By Scott Peterson, Avalara
“The slow pace of tax revenue growth has left many [states] with little or no wiggle room in their budgets. Nineteen states still collect less tax revenue than at their recession-era peaks, after adjusting for inflation, and most have a thinner financial cushion than they did before the last downturn.” This statement from the new Fiscal 50: State Trends and Analysis report, produced by The Pew Charitable Trusts, confirms what we suspected: States are looking to increase revenue.
Frequently, when a state needs to increase revenue, it looks at sales taxes. A sales tax strategy getting more and more traction today is going after Fulfillment by Amazon (FBA) and other marketplace sellers. FBAs are the third-party sellers using Amazon to fulfill orders on their behalf. To do this, their inventory is stored in Amazon warehouses, and Amazon is free to move the inventory from warehouse to warehouse as it sees fit. The consequence of this is that the FBAs may now have a physical presence in multiple states, creating in each one a “nexus” — that is, an obligation to collect sales and use tax on behalf of that state.
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Until recently, states generally ignored FBAs, but third-party marketplaces did more than a trillion dollars in sales in 2016, making them just too tempting to ignore. Several states have enacted or are considering enacting legislation related to taxing marketplace sales, including Minnesota, Washington, Virginia, Arizona, New York, Rhode Island and Texas.
The Choices For FBAs
The choices for FBAs are not optimal. They can choose to do nothing and wait until a taxing authority comes calling. Bureaucracies being what they are, it could be some time before an issue arises. The downside of this, however, is that when a taxing authority does approach, the company may find itself with significant past taxes due — and possibly interest and penalties.
A better option for many FBAs is to participate in a new sales tax amnesty program for third-party sellers. The program offers sellers a chance to come “clean” if they haven’t been collecting sales tax in states where they should. It also applies to any sale made by a seller, regardless of how they make that sale, as long as the only nexus the seller has with a state is having property in a fulfillment center. As part of the amnesty program — launched by the Nexus Committee of the Multistate Tax Commission (MTC) and run through MTC’s National Nexus Program (NNP) — sellers would:
- Voluntarily begin paying taxes in states “in which they may have substantial nexus.” In return, sellers would be protected from liability for back taxes in almost all the participating states. Some states are willing to only waive interest and penalties accrued during their “look-back periods.”
- Begin collecting and remitting sales tax in those states were nexus exists. Amazon will collect the sales tax if requested to do so and charges 2.9% of the sales tax collected in that state. Third-party services are also available to automate sales tax collection and remittance.
As of this writing, 21 states are participating in the amnesty program, including Alabama, Arkansas, Colorado, Connecticut, Florida, Idaho, Iowa, Kansas, Kentucky, Louisiana, Missouri, Nebraska, New Jersey, Oklahoma, South Dakota, Tennessee, Texas, Utah, Vermont, Washington D.C. and Wisconsin. The program is scheduled to run from August 17 to October 17, 2017, ahead of the next holiday season.
What FBAs And Other Third-Party Sellers Should Do Next
- Determine which states they might owe sales tax in and the amount of sales they are doing.
- Talk to an accounting expert to weigh the risks and rewards of participation in the amnesty program, including the potential costs of inaction vs. relying on a third-party service to calculate and remit sales taxes vs. paying Amazon 2.9% of the collected sales tax per state.
- Visit the sales tax amnesty program web site for more information or to enroll.
- Put in place processes to ensure they properly remit and report the collected sales taxes for each state. This can be supported by a third-party service to reduce complexity and ensure accuracy, or for FBAs by Amazon.
Carefully considering whether the sales tax amnesty program is right for you is a good step toward better understanding your sales tax obligations. If you know or discover you have nexus in a participating state but you’re not collecting there yet, you may essentially get a clean slate while the program is in effect.
Scott Peterson is Vice President, U.S. Tax Policy and Government Relations, Avalara, Inc. In his role, Peterson leads Avalara’s effort to be the first name in sales tax automation. Prior to joining Avalara Peterson was the first Executive Director of the Streamlined Sales Tax Governing Board. For seven years he acted as the chief operating officer of an organization devoted to making sales tax simpler and more uniform for the benefit of business. Before joining Streamline, Peterson spent 10 years as the Director of the South Dakota Sales Tax Division, where he was responsible for the state sales and use tax, the state’s contractor’s excise tax, the sales and use tax for over 200 cities, and the sales and use tax for four tribal governments.
