For many businesses, selling online via a marketplace, whether targeting consumers or other businesses, has been liberating. The lack of a clear mandate to collect and remit sales taxes has meant lower shopping cart totals, as well as one less onerous process to manage.
But state governments now have a problem that will likely end tax-free sales in many states. According to Fiscal 50: State Trends and Analysis, a report produced by The Pew Charitable Trusts, many states are strapped for revenue and are facing tight budgets. That makes collecting sales tax revenue from online marketplaces a very attractive idea.
Online marketplaces tend to be physically distributed organizations. Amazon, for example, has established warehouses across the country to minimize delivery times, and it distributes marketplace sellers’ goods to these warehouses as it deems fit. Thousands of other merchants that previously housed their own inventory have now outsourced inventories to other marketplaces or to fulfilment service companies. Several states now assert that this establishes nexus—that is, an obligation to collect and remit sales taxes because of the physical presence of goods in the warehouse, even if no office or storefront exists in the state.
The courts ruled long ago that property in a state creates nexus, and that inventory is property, so several states have enacted or are considering enacting legislation related to taxing marketplace sales. Those states include Minnesota, Washington, Virginia, Arizona, New York, Rhode Island and Texas.
For business-to-business sellers, it seems that the die is cast. They are very likely to eventually be collecting and remitting sales taxes for non-exempt customers. The only question is how to make this as painless as possible. And in this case, the pain comes in two varieties. The first is the possibility of back taxes, which may already be due in a number of states. The second is operational complexity.
Amnesty for Back Taxes
Sellers who have had success with their marketplace strategy may resist the possibility of upsetting the applecart by starting to collect sales tax. Unfortunately, waiting for a state to demand compliance could lead to an immediate requirement to pay back taxes, along with possible penalties and interest.
To minimize the possibility of having to pay back taxes, many sellers will want to participate in a new sales tax amnesty program. This program, the brainchild of the Nexus Committee of the Multistate Tax Commission (MTC) and managed by MTC’s National Nexus Program (NNP), is generous. It applies to all past sales as long as the basis for nexus in the state is only the existence of property in a third-party warehouse or fulfillment center. The requirements for the program are also pretty simple and straightforward. Sellers must begin collecting and remitting sales taxes in the states where they are granted the amnesty.
So far, 23 states and the District of Columbia have committed to participating in the amnesty program. Those states are Alabama, Arkansas, Colorado, Connecticut, Florida, Idaho, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Minnesota, Missouri, Nebraska, New Jersey, North Carolina, Oklahoma, South Dakota, Tennessee, Texas, Utah, Vermont and Wisconsin. There are conditions in some states, but most have few conditions.
Whether a seller should participate in the amnesty program is really a question for a tax professional—and sellers should not put off asking it. The program is scheduled to run only until Oct. 17, 2017, and there is no indication that an extension will be offered.
Automated Collection and Remittance
The second area of pain is operational. A typical business-to-consumer seller knows that only an occasional buyer, such as a church, will be exempt from sales taxes. By contrast, a typical B2B seller’s customers are often exempt, although each state’s regulations regarding exemptions for business purposes vary. This makes the process of managing exempt buyers and their exemption certificates—not to mention calculating the correct sales tax for each state for non-exempt buyers—extremely complex and time-consuming.
In practice, no B2B seller can ensure across-the-board sales tax compliance without a robust system for automating the management of exemptions and sales tax rates. Fortunately, there is plenty of help out there in the form of third-party services. Amazon, for example, will collect sales taxes for a fee of 2.9% of the sales tax collected. However, it’s important for sellers to do their homework before selecting a service to make sure they are able to automate all the processes they want to automate for the best possible price. They may also discover other aspects of retailing they can automate in order to increase efficiency and their power to sell.
Collecting and remitting sales tax may be an inevitability for marketplace sellers, but it doesn’t have to be a burden. By getting the right processes in place and taking advantage of the amnesty program, sellers can be sure they are operating a healthy, compliant business and stay focused on what’s most important: providing the right products to their customers.
Scott Peterson is vice president, U.S. tax policy and government relations, for Avalara Inc., a provider of sales tax collection software. Prior to Avalara, Peterson served for seven years as the first executive director of the Streamlined Sales Tax Governing Board, an organization that worked with states to make tax rules more uniform. His is also a former director of the South Dakota Sales Tax Division.