Voluntary Disclosure Program Can Eliminate Sales Tax Exposure for Online Retailers (article)
The Multistate Tax Commission (MTC) has recently established the Online Marketplace Seller Voluntary Disclosure Initiative (Initiative), which is a special voluntary disclosure program (VDA) that will allow certain online marketplace sellers to prospectively begin collecting sales tax in participating states. As states invoke authority to tax transactions made by such online sellers, the Initiative offers a valuable opportunity for these sellers to eliminate past sales tax exposure.
The VDA applies to sellers using a marketplace provider/facilitator (PF), such as the “Fulfillment by Amazon” program offered by Amazon.com, Inc. A marketplace PF is a person who facilitates a retail sale by an online marketplace seller, where the PF:
- Lists or advertises for sale by the online marketplace seller on a website, tangible personal property, services, or digital goods that are subject to sales/use tax;
- Either directly or indirectly through agreements or arrangements with third parties, collects payment from the customer and transmits that payment to the online marketplace seller; and
- Provides fulfillment services to the online marketplace seller.
In exchange for applying, the participating states will generally waive all past tax liabilities, interest, penalties. The Initiative runs from Aug. 17 through Oct. 17, 2017. The states participating in the Initiative have agreed not to disclose to other taxing jurisdictions the identity of any taxpayer entering into a VDA under this special time-limited initiative, except as required by law, pursuant to a court order or in response to an inter-government exchange of information agreement in which the requesting entity provides the taxpayer’s name and taxpayer identification number.
Registration in the VDA for eligible sellers is permitted for the following states participating in the Initiative: Alabama, Arkansas, Colorado, Connecticut, Florida, Idaho, Iowa, Kansas, Kentucky, Louisiana, Nebraska, New Jersey, Oklahoma, South Dakota, Tennessee, Texas, Utah, Vermont, and Wisconsin.
Additional terms and conditions apply to each state. For example, Colorado will waive any back tax liability for uncollected sales/use tax; however, Colorado will not waive back tax liability for income tax beyond its normal four-year lookback period. Colorado notes that it already has a small seller income tax nexus exception for sales less than $500,000 into the state. Nebraska will consider waiving back tax liability both for uncollected sales/use tax and income tax. South Dakota imposes sales/use tax but does not impose income tax. Wisconsin will require payment of back tax and interest for a lookback period commencing Jan. 1, 2015, for sales/use tax, and including the prior tax years of 2015 and 2016 for income/franchise tax.
In addition to using a marketplace provider to facilitate retail sales, the online marketplace sellers, with respect to the states participating in the Initiative, will need to meet the following requirements:
- The seller must not be registered with the state taxing authority;
- The seller cannot have filed returns with a state for the tax type that the seller is seeking voluntary disclosure relief (e.g., sales/use tax, income/franchise tax, or both), cannot have made payments of such taxes to the state, or cannot have made any other prior contact with the state concerning liability or potential liability for such tax type;
- The seller must have no location, property, employees, or agents in the state, except for the online marketplace seller’s inventory stored in a third-party warehouse or fulfillment center located in the state, or other nexus-creating activities of the marketplace PF on behalf of the online marketplace seller in the state; and
- The seller must agree to register as a seller or retailer with the state and timely collect, report and remit sales/use tax and file returns on all taxable retail sales to customers in the state prospectively as of the effective date (not later than Dec. 1, 2017).
Participants can apply for the Initiative either online or via email using PDF forms sent directly to email@example.com. As noted above, the applications must be received by the MTC between Aug. 17 and Oct. 17, 2017. A taxpayer can apply to a state anonymously and will not be required to disclose its identity to the state until the taxpayer registers with the state and the VDA is executed. The taxpayer may choose which state and which tax type (e.g., sales/use tax, income/franchise tax or both) to seek voluntary disclosure relief. The taxpayer can also withdraw the application for voluntary disclosure with any state at any time prior to execution of the VDA.
Note that the standard MTC VDA program application is used for the Initiative. While the application form requires that a taxpayer has an estimated total tax liability of at least $500, all applications received under the Initiative will be processed regardless of this threshold. Also, response times permitted in the Initiative may be shorter than those provided in the MTC Procedures for Voluntary Disclosure.
The sales tax exposure associated with online marketplace sellers stems from nexus created by the storage of inventory in warehouses owned or operated by a marketplace PF, such as Amazon.com, Inc. Until recently, states have largely ignored these arrangements. However in 2017, Minnesota and Washington enacted legislation that specifically taxes marketplace sales. Meanwhile, Virginia enacted legislation providing that the storage of inventory in the state creates sufficient nexus to require out-of-state businesses to collect Virginia sales and use tax. Further, a number of other states have also considered taxing marketplace sales.
Given the emerging trend for states to assert that marketplace sales arrangements are nexus-creating activities, the Initiative is very attractive to eligible taxpayers since it will generally result in the waiver of all prior sales and use tax liabilities, income/franchise tax liabilities, and penalties and interest. In exchange, taxpayers will agree to register for, collect and file sales tax returns, prospectively. Further, the offer of such a generous amnesty program may signal the intention of these states to take a more aggressive approach towards asserting nexus against taxpayers after the Initiative has concluded.
As a result, we advise online marketplace sellers using Amazon.com, Inc.’s FBA or similar programs to understand where goods offered for sale are being stored. Further, these taxpayers should consult with their state and local tax advisors to evaluate the costs and benefits of participating in the Initiative.
If you have any questions about the Initiative, please contact your CBIZ tax advisor, Geoffrey Christian, Sarfraz Bacchus or the CBIZ National Tax Office.
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