Just ahead of the busy holiday shopping season, states are incentivizing online marketplace sellers to register for tax collection and remittance within their jurisdictions. As ecommerce has risen in recent years, state and local governments are cracking down on online sellers operating within their boundaries. A new sales tax amnesty program, running from August 17 to October 17, will offer online businesses leveraging warehouses, such as Amazon’s Fulfillment centers, the opportunity to register for the amnesty without penalty of back taxes.
The Multistate Tax Commission (MTC) will administer the amnesty program, with fifteen MTC member states – Alabama, Arizona, Colorado, Connecticut, Idaho, Iowa, Kansas, Kentucky, Louisiana, Nebraska, New Jersey, Oklahoma, Texas, Utah and Vermont – agreeing to participate, with more states likely joining in the coming weeks.
What are the Incentives to Participate?
Simplified compliance. Online marketplace sellers may not have a storefront in a specific state. However, by using a storage warehouse located within a state, leveraging a fulfillment agent or having inventory in a fulfillment center, sellers most likely have a tax obligation, or nexus, to that state. With this proliferation of fulfillment centers has come uncertainty and confusion on the part of online sellers related to where products are shipping from, and whether or to whom sales tax should be collected and remitted.
An unregistered online seller with nexus in a particular state will be asked on the tax registration forms when their business began in that jurisdiction. Registering under the MTC Sales Tax Amnesty program simplifies compliance because accurate information can be shared without financial risk.
Forgiveness of back taxes. Under the new amnesty program, participating online sellers will likely not be liable for back taxes. Depending on a business’ nexus situation, there may be cases where the seller is liable for back taxes. It is also quite likely that back income taxes will be waived as well.
Understand your liability. In previous years, the newness of e-commerce and online marketplaces such as the Fulfillment by Amazon program led to unclear statuses for online sellers and states with Amazon warehouses within their borders. However, within the last year, numerous tax authorities have determined that online sellers with goods stored in warehouses have nexus for the state in which the warehouse is located. Amazon’s growing revenue from its Fulfillment by Amazon sellers, $30 billion worldwide in 2016, has captured the attention of states, and as a result, many intend to begin pursuing taxes owed to them.
Considerations for Enrollment & Disclosure
Taxes moving forward. Businesses that register during the August to October window will need to begin collecting sales tax starting Dec. 1, 2017. As registered businesses, they will now regularly be required to meet the tax requirements of the state(s) in which they registered. Accountants can help businesses build this new obligation into future financial plans. In addition, if a business grows its e-commerce presence in new regions, the business’ nexus should be closely monitored to avoid compliance and back tax issues going forward.
Taxes in multiple states. A seller’s tax obligation is based on its presence in a state, or nexus, and the threshold for when a presence results in a sales tax nexus differs from state to state. A nexus study can be conducted to determine where a taxpayer has nexus and must register to collect and remit sales tax. The presence of people (employees, service people or independent sales/service agents) or property (inventory, offices, and warehouses) creates nexus. Consigned inventory, the designation Amazon uses for inventory in their fulfillment centers, creates temporary nexus at a minimum.
If an online business has significant nexus with more than one state, those businesses can disclose multiple states through the amnesty program. An online seller with multi-state nexus that forgoes registration faces the risk to their finances down the road via back taxes, interest, and penalties from numerous states.
Amazon will collect tax for third-party sellers, but only if the seller requests that service. Amazon charges a fee for this service: 2.9 percent of the sales tax collected. Sellers must still remit and report collected taxes themselves.
If you are unsure if this situation applies to you, speak with your CPA and determine if sales tax should have been collected and remitted. And if you do indeed have nexus, be sure to apply for the amnesty program, as well as collect and remit proper taxes going forward (and filing sales tax returns).
The above information on the sales tax amnesty was posted on the CPA Practice Advisor website written by Scott Peterson who is vice president of U.S. Tax Policy and Government Relations for Avalara, Inc. Prior to joining Avalara, he was the first executive director of the Streamlined Sales Tax Governing Board. Contact Scott at [email protected].
