Pennsylvania offers limited amnesty to unregistered remote sellers with inventory in the commonwealth

From now through May 8, 2021, the Pennsylvania Department of Revenue is offering a 90-day voluntary compliance program for unregistered out-of-state businesses with inventory in Pennsylvania. The program provides a limited lookback period and penalty relief for participating businesses that become compliant.

Businesses that fulfill the requirements of the program will no longer be liable for taxes owed prior to January 1, 2019. The department will also waive penalties that would otherwise be applied to the past-due tax returns and unpaid taxes. Participating businesses will be liable for any taxes owed as of January 1, 2019.

This voluntary compliance program is specifically for out-of-state businesses that established physical presence nexus with Pennsylvania through inventory or property stored in the commonwealth. It offers them an opportunity to voluntarily identify themselves to the department and become compliant.

Voluntary compliance programs are generally good both for states and sellers. They reduce past tax burdens and financial penalties for participating out-of-state businesses, and they level the playing field for in-state businesses. At the same time, they increase state tax collections, bringing in outstanding past taxes as well as future taxes by newly registered businesses, without entailing costly audits or lawsuits. 

Inventory creates nexus for marketplace sellers

It’s common for a business selling through an online marketplace to have inventory in more than one state. Marketplace facilitators like Amazon often have warehouses and fulfillment centers across the country, and third-party sellers often use the fulfillment services offered by marketplaces (e.g., Fulfillment by Amazon, or FBA) to cut down on delivery times.

Pennsylvania is one of several states actively pursuing out-of-state third-party sellers for back tax liability created by their marketplace inventory. Other such states include California, Massachusetts, Washington, and Wisconsin. This isn’t a new thing: The Wisconsin Department of Revenue announced in 2014 that sellers using distribution facilities in Wisconsin were liable for Wisconsin taxes on their sales.

Nonetheless, many marketplace sellers have fought — and are fighting — these assessments. They argue that they don’t control their inventory after they ship it to a marketplace facilitator, and often don’t even know the location of their inventory. Thus, they believe the marketplace facilitator, not them, should be liable for any tax obligations the inventory creates.

State tax authorities typically take a different stance, that taxpayers are under an obligation to know the tax laws in states where they do business and comply with them. In 2018, the Washington Department of Revenue held that “a taxpayer’s misunderstanding or lack of knowledge of its tax liability are not circumstances beyond its control, and do not allow waiver or cancellation of delinquent penalties or interest.”

The California Department of Tax and Fee Administration has reached similar conclusions in its aggressive pursuit of back tax liability established by inventory stored in marketplace-owned or operated facilities. 

How to apply for the Pennsylvania Voluntary Compliance Program

The first step toward tax amnesty is to determine whether nexus with Pennsylvania exists by completing the Physical Presence Business Activity Questionnaire, either online or on paper. After reviewing the information, the Department of Revenue will contact businesses “to discuss how to become compliant.”

Businesses accepted into the voluntary compliance program must register, file any tax returns that were due, and pay the outstanding taxes. Once these steps have been successfully completed, the department will abate all penalties from noncompliance.

Any businesses granted amnesty must continue to maintain tax compliance with Pennsylvania. Failure to do so could interfere with the terms of the voluntary compliance program. Additional details are available at Voluntary Compliance Program for Retailers With Inventory in Pennsylvania.

If you’re worried you may have an obligation to collect and remit sales tax in states where you’re not registered, the Avalara Sales Tax Risk Assessment can help.

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