The past year proved that this is a critical time for online marketplace sellers, as more states enact sales tax nexus legislation that targets online sellers. States want to capture some of the growing revenue as people increasingly turn to online marketplaces, such as Amazon, for their shopping needs, in turn increasing online seller tax compliance obligations.
It is important to remember that if a seller has any presence in a state – such as inventory in a 3rd party warehouse – this creates “traditional” nexus. Physical presence in the state requires registration and collection.
However, for online sellers with no physical presence to create nexus, states have attempted to play catch-up by enacting remote seller nexus legislation. This helps the states capture sales tax revenue from out-of-state sellers.
Behind this picture are the sellers themselves — and the accountants and tax professionals who guide them. How will you stay on top of all the new requirements? How will you avoid potentially hefty penalties for noncompliance?
Here are three of the most important sales tax developments to be aware of in order to help your clients who are online sellers minimize risk.
1) Implications of South Dakota v. Wayfair Supreme Court Decision
We are on the cusp of one of the most important court decisions regarding sales tax in decades. On January 12, 2018, the U.S. Supreme Court agreed to hear South Dakota v. Wayfair, Inc., a case that revolves around the concept of economic nexus – nexus that correlates with a set level of sales or gross receipts activity within a state and requires no physical presence.
In taking on the dispute between South Dakota and Wayfair, the Supreme Court will determine whether states have the right to require tax collection from online marketplace sellers and other remote sellers with no physical presence in their states.
The issue of sales tax nexus has not been addressed on a federal level since the Supreme Court decision in Quill Corp. v. North Dakota in 1992, and so much has changed since then. For perspective, in 1992 there were only 10 websites and no internet users. Today, people live and breathe the internet, and e-commerce thrives as a result.
Since states can’t require online retailers that don’t have physical presence in the state to collect and remit sales tax, they have come up with other ways to bring in revenue from online sales. It’s unlikely that states will hold off on passing legislation on remote sellers in anticipation of a Supreme Court decision.
Given that South Dakota v. Wayfair rose to the highest court, the days are likely numbered when remote sellers won’t face some sort of tax collection or reporting requirements in every state. The only question is whether it will be a Supreme Court decision, Federal legislation, or a patchwork of state rules that will bring the changes.
2) Notice and Reporting Requirements Legislation
One vehicle that states use to capture tax revenue from remote sellers is notice and reporting requirements legislation. Generally, this type of legislation requires non-collecting retailers that make sales into a state but do not collect sales or use tax, to file reports with the state’s Department of Revenue as well as notify customers of their use tax obligation. This puts the use tax remittance burden on the customer rather than placing a collection responsibility on the seller. However, the notice and reporting requirements are burdensome – arguably more so than collection.
A flurry of states enacted reporting requirements legislation with 2017 and 2018 effective dates, each with their own nuances. Some states built in significant penalties for non-complying remote sellers. For example, Rhode Island’s legislation includes five separate requirements that each carry a $10,000 penalty per calendar year for non-compliance.
In some of these states, there are sales or taxable sales thresholds that sellers need to exceed before they are subject to the notice and reporting rules. If these thresholds are exceeded, the seller may choose to comply with notice and reporting requirements or simply register to collect and remit sales tax. Of course, this is what the states are hoping for and will be important to consider, as the reporting requirements can be more of a hassle than collecting.
But, remember that for online marketplace sellers in the Amazon FBA program, inventory in Amazon’s warehouses establishes physical nexus with the states. And this requires registration and collection of the tax.
3) Tax Amnesty Opportunities
Tax amnesty programs are rare opportunities that states give taxpayers to help them out, but they are frequently underutilized. As states crack down on collection, they also tend to introduce an amnesty program to help companies get ahead of a bad situation.
Some states enacted tax amnesty programs that are up and running this year, and more may do so in the course of 2018. What is the benefit to taxpayers? If you are required to collect and remit sales tax in a state and have neglected to do so, tax amnesty programs typically offer some terrific benefits – sometimes including tax forgiveness, interest reductions, and penalty abatements.
Eight hundred and fifty-two online sellers participated during the fall of 2017 in the Multi-State Tax Commission’s Online Seller Amnesty program in order to minimize their liability. The program was geared toward traditional online marketplace sellers with inventory in third-party warehouses. Twenty-five states participated and most provided full tax forgiveness. These sellers removed millions of dollars of tax risk from their businesses (and their personal liability).
While such programs are helpful for companies, they might serve as motivation for states to hone efforts to go after online sellers. A few states (led by Massachusetts, which sued Amazon) have a list of all FBA Sellers with inventory in their state and are now systematically sending notices to alert companies that they have past liabilities and must register to collect tax. We have worked with a number of companies that have been discovered by a few states. In these cases, options are very limited and typically require payment of tax back to the initial date nexus was created.
In states that don’t have an amnesty program running, there are still options such as a Voluntary Disclosure. And we’ve been working with a few states to negotiate limited look-back periods for online sellers.
The Importance of Staying Ahead
Online marketplace sellers that aren’t aware of their requirements to collect sales tax and haven’t adjusted to recent changes are likely mishandling sales and use tax on their sales. This leads to trouble if they’re audited, potentially resulting in tremendous unexpected costs.
As states crack down hard on online sellers and limit the opportunity for tax amnesty, it’s more important than ever to help online seller clients understand what they must do to get straight with sales tax. As business advisors, you should be ready to help your clients evaluate this tricky area.
- How are you advising your clients about these issues?
- Are your clients the type to close their eyes and hope the states don’t find them? Or are they actively looking to manage their risk?
- Are you prepared to talk them through this decision?
Please share your experiences, thoughts, and questions in the Comments section!