Sales Tax Amnesty Possible for Online Sellers in 2017
If your business sells taxable goods online—also known as marketplace or FBA-style selling (fulfilled by Amazon)—24 states are now participating in a program that may forgive back sales taxes, interest and penalties if you haven’t collected and remitted tax in states where you should have. The program runs from August 16 through October 17, so there’s not much time to file.
Officially called the “Online Marketplace Seller Voluntary Disclosure Initiative,” offered by the Multistate Tax Commission (MTC), the initiative’s purpose is to get businesses to become compliant with state tax laws without incurring a potentially bankrupting burden of back taxes and fines.
The dictionary defines nexus as a connection or link. Where sales tax is concerned, having some sort of physical presence in a state may create nexus—a business connection with that state. Selling goods through a company like Amazon, eBay, Wayfair or others, where you store your products in their warehouses or fulfillment centers, and they pack and ship your merchandise to customers, may create that nexus and an accompanying tax obligation.
This makes an already complicated U.S. sales tax situation even more so. Sellers may have not even realized they owe taxes to a state where they actually sell no merchandise, simply because their goods were warehoused there. Up until recently, states have largely ignored marketplace sellers, but many now want a piece of that very, very large pie—Internet Retailer’s research reported those transactions topped $1 trillion globally in 2016.
Before considering amnesty, however, marketplace sellers need to know where their goods are being stored and shipped from in order to be able to determine where they may have a tax obligation, and then research whether those states are participating in the program.
The Amnesty Program
This program has been described by an Amazon partner as a once-in-a-lifetime opportunity. It’s open to all online marketplace sellers, whether or not they sell through Amazon specifically, but only if they haven’t been collecting and remitting sales tax already in a specific state. (However, these businesses may still qualify for income or franchise tax amnesty.)
If a business already has established nexus in a state—say by having a sales office or its own warehouse there—it is also ineligible.
As mentioned previously, 24 states are participating in the program, but each has its own rules and conditions, and some have limitations. The Sales Tax Institute offers an excellent chart with links to the state amnesty pages.
For businesses concerned that exploring the program will expose them to penalties they would not otherwise have incurred had they avoided it altogether, MTC will not reveal company information to the state until both the state and the business have signed a voluntary disclosure agreement.
Avalara recommends businesses consider these three questions to decide if participation in the program might be a good choice:
- Are you concerned you might owe sales tax in one or more states?
- If you could resolve those back taxes with a little paperwork, would you?
- Would you resolve past taxes issues if that meant starting to collect sales tax?
The Sales Tax Institute also suggests in their free webinar that if you’re unsure whether you qualify for the program, but you’d like to participate, you should apply regardless.
Are There Risks to Participating?
Aside from getting on the states’ tax radar, you’ll be taking on administrative responsibilities for registering your business with the states and sales tax collection by December 1. The states will expect you to collect and remit tax on all sales, not just marketplace-associated ones, if you also sell there and fulfill through your own site. The complexity of the sales tax landscape, with each state—and often smaller jurisdictions within states—having distinct tax rates and highly dynamic exclusion lists, may well necessitate purchasing special software to keep up-to-date with it all.
Another potential sticking point is that you’ll now need to charge your customers sales tax, which may make them unhappy, even though the tax is their obligation.
Risks to Not Participating
Not collecting and remitting sales tax to distant states wasn’t always a big deal, but now it is. States are becoming more aggressive, with strong legislation and enforcement efforts. As traditional brick-and-mortar stores decline and the marketplace-style of selling gains a greater share of the retail market, states don’t want to see their tax revenue streams drying up.
Avoiding the problem will become more and more difficult to do over time, so it pays to deal with the issue now, during this golden period. It’s also worth remembering that if you don’t collect sales tax from customers when you should have, your business will be liable for the unpaid taxes, plus any fees or penalties you incur. That may turn out to be a financial burden that some smaller sellers cannot shoulder.
Given the available options, taking advantage of the multi-state tax amnesty program may turn out to be the best of the bunch. While individual states offer periodic programs and voluntary disclosure arrangements, the MTC amnesty deal may result in the least risk and penalty, along with the least amount of work.
Before making any decision, however, read up. Here’s a list of resources, and there are many more available online: