Indiana creates one-time voluntary disclosure agreement for online marketplace sellers
In the spring of 2017, in order to increase sales tax collections from remote sellers, Indiana created a sales tax collection obligation for out-of-state sellers based on their economic activity in the state (economic nexus). It applies to remote retailers with more than $100,000 in gross revenue from Indiana sales, or more than 200 separate sales transactions in the state. Economic nexus was to take effect in Indiana July 1, 2017, but enforcement is on hold pending a legal challenge.
Now, the Indiana Department of Revenue (DOR) is offering a one-time voluntary disclosure initiative for out-of-state online retailers that sell to Indiana customers and have inventory stored in Indiana warehouses owned by a third-party (e.g., marketplace sellers).
The application period is open now through December 31, 2018.
What is a voluntary disclosure agreement?
A voluntary disclosure agreement (VDA) is a binding agreement between a taxpayer and a state. It provides a non-collecting taxpayer with outstanding tax liability an opportunity to comply with state tax laws moving forward, in exchange for certain benefits (e.g., reduced penalties and interest, a limited look-back period).
Year-round VDAs exist in most states, including Indiana. The state’s standard program limits the look-back period (the length of time it can hold a taxpayer liable for unpaid tax) for sales and use tax and income tax to three years, plus some of the current year. It doesn’t waive the interest due on back taxes, but it does waive applicable penalties and provides some protection from audits.
Special VDA program for out-of-state online retailers
Indiana’s one-time-only VDA for out-of-state internet sellers differs from its standard VDA program in a couple of key ways. For starters, it’s a temporary offer that expires on the last day of 2018. In addition, it shortens the look-back period as follows:
- One full calendar year (2017), plus the current period, for sales and use tax
- The calendar or fiscal year 2017 for income tax
This program is “tailored to meet the unique needs of retailers that have inventory located in third-party Indiana warehouses and sell to Indiana customers” — many of which have both income and sales/use tax obligations. DOR Commissioner Adam Krupp says it offers qualifying retailers “the opportunity to enter into an agreement with the DOR that fulfills their tax obligations.”
To qualify for this special voluntary disclosure initiative, a retailer must not be an Indiana resident with clearly defined sales and income tax filing obligations in the state. In addition, applicants must sell to Indiana customers and have:
- Inventory stored in a third-party Indiana warehouse;
- Never filed Indiana tax returns for the tax in question;
- Never registered for the tax in question; and
- Never been audited or contacted by the DOR about the tax in question.
Additional information, including how to apply, is available from the Indiana Department of Revenue.
Multistate VDA for online marketplace sellers
Indiana isn’t the only state to offer a special voluntary disclosure program to online marketplace sellers. The Multistate Tax Commission oversaw a multistate voluntary disclosure program for online marketplace sellers last year, August 17–November 1. During that VDA program, 24 states and the District of Columbia waived all or a portion of eligible back taxes for successful applicants who registered with the state and agreed to collect and remit applicable taxes moving forward. Indiana did not participate in that program.
Taxing online marketplace sellers
If there’s a trend toward tailoring tax amnesty programs to third-party internet sellers, it’s because states have ramped up their efforts to tax their sales.
Last year, Minnesota, Pennsylvania, Rhode Island, Virginia, and Washington passed laws targeting marketplace sales. The Arizona Department of Revenue issued a ruling on the subject in 2016. Alabama and Oklahoma passed marketplace sales tax laws earlier this year. Learn more about marketplace sales tax laws.
Precedent upheld by the Supreme Court of the United States (Quill Corp. v. North Dakota, 1992) holds that states cannot tax a business that doesn’t have a physical presence in the state. Because of this, sales by remote internet sellers have gone untaxed for years. Under marketplace sales tax laws, inventory that’s stored in a state in third-party-owned warehouses establishes a physical presence in the state for the sellers.
Quill’s physical presence limitation is currently under fire. South Dakota is challenging it in South Dakota v. Wayfair, Inc., which the Supreme Court is deliberating after hearing arguments on April 17, 2018. If the court rules in favor of South Dakota, states could be granted more freedom to tax remote sales.
If the court sides with Wayfair, the physical presence limitation would remain in place. Should this occur, more states are likely to turn to marketplace sales tax laws like those established by the states listed above.
The 2021 sales tax changes report: midyear update
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