While most companies (U.S. and foreign) understand that owning inventory in a private or public warehouse creates a non-rebuttable presumption of state income/franchise tax and sales/use tax collection nexus, companies often lose sight that storing inventory at an Amazon warehouse through the Fulfillment by Amazon program (“FBA” and similar marketplace programs) likewise creates nexus.
Under FBA, sellers can list their products on Amazon’s website (alongside Amazon’s products) and have Amazon hold their inventory in warehouses throughout the United States. Once an order is received, Amazon then ships those products to the sellers’ purchaser.
The physical presence of inventory in Amazon’s warehouses is sufficient to create nexus for corporate income/franchise taxes, personal income taxes, and sales tax collection regardless if the seller has any other physical or economical presence in the state. It is up to the seller to know what state the inventory resides in, being mindful that nexus may be expanded from the original ship-to-state to other states if some of the inventory is moved by Amazon to a warehouse in another state.
Amazon will not give tax advice to their market place sellers about whether and where they should be charging sales tax on their sales and will only collect the tax (for a fee) in states that the marketplace seller instructs Amazon to collect the tax (although this later position is currently the subject of controversy in South Carolina). It remains the responsibility of the sellers to remit the tax to the appropriate state and file state sales tax returns.
State tax departments recognize that there is widespread non-compliance through the use of marketplace inventory fulfillment, such as Fulfillment by Amazon, and are ramping up their efforts to ferret out companies that are not complying with their state sales tax obligations. As fair warning, some states have recently joined the Multistate Tax Commission’s (“MTC”) Online Marketplace Seller Voluntary Disclosure Initiative.
In cooperation with certain states, the MTC has announced a one-time amnesty program that will allow online marketplace sellers utilizing a marketplace provider/facilitator (with the seller having no other physical presence nexus) to either settle back year state taxes under a favorable look-back period or, in some states, will waive taxes due for all prior years, so long as the sellers agree to be compliant prospectively (generally by December 1, 2017).
Those sellers that have nexus in a participating state and don’t participate in the MTC’s limited amnesty program, could, upon discovery by a state tax authority, be subject to taxes (plus interest and penalties) since the seller first maintained property in an Amazon or other marketplace warehouse or location. Furthermore, sellers that don’t participate in the MTC amnesty program may potentially be jeopardizing their ability to independently enter into voluntary disclosure programs with the participating states under similar favorable terms.
As of the date of this article, according to the MTC, the following states have agreed to participate in the amnesty program:
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
Please beware that other states may decide to join after the date of this article. In addition, states not joining, such as California and New York, may entertain favorable terms under their general voluntary disclosure programs.
A seller will be allowed to participate on a confidential, no-name basis during the voluntary disclosure process on a state-by-state and tax type basis. A seller will not need to identify itself to a state until it has entered into a Voluntary Disclosure Agreement with that state. To participate in the MTC amnesty program, a seller will be required to apply through the MTC and among the information that will be required is a reasonable estimate of the seller’s tax liabilities (i.e., corporate income/franchise taxes, uncollected sales taxes, pass-through entity owners’ personal income taxes, etc.) for the past four (4) years.
Any business that is selling its products through Amazon’s marketplace or utilizing similar marketplace providers should analyze its state tax compliance and determine whether it makes sense to enter into the MTC’s amnesty program. The multi-state tax amnesty program is specifically targeted and limited to sellers that utilize marketplace providers. However, states offer general voluntary disclosure programs throughout the year and allow companies to come forward to comply with their state tax obligations. Nevertheless, the MTC’s amnesty program seemingly contains more favorable terms than would otherwise be available to marketplace sellers.
This year is an extremely volatile year in the area of sales and use taxation. States are exceedingly becoming aggressive in seeking sales and use taxes that have not been paid.
Please click on the following links to read other articles by Tony Switajewski on this topic:
If you would like to learn more about this one-time amnesty initiative or would like assistance in entering the amnesty program, please contact Tony Switajewski at (860) 561-6810 or firstname.lastname@example.org
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.