How often do states forgive taxpayers back tax liabilities or, for that matter, agree on anything? It’s probably about as rare as the recent total solar eclipse. But, as of August 17, 2017, for a two-month period ending October 17, 2017, over 20 states have come together through the Multistate Tax Commission to offer online marketplace retailers a unique and robust tax amnesty program. If the taxpayer is approved, this program generally allows a taxpayer’s back taxes to be forgiven in exchange for agreeing to register, file, and pay state taxes going forward.
Background: Over recent years, many small- to medium-sized online retailers have had a tremendous opportunity to expand their online markets and obtain efficiencies in the fulfillment/shipping of its goods to customers. This opportunity has come through innovative third party companies like Amazon, EBay and others. Amazon’s program is called “Fulfillment by Amazon” (FBA).
The way these programs work is that the online FBA retailer through this service is allowed to utilize Amazon’s distribution facilities and essentially outsource the entire fulfillment process. Amazon, for example, has warehouse distribution centers all over the U.S. and will inventory and position the online retailer’s product strategically in their distribution center network. This ensures the efficient and timely delivery of the seller’s specific product purchased online to the end user customer. Therefore, once the taxpayer starts participating in the FBA, the online retailer may have product inventory located in many states where it otherwise would not have a connection or nexus.
Undiscovered Back Tax Liabilities: Most states deem inventory located within their state alone as sufficient connection so that the state’s taxes will generally apply to that taxpayer. Many online retailers have struggled with these requirements, especially for sales tax purposes. Because of the inventory located in a state, they should (most likely) be charging, collecting and remitting that state’s state/local sales tax on sales in that state. As a result, there are many of these retailers who likely have several years of back tax liabilities that are just waiting to be discovered if (or when) a state decides to audit them.
Participating States: Alabama, Arkansas, Colorado, Connecticut, DC, Florida, Idaho, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Minnesota, Missouri, Nebraska, New Jersey, North Carolina, Oklahoma, South Dakota, Tennessee, Texas, Utah, Vermont, and Wisconsin.
What are the requirements for participating?
The Taxpayer must:
- Be an online marketplace retailer
- Not already be registered with the state
- Have had no contact with the state regarding the back tax liability
- Timely apply for approval through the MTC (Aug. 17 through Oct. 17, 2017)
- Include in the application a “good faith” estimate of the back tax liability (all applicable taxes)
- Agree to register, file and report applicable taxes going forward.
Items to think about if you participate:
- Peace of mind created knowing you are compliant going forward and have no back tax liabilities
- Some competitive advantage may be lost going forward with other online retailers who are not complying and collecting the sales tax for example.
- You will have an ongoing tax return filing and tax payment obligation (probably a monthly filing obligation in each state). You will have to register and begin collecting and filing tax returns in the states where you have inventory and into which you are selling product.
- Other taxes like income taxes may also apply.
How do I apply?
- Determine the states where you have potential tax liability
- Estimate your tax liability by state
- Consult with your state and local tax advisor to verify your eligibility and to discuss the pros and cons of participation in the program
- Your state and local tax advisor can also assist you in the anonymous MTC application process
- File with the Multistate Tax Commission under the MTC Multistate Voluntary Disclosure Program
The State and Local Tax group at Crosslin stands ready to assist you with this or any state and local tax need you may have. If you have questions, or if we can be of service, please contact Mark Loftis, Director of State and Local Tax, mark.loftis@crosslinpc.com or 615.320.5500 ext. 472.
