By Shane Ratigan JD, LLM and Jennifar Hill JD, LLM
Online marketplace sellers can take advantage of a new multi-state tax amnesty program – if they apply by October 17, 2017.
Online marketplace platforms allow big and small companies to access a global market without incurring significant advertising or marketing costs. For those sellers that are looking to expand their customer base, using an online marketplace might be an attractive option.
Many sellers that utilize online marketplace providers also take advantage of marketplace providers’ order fulfillment services. Order fulfillment services help sellers avoid headaches by allowing them to take advantage of economies of scale. They do this by acting as an outside resource that maintains inventory, handles and packs orders, invoices customers, ships items, and even processes returns for the products sold.
Fulfillment Services and the Duty to Collect Sales Tax
In the taxation universe, the term “nexus” refers to the connections or activities with which a person or company engages. Those connections or activities may trigger an obligation to comply with tax rules within a given state or locality. For sales tax purposes, having physical presence in a state results in nexus.
For sales tax purposes, states often believe an entity has an obligation to comply with sales tax rules when the company has inventory located in the state. Once inventory is stored in a given state, the state will often take the position that the owner of the inventory has an obligation to comply the state’s sales tax rules.
For all the advantages order fulfillment services offer, there is at least one important complication to consider: Having inventory in an online marketplace provider’s fulfillment center in any given state likely triggers an obligation to calculate, collect, and remit sales taxes on sales made to customers within that state.
Sellers with an obligation to collect and remit sales tax are liable for uncollected tax, along with interest and penalties.
What to do Now?
For companies that are only now considering utilizing an order fulfillment service provided by an online marketplace provider, keep the concept of sales tax nexus, and the obligations it can entail, in mind.
For companies already engaged in a fulfillment relationship with an online marketplace provider, find out where your inventory is! These locations likely trigger sales tax nexus in the respective states.
The combination of new technology (online marketplace platforms), a new distribution channel (order fulfillment service providers), and an old way to trigger nexus (inventory stored in state), has put many e-commerce vendors in a situation they did not plan for.
At least 19 states are now offering a coordinated sales tax amnesty program that targets online marketplace sellers that use order fulfillment services. The program, called the Online Marketplace Seller Voluntary Disclosure Initiative, is being rolled out under the auspices of the Multistate Tax Commission (MTC). More details on the initiative, can be found on the MTC website.
How to Qualify for the Program
There are major benefits for those who participate in the program, including waiver of tax for past periods, waiver of penalties, and even income or franchise tax amnesty if requested. To qualify for the amnesty program, applicants must:
- Not be registered with the state taxing authority;
- Have no other nexus creating circumstances, besides those created by an arrangement with an online marketplace provider;
- File their applications within the provided time frame; and
- Once granted amnesty, register for the applicable tax accounts by Dec. 1, 2017.
In addition, the program rules allow an applicant to maintain anonymity throughout the process, with the MTC revealing the applicant’s name only if a voluntary disclosure agreement is signed.
These qualifications, and the risks involved, demand a closer look at an individual seller’s facts and circumstances to assess if there is a fit. Qualified sellers that choose to participate in the program could receive significant financial benefits and risk reduction. However, sellers don’t have much time to act; the program ends on October 17, 2017.
Please contact Bob Heller, Shane Ratigan, or another member of the CN state and local tax practice with any questions, comments, clarifications, or inquiries if you think your company might be ready to participate in the Online Marketplace Seller Voluntary Disclosure Initiative.
Jennifar Hill, Senior, is part of Clark Nuber’s state and local tax practice team.
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