Multistate Tax Commission Offers Online Sellers a Limited-Time Amnesty in Certain States

By Tina Chunn, SALT senior manager

As noted in an article from our July 2017 newsletter, many smaller companies that make online sales are using third-party fulfillment networks to store their products and provide pick, pack and ship and customer support services. Currently, many states consider the presence of resale inventory at these fulfillment centers to create nexus for sales/use tax and income tax purposes, thereby requiring these companies to collect and remit sales/use tax, file sales/use tax and income tax returns, and pay income taxes. Many of these companies are unaware of these state tax obligations, and therefore have unpaid tax liabilities.

In light of the foregoing, and in an effort to assist these companies in becoming compliant with their state tax obligations, the Multistate State Tax Commission (“MTC”) has developed an amnesty (i.e., voluntary disclosure) program for businesses that have made online sales using a “marketplace provider/facilitator,” such as Amazon’s fulfillment by Amazon (“FBA”) program or similar program. [1] This program is limited to applications received between Aug. 17, 2017 and Oct. 17, 2017, and will relieve the taxpayer of fines and penalties, as well as back taxes in many cases, for periods up to Dec. 1, 2017. The amnesty will apply to sales/use as well as income/franchise taxes in these participating states.

This program presents a unique opportunity for online sellers that use a marketplace provider/facilitator to wipe out any prior-period tax exposures and get into compliance with their state tax obligations going forward. In a typical voluntary disclosure program, states will ordinarily waive penalties, and in limited circumstances, interest, but will require the payment of back taxes for either a three- or four-year period (referred to as the “look-back period”). However, under this special initiative, many of the participating states have agreed to waive past due taxes without regard to the look-back period, provided that the taxpayer starts complying with its sales/use tax and income tax obligations by Dec. 1, 2017.

Since this program is a voluntary disclosure initiative, the taxpayer’s name will not be disclosed until the taxpayer registers with the state and the voluntary disclosure agreement is executed. Typically, the MTC will work with a taxpayer’s representative, such as Aprio, to coordinate this effort. Additionally, the program does not require the taxpayer to apply for all taxes in all states. The taxpayer is able to choose the states and taxes for which it seeks amnesty under the program. As of Aug. 14, there are 19 states participating in the program (more may be added).

Participation is limited to those taxpayers making online sales (including foreign sellers) with nexus in the state only through the use of a marketplace provider/facilitator. Other nexus-creating activities will void this program. Additionally, the taxpayer is not eligible for amnesty on taxes for which it is currently registered or for which it has had prior contact with the state.

We caution that states are beginning to audit online sellers that use a marketplace provider/facilitator, and are designing aggressive audit programs to identify and target these taxpayers. [2] As this amnesty period ends, many states will be less lenient in offering relief on back taxes for taxpayers if identified under audit. It is important to note that the statute of limitations does not run on back taxes if a return has never been filed in a state. Thus, states will be able to assess taxes for all prior periods during which this nexus-creating activity occurred.

The SALT team at Aprio has extensive experience working with state amnesty programs, and we are available to assist you in determining whether this program is appropriate for your business and developing an action plan to address this area of risk. Our goal is to make sure that your business is in compliance with its state tax obligations so that it does not encounter unexpected tax exposure. Please contact us today so that you do not miss the application window.

Contact Tina Chunn at tina.chunn@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

[1] The MTC is an intergovernmental state tax agency working on behalf of states and taxpayers to facilitate the equitable and efficient administration of state tax laws. For complete details on the program, including application procedures and forms. For purposes of this program, a “marketplace provider/facilitator” is “a person who facilitates a retail sale by an online marketplace seller by (1) listing or advertising for sale by the online marketplace seller on a website, tangible personal property, services, or digital goods that are subject to sales/use tax; (2) either directly or indirectly through agreements or arrangements with third parties collecting payment from the customer and transmitting that payment to the online marketplace seller; and providers fulfillment services to the online marketplace seller.”

[2] Based on comments made during a recent MTC webinar about this amnesty initiative, Washington, California and Pennsylvania are known to be actively targeting online sellers using a marketplace provider/facilitator for audit. Other states have revealed that they are developing methods and procedures for conducting these types of audits.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.