“What’s A Remote Seller To Do?” you ask. “Register and Collect,” states say.

Ohio is the most recent of states to have enacted a click-through nexus provision.  To date, 24 other states have adopted (by statute or otherwise) some form of either an affiliate nexus or a click-through nexus provision.

Under an affiliate nexus provision, a rebuttable presumption of nexus is typically established for an out-of-state seller that has an in-state affiliate selling similar products, storing inventory, or engaging in other activities that potentially assist the out-of-state entity in building or maintaining a marketplace in the state.  Under a click-through nexus provision, a rebuttable presumption of nexus is established for an out-of-state seller that enters into an agreement with an in-state seller who, for consideration, refers potential customers to the out-of-state seller.  This referral typically occurs via a web link on the in-state seller’s website.

In essence, if I am an e-commerce company using Amazon FBA program services, and storing inventory in Amazon warehouses, I must register for sales tax in each state in which Amazon has a warehouse.

These standards are creating potential nexus for remote sellers transacting business over the Internet on electronic marketplace websites such as Etsy, Overstock and Amazon.  Further exacerbating the compliance headaches for fledgling e-commerce companies is the reality that Amazon is opening warehouses throughout the country, encompassing half the states to date.  Through Amazon’s FBA (Fulfillment By Amazon) program, for a fee Amazon will store an e-commerce company’s inventory in its warehouses, fulfill customer orders, and provide invoice and collection services for FBA program participants.  In order to meet the same or next-day needs of its customers, Amazon moves FBA program participant inventory to the warehouses that are most-cost effective for Amazon. 

In other words, if I am a Nevada-based e-commerce retailer participating in the Amazon FBA program, and 50% of my customer orders are on the East Coast, Amazon will move more of my inventory from warehouses to which I directed my suppliers to ship, to warehouses located on the East Coast, in order to minimize individual order shipping costs and increase speed of delivery.  This means that quite often an FBA program participant has no idea where its inventory is being stored until it receives its sales reports from Amazon denoting form where the orders were fulfilled.  Nearly every state in which Amazon stores my inventory to via FBA considers that inventory to create nexus for sales tax, and potentially other tax purposes.  In essence, if I am an e-commerce company using Amazon FBA program services, and storing inventory in Amazon warehouses, I must register for sales tax in each state in which Amazon has a warehouse.

... if I have never registered or filed a sales tax return in a state, there is no statute of limitations or limitation on the state’s ability to look back and collect the tax from me.

Furthermore, once registered for sales tax in a state, I must collect sales tax on all sales to customers located in that state, not just those fulfilled by Amazon.  I must also be concerned about whether my third-party web-linking agreements or affiliates are creating nexus for me in other states that have enacted some form of either an affiliate nexus or a click through nexus provision.  

To make matters worse, if I have been selling in state in which I have nexus (e.g., stored inventory in an Amazon warehouse) since 2009, the states can go back to 2009 to collected the tax out of my pockets.  In other words, if I have never registered or filed a sales tax return in a state, there is no statute of limitations or limitation on the state’s ability to look back and collect the tax from me.  This is tax that I could have – and should have – been collecting from my customers all along, and will be hard pressed to ever get from them 5 or 6 years after the sale. 

During the past six months, I have represented numerous e-commerce retailers in negotiated settlements (e.g., Voluntary Disclosure Agreements) with such states.  

For those readers not familiar with the benefits of a Voluntary Disclosure Agreement (VDA), the benefits include:

• Anonymously disclose and remit unpaid, underreported, or overdue taxes, including those collected and not remitted, without fear of state legal action or audit.  Since they don’t know who the retailer is, the retailer has leverage to negotiate a settlement.  If they discover the retailer before the retailer approaches them anonymously, “all bets are off”;
• Limitation of the "look-back period" to statutory periods (typically 3 or 4 years);
• Full waiver of all civil and criminal penalties;
• Self-audit results are reported for purposes of liability disclosure, minimizing risk of audit error or issue resolution to the state’s benefit;
• Immediate registration and ability to begin collecting the sales tax from my customers on each sale – that is, we can “stop the bleeding”.

Not only have our negotiated settlement efforts (VDA) resulted in minimized lookback periods and reduced tax liability for my clients, they have

• eliminated hundreds of thousands of dollars in penalties;
• established payment plans for the retailer to be able to re-pay the liabilities over time; and
• enabled the retailers to begin collecting the tax from the customers.  

It will not be long before they have the names of the FBA program participants, as well as those selling through other electronic marketplaces.  This is what we call “fish in a barrel.”  

It is extremely difficult to register prospectively to collect the sales tax from customers without addressing historical compliance exposure.  These periods will always remain open and can threaten the viability of a business is discovered by a state or states (they do talk to one another).

My contacts at each of these states have shared with me that they are currently flooded with such settlements and are ramping up audit efforts to proactively pursue enforcement against e-commerce retailers.  It will not be long before they have the names of the FBA program participants, as well as those selling through other electronic marketplaces.  This is what we call “fish in a barrel.”  

The moral of the story . . . it is becoming increasingly difficult for businesses – especially remote sellers - to keep track of where their business activities may give rise to sales tax collection and filing responsibilities.  States continue to adopt novel standards under which remote sellers are deemed to have sales tax nexus, and continue to enhance enforcement efforts against remote sellers.  Due to the increased presence of companies like Amazon, traditional modes of electronic commerce are resulting in sales tax nexus compliance obligations for companies that utilize these marketplaces to reach a wider audience. However, proactively identifying these areas of exposure and negotiating favorable disclosure agreements with states in exchange for prospective tax compliance can save a company $Millions in unrecorded historical liabilities.