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25 States Participating in Sales and Income Tax Amnesty Program for Online Sellers
The Multistate Tax Commission (MTC) is offering a limited-time, multistate voluntary disclosure agreement (VDA) opportunity for certain businesses who sell online and have nexus in a participating state because of the location of their inventories.
Specifically, the VDA opportunity applies to businesses selling through a third-party online marketplace provider or facilitator (e.g., Amazon) that stores the businesses’ inventory in the providers/facilitators’ own warehouses or fulfillment centers in the participating state. This program does not apply to businesses who sell online but who store inventory in their own warehouses/fulfillment centers.
States will waive all liabilities, including penalties, interest, and tax for all prior years.
Unlike most VDA programs, this one is uniquely beneficial because, with limited exceptions, it will eliminate all tax, interest, and penalty liabilities in participating states for all prior years, and only requires prospective compliance.
Eligibility for the amnesty
The special VDA initiative will run from August 17, 2017, through November 1, 2017. It is only available for online sellers that have nexus in a state as a result of activities from their marketplace providers/facilitators.
Marketplace providers are companies like Amazon that facilitate online transactions between a seller and a buyer. Typically, the nexus-creating activity is in-state inventory located in a warehouse that is operated by the marketplace provider (e.g., “fulfilled by Amazon”). Generally, seller-owned inventory located in a state creates nexus in that state for both sales tax and income tax purposes, despite the fact that the seller may not know where its inventory is located, and it eliminates the seller’s Public Law 86-272 protection from income tax.
To be eligible for the MTC’s program, businesses generally cannot have had any previous contact with the relevant states about the tax liabilities that they want to disclose. North Carolina is the only exception — it will consider applications from businesses that have had prior contact with the state about potential tax liability. Applications must be submitted within the limited window stated above. Submission of applications online via the MTC website is strongly encouraged.
Participating states and terms of agreement
Nearly half of the states are participating in this program. The following 25 states will accept applications through the MTC.
- District of Columbia
- New Jersey
- North Carolina
- Rhode Island
- South Dakota
Note that “home rule” taxes not administered by the state are not covered under this initiative.
Waiver of all tax, interest, and penalties
Participating states will generally waive all tax, interest, and penalty liabilities, for any and all prior years, though there are exceptions for Colorado, the District of Columbia, Massachusetts, Minnesota, and Wisconsin.
Under the agreement, a taxpayer business must register as a seller or retailer to collect and remit sales and use tax as of the effective date in the agreement, which will be no later than December 1, 2017. Because the MTC anticipates a 30 ‒ 60 day processing time for VDAs, businesses should apply as soon as possible to avoid running out of time to register for sales/use tax collection by the December 1 deadline.
The business will also be required to begin filing income/franchise tax returns for the 2017 tax year if it is subject to those taxes. Those returns would be due by their statutory deadline (e.g., spring 2018 for companies with a calendar tax year).
The taxpayer will have the ability to choose the state(s) and tax type(s) for which it seeks relief. Agreements will be available for sales and use tax, income/franchise tax, or both. However, it is important to note that according to the MTC’s Frequently Asked Questions page, taxpayers are advised to disclose all applicable tax types in their application. This is because taxpayers who only disclose one type of tax (e.g., sales tax) risk being audited later by participating states for nondisclosed tax types (e.g., income/franchise tax), and as result would not be eligible for amnesty benefits for those tax types.
The application process will be anonymous until agreements are executed. Applications must include a good faith estimate of the tax liability in each state for the prior four years.
Determining the state where inventory is stored
In order to determine which of the 25 participating states a business will need to include on the VDA application, it is first necessary to know where the business’ inventory is being held by its marketplace provider/facilitator. As a result, online sellers will need to perform some due diligence to evaluate where their inventory is located.
For companies using “fulfilled by Amazon” (FBA) to sell goods online, it has historically been difficult to determine which of Amazon’s fulfillment centers an online seller’s goods are stored in, and companies have simply assumed that their inventory might be in any one of Amazon’s many locations.
Today, however, Amazon will readily provide its online sellers with a list of fulfillment centers where that seller’s inventory is stored. As a result, companies that sell online using FBA should contact Amazon as soon as possible to determine where their goods are stored, so that they can quickly identify which states to include in the VDA application.
How we can help
This is a very small window of time to complete all the documentation for the application. CLA’s state and local tax professionals can help you prepare the MTC voluntary disclosure agreement application.