Online marketplace sellers may be responsible to collect and remit sales taxes for product sales in states where their inventory is stored in third-party fulfillment centers, such as those owned by Amazon.com Inc.
A new initiative from the Multistate Tax Commission (MTC) could help sellers that use Amazon’s Fulfillment by Amazon program address potential tax liabilities without paying fines and penalties for not complying with state laws in the past.
Some states have been auditing marketplace sellers who they believe owe the state taxes. These states assert that the retailers’ inventory has been stored in Amazon fulfillment centers in their state, thereby creating a physical presence, or “nexus.”
For Amazon sellers that haven’t been paying sales taxes in those states, there’s a risk that if they file a voluntary disclosure (indicating that they have not been paying sales taxes properly, but want to going forward) they may be hit with fines and penalties for not being tax compliant.
The Multistate Tax Commission National Nexus Program is offering a limited-time, voluntary disclosure initiative to online marketplace sellers, particularly aimed at Amazon FBA sellers. This program, “Online Marketplace Seller Voluntary Disclosure Initiative,” means that online retailers can apply for a sales tax permit during the amnesty period between Aug. 17 and Oct. 17, 2017, and participating states will not hold retailers accountable for past liabilities or any associated fines and penalties (Wisconsin and Colorado have exceptions to this rule). There are 23 states participating in the initiative so far. Sellers must register in each state during the amnesty period and begin collecting sales taxes by Dec. 1, 2017. The states participating include:
These states will consider applications for voluntary disclosure received by the Multistate Tax Commission staff during the amnesty period. Applications can be found on the MTC website. Applicants get to choose which states they apply to, and the taxpayer’s identity isn’t disclosed to the state until the state agrees to the voluntary disclosure agreement. For more details, including requirements for eligible applicants, click here.
Amazon does not have warehouses in every state in the country. Some states are participating in the initiative even if there isn’t an Amazon warehouse in the state in anticipation that Amazon will eventually build a warehouse there.
The U.S. Supreme Court’s 1992 ruling in Quill Corp. v. North Dakota prohibits states from requiring merchants to collect taxes unless they have a physical presence, or “nexus” in legal terms, in the state. Still, several states have tried to force out-of-state online retailers to collect sales tax, even though the Quill decision means that only companies with an office, store, warehouse or other physical presence in a state can be required to collect and remit a state’s sales tax.
For retailers and brands that sell on Amazon’s marketplace and use its fulfillment services, states have taken the position that storing goods in an Amazon warehouse creates nexus, says Richard Cram, director of the Multistate Tax Commission National Nexus Program.
“A lot of states are struggling with this issue and have difficulty identifying online marketplace retailers, but the tools for doing so are improving and it will be just a matter of time that states will get better at this,” Cram said on a webinar hosted by the MTC and Prosper Show on Aug. 10. “States that are doing this are thinking ‘let’s see what we can get if we offer a carrot, or an incentive, and get that back-tax liability relief’ rather than go through the resources to find those people.”
Some states are going to retailers’ shopping carts on Amazon.com to see if the seller is collecting sales tax in the state, Cram says. If a seller isn’t collecting tax, that’s when states begin trying to discover marketplace sellers’ identities and learn more about their businesses. Cram says states will typically send sellers a “nexus questionnaire” that asks them how long they’ve been selling in the state, what their sales are in the state, how long they’ve been storing inventory in the state and other related questions.
If a state can prove that the marketplace seller has had nexus in the state somewhat regularly and hasn’t collected or remitted taxes, there’s no statute of limitations for how many years back the state can penalize the company. “If you’re not a filer, you’re really vulnerable to the back-tax liability,” Cram says.
The first step for an Amazon seller considering the sales tax amnesty program is to figure out where the seller’s FBA inventory has been stored, says James Thomson, partner with Buy Box Experts, a consulting firm that helps brands and manufacturers sell on marketplaces.
Sellers are aware of which Amazon fulfillment centers they send their inventory to, however, Amazon often moves inventory to other Amazon fulfillment centers before shipping it to consumers without notifying sellers. The information is in Amazon’s seller dashboard, but its reports are challenging to gather and decipher, Thomson says.
Amazon did not respond to request for comment, but on its seller dashboard it says sellers can get a daily report of inventory, which includes “quantity, location, and disposition for the past six months.” For historical data, sellers must look at a monthly report. There also are technology vendors, such as Wherestock.com, that provides sellers data of where their inventory has been stored.
But even if sellers know in which states their inventory is stored, there’s a lot to consider before registering to file taxes in each state. “It’s worth considering that the filing fees for some states are high enough that they could be higher than the actual amount of sales tax that a seller may have to pay,” Thomson says. “For example, if you sell $500 a quarter into North Dakota, equating to less than $40 of sales tax, do you really want to spend $40 per month in filing fees? Some sellers are actually better off paying the fine if they get audited by a state.”
Paying sales tax requires some risk assessment and management, Thomson adds. Both he and Cram recommend sellers hire a tax adviser to assess their risk and help ensure they get paperwork properly submitted during the available amnesty window, if that’s what they choose.
For more details, including requirements for eligible applicants, click here.