Updated 10.19.17 to reflect the new deadline for the multistate sales tax amnesty program.

Massachusetts is boldly going where few states have gone before: after Amazon marketplace sellers. Its mission: increase tax collections from internet sales.

Fulfillment by Amazon (FBA) sellers and other third-party vendors selling via online marketplaces are a little like dark matter; states know they’re out there but can’t easily prove it. There are compelling reasons for them to do so. If states could identify with certainty the sellers that store goods in marketplace provider warehouses, they could significantly increase their sales tax collections.

The payoff potential is huge. Third-party sales now account for more than 50 percent of Amazon’s sales; “over 2 million sellers” now use Amazon’s marketplace platform to sell more than 1 billion items. And Amazon is just one marketplace provider. According to Internet Retailer, marketplace sales topped $1 trillion in 2016. States missing out on even a fraction of that tax revenue feel it. Overall, state sales tax revenue is declining as consumer habits shift from brick-and-mortar stores (that collect tax on all taxable sales) toward online stores (that may not).

But it’s difficult for state tax departments to increase online sales tax revenue without better information, and their existing enforcement systems aren’t up to the task — they grew out of the brick-and-mortar era. State audit departments currently function like the intrepid Starship Enterprise, boldly but haphazardly searching the vast internet for non-compliant vendors.

It’s in the states’ best interest to come up with a better way.

Massachusetts to Amazon: Identify marketplace sellers with inventory in Massachusetts

On Aug. 31, 2017, the Massachusetts Department of Revenue presented Amazon with a summons to identify third-party sellers that store, or have stored, “any tangible personal property in any location in Massachusetts that is, or was, owned or leased by [any] affiliated entity … on or after January 1, 2012.” Hat tip to Bloomberg BNA for the summons.

According to the summons, the information is needed “to assist the Commissioner in the determination of certain vendors’ sales and/or use tax liability.” Governor Charlie Baker and the Department of Revenue have said only that this is a “routine summons for information.” Since Amazon is a registered seller in Massachusetts, the state has a right to audit it and the company is legally bound to comply with requests for pertinent information.

Yet former Amazon executive James Thomson notes that going after out-of-state sellers with inventory in Massachusetts is unprecedented: “I haven’t seen anything like this. If Massachusetts is successful, every state in the nation will say, ‘We want that list, too.’”

He’s not wrong, and Massachusetts is likely to share what it learns if it obtains the information it seeks: All states participate in information sharing programs. These generally aren’t binding, but it behooves states to honor them for quid pro quo purposes. Massachusetts knows that if it gives California helpful information today, California could respond in kind tomorrow.

However, as of this writing, there is no indication Massachusetts will obtain the information it seeks. Amazon refused to comply with the initial summons and stated that it “did not intend to produce” the documents. It hasn’t commented publicly on the case since Sept. 25, when the Massachusetts Superior Court ordered the company to produce the documents within 20 calendar days, but it could argue that the identities of its marketplace sellers have no bearing on an audit. It’s certainly in Amazon’s best interest to protect its marketplace sellers; they generate more revenue than its own sales.

New tactic, old game

Going after Amazon for marketplace seller identification may be a new tactic, but it’s part of an old game — states’ ongoing efforts to obtain tax revenue from remote sales.

Non-collecting out-of-state businesses aren’t a new phenomenon, but they’ve grown exponentially since the birth of ecommerce. The more sales tax revenue eludes states, the more intent the states are on capturing it. Yet their efforts have been hampered by the U.S. Commerce Clause as interpreted by Quill Corp. v. North Dakota 504 U.S. 298 (1992), which held that a state cannot tax a business unless that business has a substantial connection to (i.e., physical presence in) the state, or nexus.

So, states are getting creative. They’ve broadened the definition of nexus to include affiliate relationships (affiliate nexus), referrals from links on in-state websites (click-through nexus), and even the amount of business done in the state (economic nexus). Massachusetts, Ohio, and Rhode Island have enacted laws whereby remote vendors create a physical presence in a state by placing software or internet cookies on in-state computers and handheld devices. Minnesota, Rhode Island, and Washington are among a handful of states with new policies requiring marketplace providers (e.g., Amazon, eBay) to collect tax on their marketplace sales.

Perhaps most surprisingly, states aren’t focusing their efforts on sellers alone. Five states have adopted use tax notification and reporting requirements, whereby non-collecting sellers must share consumer purchase information with state tax authorities. Tax departments will likely use this information to enforce consumer use tax compliance.

Stay informed, but don’t panic

Massachusetts’ attempt to obtain the identities of FBA sellers is notable, but it’s still just an attempt. If Amazon continues to refuse to comply with the state, the case could be in litigation for years. Legal battles over remote tax revenue are already pending in several states, including Alabama, South Carolina, and South Dakota. Resolution is never swift.

Nonetheless, the Massachusetts case is indicative of states’ creativity and persistence. The Bay State is one of several states intent on taxing remote sales by any means necessary. If this attempt fails, there will almost certainly be another. If it succeeds, states will be better positioned to audit third-party vendors for sales tax. Internet sellers will face increased scrutiny and will have to redouble their efforts — and spending — to ensure tax compliance.

Massachusetts’ move in light of the online marketplace seller tax amnesty program

The timing of this case is interesting: It coincides with the final weeks of the Online Marketplace Seller Voluntary Disclosure Initiative, a multistate tax amnesty program for online marketplace sellers that concludes Nov. 1, 2017. Nineteen states are offering full amnesty and waiving all applicable back taxes for vendors that register and collect tax by Dec. 1, 2017. Massachusetts is one of six states offering more limited amnesty. Additional information is available at the Avalara Resource Center.