State governments continue to pursue remote sellers who sell to consumers in their state. Marketplace facilitators like Amazon’s Fulfillment by Amazon (FBA) assist online sellers to facilitate retail sales in states where they have no locations/employees. The facilitators maintain fulfillment centers in various states to store the inventory of the sellers. The maintenance of inventory by the online seller through a marketplace facilitator is sufficient to create nexus. Many online sellers are not aware of this fact.
Nexus is a concept that many businesses do not understand from sales/use tax and income/franchise tax perspectives. It is the minimum connection the state government requires in order to subject the company to sales tax collection or income tax liabilities. Nexus is established when a business has a physical connection with a state through employees, property, volume of sales, or other action.
MTC’s Special Voluntary Disclosure Initiative
The Multistate Tax Commission (MTC) is an intergovernmental state tax agency with 49 states as members in some capacity. Their National Nexus Committee is offering a limited-time voluntary disclosure program, or amnesty, for remote sellers with 19 states participating at various levels. The program runs from August 17, 2017, to October 17, 2017, and is open to:
- Taxpayers who have not registered with the state, filed tax returns with the state for the tax type, or had prior contact with the state.
- Taxpayers who must be online sellers using a marketplace provider and have no assets or activities in the state other than the maintenance of inventory at a fulfillment center.
- Taxpayers who register online during the initiative and either begin collecting sales tax by December 1 or file an income tax return for the period that includes December 1, 2017.
As of the date of this Wipfli Alert & Update, the following states are participating: Alabama, Arkansas, Colorado, Connecticut, Florida, Idaho, Iowa, Kansas, Kentucky, Louisiana, Nebraska, New Jersey, Oklahoma, South Dakota, Tennessee, Texas, Utah, Vermont, and Wisconsin. Please refer to MTC’s website for the official list of participating states because the list of states may change.
Benefits of Initiative
Normally when filing a voluntary disclosure agreement (VDA), the state requires some lookback period of usually three to four years. In addition, interest and sometimes penalties may be imposed. With this special voluntary disclosure initiative, the filing is prospective only so sales taxes can be charged to the customer and then remitted to the state. In a normal VDA situation, the sales tax cost for prior periods may be borne by the seller itself.
While 19 states are participating, the online seller can choose the specific states to pursue on their own. There are a few states that have some qualifiers to their involvement, including Wisconsin, which requires a lookback to 2015. Colorado requires a four-year lookback for income taxes to receive the sales tax relief.
Risks of Initiative
The online seller is required to file an application and provide background information on its activities. If there are any material misrepresentations, the state can void the VDA and likely pursue taxes for prior periods, potentially beyond its normal lookback period. Hence, if a company has sales activities in a different channel (e.g., wholesale to distributors), activities to support that channel could prevent the company from qualifying.
Future Compliance Responsibilities
If an online seller decides to proceed with this initiative, it needs to have systems in place to begin collecting the tax by December 1. Some ERP software systems have sales tax capabilities. Otherwise, there are sales tax software companies (e.g., Vertex SMB) that assist in adding a sales tax solution to current software systems.
With the continued pursuit of online sellers and pending federal legislation, online sellers may want to consider participating in this initiative. For answers to commonly asked questions, read “Short-Lived Amnesty Program for Remote Sellers Requires Attention Now - Frequently Asked Questions.” Wipfli’s State and Local Tax professionals are familiar with the VDA process and can assist in evaluating your facts to ensure you qualify, as well as selecting and implementing a sales tax software system to collect and remit the collected sales taxes.
If you have any questions, or for guidance regarding your participation in this initiative, please contact Wipfli’s state and local tax experts, Craig Cookle, Linda Feirn, Daryl Ohland, Tara Johnson, Laura Karpo, and Jessica Macklin, or your Wipfli relationship executive.