On July 31, the Multi-state Tax Commission’s (MTC) Nexus Committee convened to discuss a proposed voluntary disclosure agreement (VDA) program, which could provide tax relief for remote sellers using Amazon’s Fulfillment by Amazon (FBA), and similar marketplace services. Fifteen states indicated at the meeting that they would be interested in participating in the program. The MTC is an organization that works to achieve fairness within tax policy by developing uniform tax rules and policies that affect interstate commerce.
As proposed, the VDA program will have certain remote sellers apply to become compliant, tax- paying entities going forward in participating states. As an incentive, this VDA program would provide the remote sellers with several asked-for protections, in particular removing, or at least minimizing, assessments of back taxes owed for sales made by the remote seller where sales tax was not remitted.
Who Can Participate?
The VDA program is designed for remote sellers using online marketplaces, like the FBA program, who have no physical presence nexus in a state, except for having inventory stocked at an in-state fulfillment center used by the marketplace. Physical presence nexus is required for a state to be able to impose tax liability on a business. However, states consider having inventory held in stock by a third party for the purpose of fulfilling orders as creating physical presence nexus.
Remote sellers using third party fulfillment centers, as FBA sellers do, therefore have tax liability in any state where a fulfillment center containing their inventory is based. However, for a number of reasons, remote sellers may fail to collect tax in these states. This VDA program is designed to bring these remote sellers into compliance with their existing tax obligations.
Under this VDA program, the remote seller will need to affirm to the state that its only connection to the state is having inventory stored at an online marketplace’s local warehouse or fulfillment center. Remote sellers will need to have had no contact with a state’s Department of Revenue prior to applying, including having received notices for taxes owed. Participating states can set up further conditions, such as a minimum for taxes owed.
Qualifying remote sellers will be able to send in applications for the VDA to participating states from August 17 through October 17, 2017. The timing will ensure that these remote sellers will be enabled to report and remit taxes made during the busy holiday season.
What Does the VDA Program Do?
At a base level, a remote seller will apply to a state to become a tax collector going forward. The proposed VDA is not limited to a remote seller’s potential sales tax liability. It also includes any other tax, such as corporate income or franchise taxes, which the business could be subject to.
The key incentive in this proposed VDA program is that participating states will concede back taxes owed, including any interest that may have accrued. Under standard voluntary disclosures, a state imposes a lookback period, generally about three or four years, for which the disclosing business would owe back taxes and interest. As proposed, the VDA program has states waiving this “lookback period.”
Several states indicated at the July 31 meeting that they would be unable to fully waive the lookback — either because of policy reasons or because state law actually forbids such tax relief — though they would consider reducing the period or not imposing interest on taxes due.
The lookback period can be a particular pain point for remote sellers looking to become compliant, as the costs of gathering required documents and of paying the back taxes and interest can become exorbitant. Abrogating the lookback, if not removing it entirely, would make this program much more attractive than a standard VDA.
As an additional perk, the proposed VDA program would prohibit a state from releasing a business’s information as part of any blanket request for taxpayer information from other taxing jurisdictions. The risk of having one’s failure to pay tax disclosed to many other states has been another reason why businesses have been loath to go in for other voluntary disclosure programs However, a state could still release taxpayer information if required by law, or due to a court order.
What Comes Next?
At the July 31 meeting, Alabama, Arkansas, Colorado, Connecticut, Kansas, Kentucky, Louisiana, Nebraska, New Jersey, Oklahoma, Texas, Utah, and Vermont all indicated that they intended to implement the proposed VDA. Details on how they would implement it still needed to be hammered out. Eight additional states have indicated that they are still considering whether to participate, and will announce a decision before the August 17, 2017 start date.
Richard Cram of the MTC will be hosting a live webinar on August 9 at 2pm ET/11am PT, where he will discuss this program and go over details on who is eligible, how they would apply, and other issues to consider as an online seller when looking into the VDA program. Register for the webinar here.
For more information on how to qualify for sales tax amnesty, check out our guide, and learn how Taxify can help.