MTC Amnesty Program Provides Current Solution for Online Sellers Seeking to Resolve Sales Tax Compliance Nightmares

If you’re an online seller using the Amazon FBA program to facilitate sales, there’s a lot to absorb and consider these days regarding sales tax compliance.  Depending on who you talk to, you may get different advice:

1. Some attorneys, hungry to fight the legal issues in court (a highly costly endeavor with no guarantees), will advise that if your only activity in the state is inventory in an Amazon warehouse, you do not have to comply with that state’s sales tax laws ... that your inventory in an Amazon warehouse does not establish nexus in that state for sales tax purposes;
2. They or others may advise that Amazon should collect the sales tax ... that Amazon is acting in an agent capacity on behalf of the FBA sellers and that the sales tax compliance responsibility should fall on Amazon’s shoulders (see South Carolina’s recent announcement espousing this theory);
3. In contrast, other state tax experts, seeking to minimize your risk – including the author - will advise that your inventory in an Amazon warehouse in a state does establish the requisite sales tax nexus sufficient to require compliance with that state’s sales tax laws, and that arguably Amazon’s activities on behalf of FBA sellers establishes an agency nexus for the online sellers in those same states, regardless of the inventory, but bolstered by the presence of it;  
4. These experts may also advise that even if Amazon were determined to have taken on the sales tax compliance obligations of its FBA sellers, that the FBA sellers likewise have the same compliance obligations (joint and several liability for both Amazon AND the FBA seller, if you will);
5. Likewise, they or others may advise that in state auditors can and will hunt down Amazon FBA sellers, subject them to their state’s sales tax laws and assess them for historical liabilities relating to all prior periods in which they had inventory in an Amazon warehouse in the state (witness what California, Washington State and several other states are achieving in this regard). 

Increasingly, states such as California and Washington State have aggressively stepped up enforcement efforts against out-of-state retailers, particularly online retailers, as a result of these retailers storing inventory in third-party fulfillment centers that facilitate retail sales into the state for the retailer (e.g., Amazon FBA program). 

In my experience working with online sellers using the Amazon FBA program to facilitate sales, bullet points 3, 4 and 5 are a bitter pill to swallow, but they represent a reality.  They represent the reality in which state taxing authorities operate, with the weight of legal authority and unlimited resources behind them (especially California and Washington State).  The first 2 bullet points are theories ... nothing more.  Waiting in the wings for these issues to be addressed at the Federal or state level is certain to bring only one thing to those who wait – uncertainty and greater exposure.

Increasingly, states such as California and Washington State have aggressively stepped up enforcement efforts against out-of-state retailers, particularly online retailers, as a result of these retailers storing inventory in third-party fulfillment centers that facilitate retail sales into the state for the retailer (e.g., Amazon FBA program).  Typically, in registering for a state sales tax, a taxpayer must identify the first date on which it began “doing business” (i.e., had sales tax nexus, such as by storing inventory in the state), and must attest to the information of the registration application under penalty of perjury.  To the extent the taxpayer has historical nexus, it must address this concurrent with the registration process through a state’s Voluntary Disclosure Program.  To the extent (1) a taxpayer does not address its historical liabilities concurrent with the registration process through a state’s Voluntary Disclosure Program, and the state later identifies the taxpayer as having historical nexus, or (2) a state taxing authority contacts the taxpayer prior to its registering in the state, the taxpayer is no longer eligible to participate in the state’s Voluntary Disclosure Program.  To the extent a taxpayer is not eligible to participate in the state’s Voluntary Disclosure Program, a state taxing authority will seek to impose historical liabilities on the taxpayer as far back as nexus is asserted, which can be as many as ten (10) years worth of sales tax, plus interest and penalties.

Many online retailers are stuck – as they believe (1) they cannot register and begin sales tax compliance in states in which they have historical nexus without triggering an inquiry into historical periods, and (2) to participate in the state’s Voluntary Disclosure Program and admit liability will place them in a position that threatens the viability of the business. 

As such, taxpayers seeking to register in a state must consider whether they have historical nexus and exposure that they should resolve through a state’s Voluntary Disclosure Program.  Typically, under a state’s Voluntary Disclosure Program, a taxpayer comes forward anonymously through a third-party representative and notifies the state that it seeks to register and concurrently resolve prior periods, which still requires that the taxpayer pay historical sales tax for a period equivalent to the state’s normal statute of limitations for registered taxpayers (typically 3 to 4 years).  Understandably, this places out-of-state retailers in a near impossible fiscal position vis-à-vis historical liabilities in every state.

Many online retailers are stuck – as they believe (1) they cannot register and begin sales tax compliance in states in which they have historical nexus without triggering an inquiry into historical periods, and (2) to participate in the state’s Voluntary Disclosure Program and admit liability will place them in a position that threatens the viability of the business.  As such, many online retailers either (1) continue to ignore even their current and prospective sales tax compliance obligations in states in which they have historical nexus, or (2) register prospectively and hope for the best that they are not flagged for an audit.

Rarely in my twenty-five years of being a multistate sales tax expert have I seen states come together in a concerted effort to create an incentive for a group of taxpayers to comply with their sale tax laws, while providing complete amnesty for historical exposure.  This is precisely what the Multistate Tax Commission’s (MTC) Amnesty Program for Online Sellers does.  While this program is not everything for everyone in every state in which Amazon stores FBA Seller inventory, it does provide an excellent opportunity for online sellers to come forward in select states, in particular Texas and Florida, to register free of liability for any past due tax.  

Under the program, eligible taxpayers may obtain amnesty from any past due sales/use tax, and if applicable, income/franchise tax liability, including interest and penalties, in connection with online retail sales activity in the participating states.  Participating states include:  Alabama, Arkansas, Colorado^, Connecticut, District of Columbia, Florida, Idaho, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Minnesota, Missouri, Nebraska^, New Jersey, North Carolina, Oklahoma, South Dakota, Tennessee, Texas, Utah, Vermont, Wisconsin.  Colorado, DC, Massachusetts, Minnesota and Wisconsin require payment of back taxes for a certain period, however all other states, including Texas and Florida, provide complete amnesty for qualifying applicants who register for taxes with the state under the MTC amnesty program.  Taxpayers may elect to only pursue amnesty and register in select states, as opposed to all participating states.  Under the MTC Amnesty Program, qualifying applicants must pursue amnesty by applying between August 17 – October 17, 2017, and must be registered for sales and income/franchise tax no later than December 1, 2017.  You can read more about the program here.

Rarely in my twenty-five years of being a multistate sales tax expert have I seen states come together in a concerted effort to create an incentive for a group of taxpayers to comply with their sale tax laws, while providing complete amnesty for historical exposure.  

The MTC Amnesty Program may be the proverbial “carrot before the big stick”.  Typically, in periods following an amnesty program, state taxing authorities are more aggressive in their enforcement and impose harsher penalties against non-compliant taxpayers who ignore d the initiative.   Online sellers concerned about what to do are well-advised to speak with their sales tax expert about how the MTC Amnesty Program may benefit them, before it ends on October 17, 2017.