Where is the Inventory Located?
Many businesses that sell their products online are not responsible for collecting sales taxes or having to file state income tax returns in states where they do not have a physical presence. This is due to two main reasons: 1) the U.S. Supreme Court ruling in Quill (1992) that prohibits states from imposing sales tax collection responsibilities if there is no physical presence in the state (usually it is a state’s use tax that is involved, but for the purpose of this article, both sales and use taxes will be referred to as sales taxes); and 2) Federal Public Law 86-272 prohibits a state from imposing a net income tax when the in-state activities are limited to solicitation of orders of tangible personal property and such orders are accepted and shipped from outside of the state.
States have been aggressively fighting these limitations over the years; passing laws that assert filing requirements when affiliated companies do business in their state or when out-of-state companies post links to their website on the site of third parties located within the given state.
Recently, states have found another means to assert state tax filing requirements – by targeting companies that sell through online marketplace providers such as Amazon’s Fulfillment by Amazon (FBA) program. The FBA program allows companies to sell their products using Amazon’s logistical and online infrastructure. In order for Amazon to fulfill these orders, it needs to have the company’s products on hand at an Amazon warehouse. This results in the company owning inventory in states where Amazon warehouses are located, creating two significant state tax issues: 1) physical presence is created that will allow states to require the company to collect and remit their state’s sales tax; and 2) owning inventory is an activity that exceeds the federal protection provided by Public Law 86-272 subjecting the company to income taxation in such states.
The Possible Solution
MTC Online Marketplace Voluntary Disclosure Program
In order to encourage state filing compliance for these online companies, the Multistate Tax Commission (MTC) has worked with and reached an agreement with 24 states and the District of Columbia. The program typically allows qualifying companies that apply by November 1, 2017 to be relieved of prior tax return filing responsibilities (see below for exceptions). The qualifying company would need to begin collecting state sales taxes beginning with an effective date that is either December 1 or if later, 30 days after the taxpayer receives notice that the state has signed the voluntary disclosure agreement. The qualifying company would also need to begin filing state income tax returns for the tax year that includes the effective date. If there are any collected but unremitted taxes, such taxes will need to be remitted, and interest and penalties will be imposed on such taxes.
Qualifying companies are those that meet all of the following criteria:
- The company has not registered, filed returns, made payments of or had any other prior contact with the state for the taxes in which it seeks voluntary disclosure relief (NC will consider applications even if there has been other prior contact);
- The company is an online marketplace seller using a marketplace provider/facilitator (such as the Amazon FBA program) and represents that it does not have any nexus-creating contacts in the state, except for inventory stored in a third-party warehouse or fulfillment center, or other nexus-creating activities performed by the marketplace provider/facilitator on its behalf;
- The company has timely applied electronically by either completing an online application or emailing the completed application to the MTC at firstname.lastname@example.org stating that the organization is applying for relief under the MTC online marketplace voluntary disclosure program initiative; and
- The company agrees to the registration and filing time lines as mentioned above.
The application form can be filed anonymously and is due by Wednesday, November 1. A reasonable (but not exact) estimate of the back tax liability for the prior four years will be required as part of the application process. Please note that under this program, companies are allowed to participate even in situations where their back tax liability is under $500.
The participating states have also agreed to not share the information received as part of this program. The participants in this MTC online marketplace voluntary disclosure program are as follows: Alabama, Arkansas, Colorado, Connecticut, District of Columbia, Florida, Idaho, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Minnesota, Missouri, Nebraska, New Jersey, North Carolina, Oklahoma, Rhode Island, South Dakota, Tennessee, Texas, Utah, Vermont and Wisconsin. Note that Colorado, DC, Massachusetts, Minnesota and Wisconsin are requiring a more typical three to four year lookback period.
For qualifying companies, this can be a very beneficial program that will allow them to come into compliance with multiple state sales and income tax filing responsibilities without having to pay and file prior year taxes and interest. For more information, please feel free to contact your Sikich representative or Brian Kelley – State Tax Director at 262-754-9400. Additional information, including the application form itself, can be found on the Multistate Tax Commission’s website at: http://www.mtc.gov/Nexus-Program/Online-Marketplace-Seller-Initiative.