, then they typically
abandon the shopping cart and move on to the next seller. If they are not collecting sales tax, they will
try to figure out who the seller is. The best way to counter this is to collect sales tax in the states where
you believe you have sales tax nexus.
Nexus defined
To understand your sales and state income tax obligations as an online seller, it is critical that you first
understand where you have nexus. You likely have nexus if you have a link or a connection to a state.
Unfortunately, the definition of nexus and what is considered a taxable product or service can vary from
state to state. There are also differences in the definition of nexus as related to sales tax versus state
income tax or franchise tax. Following are a few examples of situations that may create nexus if your
online business engages in any of these within a particular state:
An employee of your company resides in that state
An agent or someone selling for you or helping you maintain a marketplace in that state. This
could be an employee who does sales, and independent contractor or a manufacturing rep who
even represents other companies.
A company sales person travels to that state
Your company participates in tradeshows in that state
Your company does substantial advertising within a state
Affiliates – Click through nexus. If you have affiliates located in those states who refer business
to you.
And of course, if your business has a warehouse or other physical presence. For many Amazon
fba sellers nexus is created when their inventory is stored in an Amazon warehouse. The date
your inventory first lands in a warehouse will typically be the beginning of sales tax nexus in that
state, assuming you don’t have any other type of nexus generating activities.
The rules to determine nexus for sales tax are typically harder to reach vs. income tax. So, if you have
nexus for sales tax you most likely have nexus for state income tax.
What about the argument that if I sell on Amazon fba I still don’t really have nexus in the state?
Virtually all states, with the exception of New York, have weighed in on this argument and they believe
having your property stored in a third-party warehouse creates nexus for sales tax purposes in their
state.
States have 2 factors from case law backing them up:
1. Does the company in that state act as your agent – helping you establish or maintain a
marketplace?
2. Property located in the state
It’s our recommendation to assume all states with Amazon warehouses will potentially create nexus
unless you hear something directly from the state to the contrary.
State income tax nexus strategy
In many cases people forget that if they register for sales tax in a state they will most likely have to
register their business entity (in the case of an LLC or Corp for example) in that state and must complete
state income tax returns. In the case of a partnership or other pass through entities there may be state
K1’s which will need to be included in one’s personal income tax returns as well.
Example: Let’s say you are required to file state income tax returns for your LLC taxed as a
partnership in 10 states. It’s possible you could also receive 10 different state K1’s causing you
to also file 10 state tax returns with your individual tax return and pay taxes in those states as
well.
State income tax compliance is typically more expensive than sales tax compliance by itself. You’ll want
to speak with your tax advisor to understand what the additional fees will be for filing multiple state
income tax returns.
In some cases, it could make sense to file for sales tax but not income tax in a state. This will depend
upon how large the state tax exposure would be to reduce filing fees.
Currently, there are 5 states that automatically register you for income taxes as well as sales tax when
you register for a sales tax permit in those states. These are;
Washington
Texas
Illinois
Kentucky
South Carolina
Sales-use tax trap – Colorado and Vermont
Colorado and Vermont recently passed a new law “Amazon Tax” for online sellers who sell products into
their states but do not collect sales tax. If you do not collect sales tax in their state the law stipulates
that you are to inform the customer at checkout that they are responsible for remitting use tax to the
state. If you fail to do this, there is a $5 penalty per occurrence. Additionally, on 1/31 of each year you
are required to mail a notice to customers who purchased $500 or more in combined sales for the year
and remind them to remit use tax. Lastly, the states want you to send them your customer list. We feel
this law is unfair but it is currently the law until repealed. Some sellers are registering for sales tax in
these states just to avoid the hassle of sending out notices.
Sales tax amnesty program strategy
In general, you should have a solid strategy in place to help determine when and where you apply for
the sales tax amnesty program. Without a well thought out strategy you could end up creating a
potential nightmare for yourself.
Steps to consider
1. Sales tax liability – it’s important to get an idea of what you potentially owe to each state you
have nexus in. You can run a report on Seller Central under Fulfillment Reports or use a tool like
TaxJar to estimate your potential sales tax liability. Be sure to figure out if any exemption for
what you sell is offered in that state. Groceries, supplements and clothing do have some
exemptions in various states.
2. Reference amnesty states – Once you have your list, you’ll want to cross reference with the
states that currently offer amnesty.
You can view the list and more information on the program here:
http://www.mtc.gov/Nexus-Program/Online- Marketplace-Seller- Initiative
3. Consider the voluntary disclosure application (VDA) for those states – the application can be
completed on the MTC website.
Here are some pitfalls to look out for:
No prior contact with state – VDA works best in cases where you have not registered in that state
and/or they have not contacted you in the past. Under these circumstances, if you submit the VDA, you
could wind up getting your application denied and having to pay back taxes and penalties.
Online market place only – Amnesty only applies to nexus created by an online marketplace such as
Amazon or other marketplaces. If you have other nexus generating activates in the state such as sales
people or affiliates then this would be grounds for denial of your application.
Make sure states offer full amnesty– Some states offer full amnesty (back taxes owed plus penalties)
while others only offer amnesty on penalties. Make sure you know the state specifics before you apply.
Be compliant going forward – Once you get your application accepted you’ll want to setup a sales tax
account in the state by the deadline and, on a go forward basis, pay and remit all sales tax.
State income tax compliance– All states except for North Carolina will require you to register and file
both state income tax and sales tax returns going forward. They will not allow you to cherry pick one
over the other.
Collect sales tax on all channels – Let’s say you start collecting in the state of Florida. You will also need
to make sure you collect sales tax from all sales channels (i.e. website, Ebay, Etsy, Amazon). Nexus is
created for the business , not just one channel.
Materiality – You may decide it doesn’t make sense to collect sales tax or be compliant in all states
depending upon what your sales are in those states. For example, if you make $500 sales in one state,
the cost of collecting the sales tax and filing state tax returns would cost more than cost of back taxes
and penalties so you’ll want to exercise good judgement here.
Collect going forward – In certain cases you may want to collect sales tax going forward to stop the
bleeding. This may make sense in states that don’t offer a VDA. Just keep in mind that if you do have
past sales tax exposure the state could still, in theory, come to collect back taxes later.
Online application, exercise caution – You’ll want to exercise caution when answering questions on the
online amnesty application. If you provide incorrect responses you could automatically disqualify
yourself from this program. We highly recommend you seek professional advice when it comes to
approaching the amnesty program. Also, it is generally not a good idea to have yourself listed as the
contact if you want to remain anonymous.
Bottom Line:
We recommend online Amazon (FBA) sellers consider 8 states for the MTC Online Seller Sales Tax
Amnesty Program:
Connecticut
Florida
Kansas
Kentucky
New Jersey
North Carolina
Tennessee
Texas
Remember, you’ll need to act fast if you want to participate in this program. Applications are being
accepted only through October 17, 2017. Once your application is accepted you must register no later
than December 1, 2017 and be compliant going forward with all sales tax collection and filing. We
suspect that states will start stepping up their enforcement after this program. The classic carrot and
stick approach.
** Disclaimer, this blog post should not be construed as actual tax advice. We recommend you consult
with your tax advisor about how to best address your particular situation **