Update, 9.28.2017 – Rhode Island is now participating in the marketplace seller amnesty program.
The tax amnesty program for online marketplace sellers that began Aug. 17, 2017, will terminate in less than one month, on Oct. 17, 2017. What does this mean for you?
What is the marketplace seller tax amnesty program?
The online marketplace seller voluntary disclosure initiative is a unique opportunity for qualifying online marketplace sellers (e.g., Fulfillment by Amazon, or FBA, sellers) to erase back income and franchise and/or sales and use tax liability in participating states. It’s open only to third-party online marketplace sellers who have inventory in a participating state(s) and haven’t registered to do business there.
Washington, D.C., and 23 states are participating in the program, which is being coordinated by the Multistate Tax Commission (MTC) Nexus Program.
Alabama, Arkansas, Connecticut, Florida, Idaho, Iowa, Kansas, Kentucky, Louisiana, Missouri, New Jersey, North Carolina, Oklahoma, South Dakota, Tennessee, Texas, Utah, and Vermont are waiving all applicable back taxes and penalties for successful applicants. Colorado1, Massachusetts 2, Minnesota 3, Nebraska4, Washington, D.C.5, and Wisconsin6 are offering more limited amnesty. All participating states require businesses accepted into the program to register and comply with tax laws by Dec. 1, 2017.
What’s happened so far, and what does it mean for online sellers?
The MTC is receiving applications from marketplace sellers every day. Taxpayers choose which states to apply to and the type of tax relief to seek: sales/use tax, income/franchise tax, or both. The MTC won’t disclose an applicant’s identity to a state until both parties (the state and the business) sign the voluntary disclosure agreement, and applications may be withdrawn at any time prior to the execution of the voluntary disclosure agreement. Taxpayers accepted into the program in a state who comply with applicable tax laws moving forward can market and sell to consumers in that state without fear of audit.
Having a physical presence in a state usually gives a business nexus, the obligation to collect and remit taxes in that state. However, states generally haven’t held businesses liable for tax if their only connection to the state is the presence of inventory in a marketplace provider’s warehouse or fulfillment center. That’s likely to change, especially for states participating in the marketplace seller tax amnesty program. In most states, sales tax revenue has declined with the growth of ecommerce; lawmakers see a potential cash cow in marketplace sales, which topped $1 trillion nationwide in 2016.
In fact, South Carolina is now suing Amazon for uncollected tax on its marketplace sales. Amazon does collect tax on some marketplace sales, but only if the seller requests the service.
How can online sellers engage before the deadline?
Taxpayers wishing to participate in the tax amnesty program must file an application with the MTC by Oct. 17. The sooner an application is filed, the more likely the applicant will be ready to collect and remit applicable taxes by Dec. 1. Applications may be filed online, or downloaded as a PDF and mailed to Multistate Voluntary Disclosure Program staff.
However, this is not a decision to make lightly. Taxpayers that have been granted amnesty in a state must collect and file all applicable taxes in that state starting Dec. 1 (for income/franchise tax, liability starts Jan. 1, 2017). This could create a compliance burden, especially for businesses that manage taxes manually.
It’s imperative that you educate yourself about the pros and cons of this program. More details are available on the MTC Online Marketplace Seller Voluntary Disclosure Initiative webpage. The Avalara Resource Center on Sales Tax Amnesty is another good source of information: It provides a list of sales and use tax experts who can advise businesses on this matter.
What happens if I don’t participate?
There’s a chance you can stay the course and continue not complying with state tax laws without being discovered by state auditors. However, participating states have suggested they’ll crack down on noncompliant marketplace sellers once the tax amnesty program concludes. If you’re audited and found liable, you’ll owe back taxes, interest, and penalties.
According to Diane Yetter of YETTER Tax and the Sales Tax Institute, “States are using the same tools that marketplace sellers use to find their competitors and are tracking down sellers to audit. And when they find you, they will assess back taxes to the date your inventory arrived at the warehouse, which could be years in some cases.”
Are there other opportunities for online sellers to limit tax liability?
The MTC tax amnesty program offers a rare chance for non-collecting retailers. This is only the second time in United States’ history that multiple states have banded together to waive back tax liability for businesses.
That said, many states do offer their own voluntary disclosure programs (VDP) to encourage non-collecting businesses to comply with tax laws. Some, like Rhode Island and Washington, have ongoing programs. Others, like New Jersey and Oklahoma, periodically offer limited, one-time VDPs to encourage voluntary remittance.
Unlike the MTC voluntary disclosure initiative for online marketplace sellers, however, most state VDPs require full payment of taxes owed during the state’s look-back period. They usually waive some or all penalties and interest due.
With just a few weeks left before the conclusion of the marketplace seller tax amnesty program, sellers have little time to weigh their options. You can find more information in our blog, at the Avalara Sales Tax Amnesty Resource Center, and from the MTC.
1 Colorado will not assess any back liability for uncollected sales/use tax, and it agrees not to assess income tax for the period prior to its four-year look-back period. Income tax due for the tax years included in its four-year look-back period, plus interest, must be paid.
2 Massachusetts is maintaining a look-back period. Details to be determined.
3 Minnesota is maintaining a look-back period. Details to be determined.
4 Nebraska will consider waiving back sales/use tax and income tax liability.
5 Washington, D.C., will consider a shorter look-back period than its typical three years for both sales/use and income/franchise tax.
6 Wisconsin will require businesses to remit unpaid sales/use and income/franchise tax plus interest going back to Jan. 1, 2015.