Amazon FBA Sellers and Online Retailers: What is the 2017 MTC Sales Tax Amnesty Program and Do I Need to Register for It?
What is an Amazon FBA Seller?
Some online retailers use the “Fulfillment by Amazon” service to store inventory, pack, ship, and provide customer service for online sales through Amazon’s fulfillment centers. For small and large retailers, this can provide significant benefits, of course at a cost. One hidden cost, however, is that using Amazon fulfillment services may create a “nexus” between the online retailer (often referred to as an “Amazon FBA Seller”) and the states where Amazon warehouses each seller’s inventory—thus, potentially, subjecting the Amazon FBA Seller to sales and use tax liability in each of those states.
While Amazon provides each FBA Seller the ability to see where the inventory is warehoused through an online resource, Amazon does not inform FBA Sellers of this resource and has not provided FBA Sellers with information related to potential tax liabilities; both sales or use tax and other income-related taxes such as gross receipts taxes and franchise taxes.
What are my obligations to collect sales taxes as an online retailer?
In states where you are required to register and collect sales taxes, you, as the retailer, must collect sales or use tax on taxable sales and remit the taxes you collected to the state. In some states where you are not required to register to collect sales or use taxes, you may still be required to send a letter or notice to purchasers in certain states alerting them that they must remit the appropriate sales or use tax to the states themselves and may be required to report the sales to the state.
It is also important to remember that certain products are not taxable in all states. For example, clothing is not subject to sales tax in every state, so clothing-only retailers may not need to register with the taxing authorities in those states which do not tax clothing. Sellers must complete a state-by-state analysis to determine their potential liability.
But I’m registered where my business is headquartered, isn’t that enough?
You need to be registered in every state where you have a nexus and meet the minimum threshold of sales. Generally speaking, a “nexus” is a physical presence in the state, however, each state defines what constitutes a “nexus” a little bit differently. Typically, a nexus is created (a) with your business’ home state; (b) with the states where you have employees; and, (c) with states where your inventory is stored, even if it is stored by a third-party fulfillment service—such as any of the Amazon FBA fulfillment centers across thirty (30) states. At least one state—Michigan—has taken the position that deliveries by a third-party service (other than a common carrier such as FedEx or UPS), including Amazon’s delivery service or use of Amazon Lockers, creates a nexus to that state even without inventory being warehoused in the state. Unfortunately, online retailers must evaluate whether a nexus exists on a state-by-state basis. Online retailers subject to sales or use taxes that do not register and pay sales or use taxes may be subject to significant interest and penalties (the state of Washington, for example, has a 39% penalty for unpaid sales and use taxes).
What is the “Amnesty Program”?
The Multistate Tax Commission (“MTC”) National Nexus Program is offering a limited-time voluntary disclosure initiative (the “Online Marketplace Seller Voluntary Disclosure Initiative”) which allows eligible online retailers to enter into a voluntary disclosure agreement (“VDA”) with participating states between August 17, 2017 and October 17, 2017. There are currently sixteen (16) states offering complete amnesty through the program and eight (8) states offering partial amnesty through the program. States offering complete amnesty have agreed to waive sales and use back tax liability as well as income and franchise back tax liability, including penalties and interest, for all prior tax periods. It is unusual for states to offer complete amnesty, making this program a unique opportunity. States offering only partial amnesty are not willing to waive all taxes, interest, and penalties but rather are only waiving certain taxes or penalties or are only waiving taxes and penalties for certain prior tax periods (determined on a state-by-state basis). Sellers with liability in states offering complete or partial amnesty should strongly consider applying for the program.
Even if an online retailer applies for amnesty through the Online Marketplace Seller Voluntary Disclosure Initiative, the online retailer will still need to register with each state individually by December 1, 2017. In some states this can be done online, in others it will require a paper application. Some states will also require online retailers registering to collect sales or use taxes to register as a foreign business entity with that state’s secretary of state. Again, these determinations are made on a state-by-state basis.
Am I Eligible for the Amnesty Program?
Online retailers are eligible for the Online Marketplace Seller Voluntary Disclosure Initiative if:
- They have not registered with the taxing authorities of that state, filed returns for the particular tax type in that state, or had any prior contact with that state concerning tax liability or potential tax liability (including receipt of a nexus questionnaire);
- The online retailer has no connection to the state except for the inventory stored in a third-party warehouse or fulfillment center located in that state or the services provided by the online marketplace provider;
- The online retailer applies to the program electronically prior to October 17, 2017; and
- The online retailer agrees to register with the state taxing authorities no later than December 1, 2017.
If you are not sure whether you qualify for the program, contact your attorney.
I’m an Online Seller but I Don’t use Amazon FBA, Can I Participate?
Yes, all online retailers, including eBay, Etsy, Shopify, or any other e-commerce platform, can participate in the Online Marketplace Seller Voluntary Disclosure Initiative for those states in which they have a nexus. It is important to remember that if an online retailer uses multiple platforms then the retailer must collect taxes for states in which they are due across all platforms, not just on those sales made through the Amazon FBA program.
What do I do about states that are not participating in the Amnesty Program?
Not every state is participating in the Amnesty Program. Unfortunately, three of the most aggressive states pursuing online retailers for sales tax—California, Washington, and Pennsylvania—are not participating. Online retailers should evaluate their liability in each state and decide whether to register. Several states also offer voluntary disclosure programs which may provide relief from certain taxes or penalties similar to the partial amnesty offered under the Online Marketplace Seller Voluntary Disclosure Initiative, but the opportunity for complete amnesty in certain participating states is not likely to be available again any time soon.
Can a state use my amnesty application against me?
In states where total amnesty is not being offered under the Online Marketplace Seller Voluntary Disclosure Initiative, a state can use the VDA to find and pursue other taxes such as franchise taxes and gross receipts taxes. For that reason, online retailers should carefully consider their exposure before applying for amnesty.
What should I do if I get a questionnaire from a state taxing authority?
Contact an attorney for assistance in evaluating the issues that you may have in that jurisdiction. Many firms have expertise in their local jurisdictions and have referral networks for other jurisdictions so that your responses can be coordinated. Do not ignore phone calls or correspondence from state taxing authorities—it could cost you.