MTC Announces Voluntary Amnesty Initiative for Online Marketplace Sellers

The Multistate Tax Commission (MTC) has just announced a special tax amnesty program for unregistered online marketplace sellers that have established nexus and historical exposure as a result of storing inventory in third-party fulfillment centers that facilitate retail sales into the state (e.g., Amazon FBA program).  Under the program, eligible taxpayers may obtain amnesty from any past due sales/use tax, and if applicable, income/franchise tax liability, including interest and penalties, in connection with online retail sales activity in the participating states. 

The MTC is an intergovernmental state tax agency working on behalf of states and taxpayers to facilitate the equitable and efficient administration of state tax laws.  The states participating in the voluntary amnesty program will consider applications for voluntary disclosure received by MTC staff during the time period August 17, 2017 through October 17, 2017 from taxpayers meeting certain eligibility criteria.

The MTC Voluntary Disclosure Program is a huge victory for Online Marketplace Sellers.

Taxpayers seeking to take advantage of this opportunity may anonymously apply for voluntary disclosure with each state online via the MTC website, or via the downloadable PDF application.  There are certain limitations in specific states participating in the program.  As such, taxpayers are advised to consult a multistate tax expert regarding the merit of proceeding under the auspice of this initiative.  Taxpayers may learn more about the Voluntary Disclosure (Amnesty) Initiative, their eligibility, and the merits of proceeding under the program, by contacting Dillon Tax Consulting.

In order to be eligible, among other things, (1) the taxpayer must not currently be registered for sales or income/franchise tax, (2) must not have been in contact with the state, and (3) must be an online seller with no nexus (physical presence) in the state other than the presence of inventory in the state using the services of a marketplace provider/facilitator (such as the Amazon FBA program or similar platform or program) to facilitate retail sales into the state.  This last eligibility criteria means that the only presence in the state in which the taxpayer seeks amnesty is the presence of inventory stored in third-party fulfillment centers, or other nexus-creating activities of the marketplace provider/facilitator on behalf of the online marketplace seller in the state.  There are other criteria pertinent to a taxpayer’s eligibility to be accepted into the MTC program by each state.  As such, taxpayers are advised to consult a multistate tax expert regarding the merit of proceeding under the auspice of this initiative.

a taxpayer may apply anonymously to each state, and will not be required to disclose its identity to a state until the state executes the Voluntary Disclosure Agreement (VDA) with the taxpayer and the taxpayer registers with the state.  

Currently, the states participating in the MTC Voluntary Disclosure Program for Online Marketplace Sellers include: Alabama, Arkansas, Colorado, Connecticut, Idaho, Iowa, Kansas, Kentucky, Louisiana, Nebraska, New Jersey, Oklahoma, South Dakota, Texas, Utah, Vermont, and Wisconsin.  Subject to certain limitations in specific states, taxpayers seeking amnesty under this initiative may file for relief from any past due sales/use tax, and if applicable, income/franchise tax liability, including interest and penalties, in connection with online retail sales activity in the state, except for sales/use tax collected but not remitted.  As part of the Voluntary Disclosure Initiative, in exchange for relief from past due tax, interest and penalties, the taxpayer agrees to register as a seller or retailer with the state and timely collect, report and remit sales/use tax and file returns on all taxable retail sales to customers in the state prospectively as of the effective date (prior to, but no later than December 1, 2017) of the voluntary disclosure agreement.  Likewise, to the extent subject to income/franchise tax, taxpayers shall agree to file and pay income/franchise taxes due, commencing with the tax year including the effective date (not later than December 1, 2017) of the voluntary disclosure agreement.  Taxpayers may select the states for which they seek to apply for amnesty under the MTC Voluntary Disclosure Program for Online Marketplace Sellers.  As such, this is not an “all or nothing” opportunity for online sellers seeking to register and “clean up the past”.  In addition, a taxpayer may apply anonymously to each state, and will not be required to disclose its identity to a state until the state executes the Voluntary Disclosure Agreement (VDA) with the taxpayer and the taxpayer registers with the state.  As such, a taxpayer may withdraw an application to a specific state – or all states – at any time prior to registering and responding to the state’s executed VDA.

This initiative is a tremendous opportunity for online sellers that have historical nexus and exposure in participating states.  Typically, if a taxpayer with years of historical nexus and tax exposure pursues voluntary disclosure with a state, the taxpayer will be required to file and pay back tax liability, plus interest, for the statutory lookback period that the state uses, which is generally the prior three to four years or more, depending on the state’s law or policy.  The state will then waive tax liability, interest and penalties for the time period prior to the lookback period.  If the state contacts or initiates enforcement against such a taxpayer before the taxpayer seeks voluntary compliance, there is not limitation of lookback and no waiver of penalties, which can often double the exposure.

[This Initiative] clearly establishes the state taxing authorities’ policy that the presence of inventory in a state does establish a sales tax nexus, or physical presence, for remote online sellers with no other nexus creating activities in the state.

The advent of this initiative certainly sheds light on the state taxing authorities’ lack of faith in Congressional ability to pass a measure such as the Marketplace Fairness Act, or similar measures that would authorize them to begin imposing sales tax collection obligations on online or remote sellers that otherwise lack a physical presence.  It also clearly establishes the state taxing authorities’ policy that the presence of inventory in a state does establish a sales tax nexus, or physical presence, for remote online sellers with no other nexus creating activities in the state.

Coming on the heels of the recent legislative effort to ensure that states are federally prohibited from imposing collection and reporting obligations on e-retailers and out-of-state sellers making sales within a state if the seller does not have physical presence in that jurisdiction [see No Regulation Without Representation Act (HR 2887)], the MTC Voluntary Disclosure Program is a huge victory for Online Marketplace Sellers.  Specifically, Online Sellers that have not registered for sales and income/franchise tax in states in which they store inventory should heed the MTC Voluntary Disclosure Program for Online Marketplace Sellers as a warning – this is a carrot before the proverbial stick.  Typically, in periods following an amnesty program, state taxing authorities are more aggressive in their enforcement and impose harsher penalties against non-compliant taxpayers who ignore d the initiative.   Given that recent practitioner and taxpayer discussions with the MTC surrounding the Voluntary Disclosure Program have created more questions than answers, taxpayers are advised to consult a multistate tax expert regarding the initiative, their individual facts, which states and which taxes to address under this program.  Furthermore, for taxpayers that have already registered, given the protection afforded through taxpayer anonymity during the entire process, we believe that even registered taxpayers have nothing to lose by applying for relief and disclosing that they recently registered, without identifying who they are.  The worst the states can do is deny the application – the best being that they accept it and the past is wiped clean in the given state.