Today begins the 2-month open application period for Sales Tax Amnesty. During this window, ecommerce sellers can apply to have more than 20 states waive back taxes, penalties and interest. In a live webinar earlier this week, James Thomson of the Prosper Show joined me to answer questions from sellers about the amnesty program. Here is a summary of what we discussed during the webinar.
Q: Is this sales tax amnesty program only designed for Amazon sellers?
A: The key to understanding the amnesty is that every state with a sales tax holds that if a seller stores inventory in their state, then they have “nexus” which means they have an obligation to collect and remit tax when selling to in-state customers.
This amnesty is designed for sellers who are obligated to collect tax because they use an online marketplace that stores inventory for them in any of the participating states, but are currently not collecting tax. It is absolutely not limited to Fulfillment by Amazon sellers.
In determining whether or not this amnesty is right for you, think about whether you store inventory in any of the participating states but do not collect sales tax there. If that’s the case, you should give the program serious consideration.
Q: If I run my own eCommerce site, can I participate? What if I sell from outside of the U.S.?
A: If you are selling on your own website, or selling from outside of the country, you are welcome to apply for this program. It doesn’t matter where the sales are coming from, but on where the sales are going to.
Q: As an Amazon FBA seller, should I apply to states which currently are not FBA nexus sites, in anticipation for future FBA warehouse expansion? Or can that be handled in the future?
A: This program is particularly attractive to sellers who currently have nexus based on the fact that they have in-state inventory, the reason being is that the program absolves them of significant (sometimes all) past liability for tax, penalties and interest. In other words, it allows them to start in the state with a clean slate.
If you don’t have inventory in a state (or have nexus in any other way) the benefit of registering early is definitely a business decision. However, with respect to this particular program, the application process requires sellers make a good faith estimate of prior tax liability in each applicable state – it is not clear whether an application with zero previous liability will be accepted.
Q: What happens if you settle your tax liability, then stop using FBA – does your nexus in a state expire?
A: Yes – It is possible to eliminate your nexus in a state by ceasing the activity that causes that nexus (for instance by leaving the FBA program). However, some states have “trailing nexus” rules which cause a seller to still be obligated to collect tax for a period of time after their nexus footprint ceases to exist.
This means once you have registered with a state to be a tax collector and remitter (which is a condition of this amnesty program), the state will continue to expect tax returns and payments going forward. You can later inform the state that you no longer have nexus but it its likely best practice to get their buy-in before you determine exactly when you should stop collecting.
Q: If I’m just starting an ecommerce business and have not been making sales yet, should I participate in the amnesty program?
A: This program is meant to provide relief to business who owe back taxes. If you are just starting your business it is unlikely that you owe back taxes, and so you don’t really need this program. The task for you is to register with the states in which you are making sales and have nexus as a new business. This way you can get ahead of your tax liability and avoid needing to rely on an amnesty program like this one.
Q: What states are participating in this amnesty? Where can I find up to date information?
A: Currently there are over 20 states that have agreed to participate in this program, but a couple more states have signalled they may decide to join before August 17. Up to date information on the program can be found on the Taxify Sales Tax Amnesty page.
Q: If a seller doesn’t meet the threshold or bright line test for needing to file on income tax, are they agreeing to file income tax regardless of whether they actually need to in this program?
A: Absolutely not. Under the program, sellers are free to apply for either sales tax forgiveness, income/franchise tax forgiveness, or both, on a state by state basis. A seller need only apply in those situations where they feel they have a past obligation that they were not meeting.
Sales tax nexus is generally established with a physical presence, such as storing inventory in a state. Income tax nexus, however, is frequently based on meeting certain economic threshold factors, such as generating a certain amount of revenue in a state in a year. If you do not meet these requirements, you do not need to apply for income tax forgiveness and you do not need to register to report income tax going forward, even if you want to take advantage of the sales tax forgiveness.
It is important to carefully evaluate what actual tax liability you may have in each state before you fill out your application. Consulting with an accountant or other tax advisor is highly recommended. We would be happy to put you in touch with someone who can help.