With states looking to expand their sales tax reach to include remote sellers, accountants and tax professionals should advise any clients who engage in “marketplace sales” through Amazon or other online marketplaces that there will be a short-lived amnesty period during which they can come into compliance with state sales tax laws, according to Scott Peterson, vice president of U.S. tax policy and government relations at Avalara.

Nexus is the minimum amount of contact between a taxpayer and a state allowing the state to tax the business on its activities. With Amazon warehouses spread across the country, states are eyeing the concept of “inventory nexus” as a means to get at their share of sales tax from the more than $1 trillion generated annually by marketplace sellers.

Peterson, who was the first executive director of the Streamlined Sales Tax Commission Governing Board, observed that retailers participating in marketplaces may be required to pay sales taxes in more states because of where their goods are stored.

A recently drafted plan by the Multistate Tax Commission’s Nexus Committee may alleviate the pain for online sellers, suggested Peterson. It provides a voluntary disclosure program, or amnesty, that would be in effect for 60 days from Aug. 17, 2017. Seventeen states are planning to join the program, with the objective of enticing remote sellers to begin collecting sales and use tax, according to Peterson.

The Multistate Tax Commission is an intergovernmental state tax agency founded 50 years ago as an effort by states to protect their tax authority. The participating states are Alabama, Arkansas, Colorado, Connecticut, Idaho, Iowa, Kansas, Kentucky, Louisiana, Nebraska, New Jersey, Oklahoma, South Dakota, Texas, Utah, Vermont, and Wisconsin.

States set their own nexus standards, with the result that sellers whose primary presence is in a non-participating state -- say, New York or California -- may nevertheless be found to have nexus in multiple other states, and so be subject to tax in those states.

These states will consider applications for voluntary disclosure received by the MTC staff during the period from Aug. 17, 2017 through Oct. 17, 2017. The taxpayer may choose which state and which tax type (sales/use tax, income/franchise tax, or both) to seek relief for. The taxpayer can also withdraw the application with any time prior to execution of the voluntary disclosure agreement.

The amnesty would forgive remote sellers that may be subject to “inventory nexus,” as the result of inventory stored in an online marketplace fulfillment center, Peterson observed. Most of the states involved would waive not only penalties and interest but also back taxes for sales and use, income, and franchise taxes, with these caveats:

  • At press time, Colorado’s participation is pending final approval;
  • South Dakota imposes sales and use tax but does not impose income tax; and,
  • Wisconsin will require payment of back tax and interest for a lookback period beginning Jan. 1, 2015 for sales and use tax.

“This would be only the second time in history that states have created an amnesty that forgave back taxes,” Peterson noted. “They typically have had programs that forgave penalties and interest, but have stayed away from waiving back taxes. People think the program will be repeated down the line, so they would be tempted to wait and get more back taxes forgiven. So states don’t do it.”

The program is aimed at sellers that participate in Amazon’s “Fulfillment by Amazon” program, but would apply to any remote seller with inventory in a marketplace warehouse, Peterson observed.

Amazon fulfillment center
An Amazon fulfilment center: Where they're located is going to begin to matter for tax purposes. Bloomberg News

“It applies to all fulfillment retailers, but it started out with people that principally use Fulfillment by Amazon,” he said. “Lots of markets use the same process, and the same procedure would apply.”

The program was born at a conference earlier this summer, when MTC Nexus Program director Richard Cram explained the concept of inventory nexus to Amazon sellers, according to Peterson.

“A number of people in the audience came up afterward and said that the states have to help them,” explained Peterson. “Members of the committee got together and drafted the agreement.”

“A lot of people will argue that that isn’t nexus to begin with, since the Quill decision requires ‘substantial’ presence,” he added. “They say that $2,000 of product stored in a fulfillment center is not substantial. That may be true, but the only way to find out is for the remote seller to litigate up to the state’s supreme court to get the answer.”

“Everyone can make the argument that they have so little presence in the state that it’s de minimis, but the cost of determining what de minimis is would be outrageous. Not many people want to make that kind of business decision,” he said.

“This all happened in the last six weeks,” emphasized Peterson. “States have until August 14, when the conference call finalizing the agreement is made, to decide their terms of participation.”

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Roger Russell

Roger Russell

Roger Russell is senior editor for tax with Accounting Today, and a tax attorney and a legal and accounting journalist.