Some states are working on a new scheme to encourage marketplace sellers that use services such as Amazon’s FBA to collect sales tax. This time they are trying to tie inventory location to nexus.
In the sales tax world, nexus is the principle that a seller has a connection or series of connections linking their business to the state. As such, the states claim that inventory qualifies as a connection to invoke nexus. In theory, this would require sellers to collect sales tax.
The issue of nexus goes back to a case involving office supply mail order house Quill Corp. and the state of North Dakota. The state argued that Quill’s licensing of software in North Dakota invoked sufficient nexus in the state for Quill to become responsible for collecting sales tax.
However, the Supreme Court of the United States (SCOTUS) became involved in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). In its ruling, SCOTUS stated that a business must have a physical presence in a state for that state to require the merchant to collect sales tax.
Traditionally this was understood to mean an office, warehouse, or some other significant physical property. Using inventory seems a bit of a stretch, but that doesn’t deter states from trying.
AMAZON FBA, THE NEW BATTLEGROUND
While there are other fulfillment services, the primary battle will be around the popular Amazon FBA program. Many sellers use it exclusively to fulfill products.
The Multistate Tax Commission, an intergovernmental state tax agency founded 50 years ago as an effort by states to protect their tax authority, is now attempting the run at inventory nexus. Eyeing one trillion Dollars in marketplace sales, the states are keen to get a share of the potential sales tax receipts from those sales.
While there have been previous attempts to link Amazon and other fulfillment services as agents of the sellers, these attempts have had mixed results.
Mostly, the targeted fulfillment companies have the legal resources to protect the lucrative marketplace business. And none want to get into the game of becoming tax collectors. So they put up enough resistance for stated to back down.
Instead, the states are now attempting to go after the individual sellers directly. A far more difficult process.
It seems state agencies and state legislatures are less interested in expensive and potentially damaging legal fights with the likes of Amazon. What if Amazon would take a case all the way to the Supreme Court and win? This would effectively nullify any inventory nexus scheme states are trying to put in play.
VOLUNTARY DISCLOSURE SWEETENED BY AMNESTY
So the Multistate Tax Commission’s Nexus Committee (MTCNC) concocted another plan. They are dangling the carrot of “Amnesty” to sellers to voluntarily start collecting sales tax in exchange for not having to pay back taxes.
The basic idea is that starting from August 17, 2017, sellers have 60 days to voluntarily disclose their previous sales into participating amnesty states. In exchange for providing the information and starting to collect sales tax, the sellers will not become responsible for previous sales tax liabilities.
This is based on the assumption that states even have the legal standing to enforce collection of sales taxes by entities located in other states.
In all states that collect sales tax, it is always the seller who is ultimately responsible for sales tax remittances, regardless if the seller received the actual sales tax from their customer.
The problem is that audits by sales tax revenue agencies can go back years and if a seller is found not to have collected sales tax when they should have, the seller must pay the state the tax, penalties, and interest.
It is this threat of potential liability for back taxes, interest, and penalties that the MTCNC is trying to use to coax marketplace sellers to voluntarily collect and submit sales tax.
THE PROBLEM WITH INVENTORY NEXUS
The issues of inventory nexus, especially with Amazon FBA program, are multi-fold.
First, with over 140 Amazon distribution centers in virtually all states, Amazon would have to provide each seller with detailed information about the location of their products.
Sellers would have to determine for which states they must collect sales tax based on the inventory locations reported by Amazon. Does one piece of inventory qualify as nexus?
Remember the Supreme Court stated the business must have a “physical presence”. Is one item, or even $2,000 of products enough to claim physical presence?
Add to this the quagmire co-mingled inventory, and this becomes ridiculous to sort out. If one item is located in one state, but three Amazon sellers and Amazon itself sell the item, which seller now has nexus in that state?
And then consider that once a seller starts sales tax collection on Amazon, they will have to also report and collect sales tax on their websites or other marketplaces such as eBay and Etsy. Imagine the reporting and paperwork nightmare this process may create.
THE VOLUNTARY NATURE AND THE CARROT OF AMNESTY SEEM TO INDICATE STATES KNOW THIS IDEA IS ON SHAKY GROUNDS
Currently the following states have committed to the amnesty program.
- New Jersey
- South Dakota
What kind of actual legal standing this program has or if is even a good idea to participate, is something sellers have to discuss with their accountant or attorney.
In some ways, it appears the states are banking on many sellers being small businesses that just want to avoid potential back tax problems. Because of the voluntary nature of the program, legal challenges to the program are unlikely.
We can only encourage you to read more about the Amnesty program here and discuss it with your legal and accounting professional. As always, the devil is in the details, and there are differences in the amnesty program from state to state.
We like to hear your thoughts on the Amnesty program in the comments section below.