---
title: Online Marketplace Seller Voluntary Disclosure Initiative may be Silver Bullet for Back Sales Tax Issues
description: The Multistate Tax Commission (MTC) National Nexus Program is sponsoring the Online Marketplace Seller Voluntary Disclosure Initiative.
---

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# [Online Marketplace Seller Voluntary Disclosure Initiative may be Silver Bullet for Back Sales Tax Issues](https://www.profitwiseaccounting.com/blog/online-marketplace-seller-voluntary-disclosure-initiative-may-be-silver-bullet-for-back-sales-tax-issues)

 Written by [David Heistein, CPA](https://www.profitwiseaccounting.com/blog/author/dh) | 8/25/17 8:31 PM

The Multistate Tax Commission (MTC) National Nexus Program is sponsoring the **Online Marketplace**  
**Seller Voluntary Disclosure Initiative**. This initiative gives online sellers an opportunity to get relief from  
back sales and income taxes. Currently 24 states are participating in the initiative and tax relief is  
available in most of the participating states.

**Important: There is a short window to apply. The MTC is accepting disclosure applications only**  
**between August 17, 2017 and October 17, 2017**. Be aware that in some cases states can take 4-8 weeks  
to process your application so we recommend applying as early as possible.  
This Voluntary Disclosure Initiative was created in response to concerns raised by many online sellers,  
especially Amazon fba (fulfillment by amazon) sellers, over what they believe to be unfair state sales and  
income tax rules. Of major concern is the rule that requires certain online sellers to register and collect  
sales tax in states where they may be using a third-party fulfillment center but do not have any physical  
presence, in the classical sense. Use of a third-party fulfillment center is considered to create nexus and  
opens these sellers up to state sales and income tax liability.  
Determining the best course of action as it relates to this initiative may not be as simple as it first  
appears as there are many factors to consider. These factors include which states you sell into, how  
nexus is determined in those states, the dollar volume of your sales in each state and more. As soon as  
the program was announced we began receiving questions and inquiries. To help clarify the program  
and answer your questions, I am providing the following thoughts and industry best practice advice  
around sales tax and this amnesty program as it applies to online sellers.

**Sales tax strategy** – In general, it pays to be conservative when considering your potential state sales tax  
exposure. The cost of sales tax compliance is relatively low vs. the potential high cost of noncompliance.  
The exception is if you are being auditing by the state. In that case you want to take a more aggressive  
position to mitigate your potential back sales tax liability. But this is really a last resort since you have  
very few options at this point.

**Example**. Let’s say you were supposed to collect 8% in California sales tax on $100,000 in sales  
over a 4-year period and you are being audited. You would owe the state $8k x 4 years =  
$32,000 not including penalties and interest. Most likely you would have to pay this out of your  
own pocket since it would be highly unlikely you could go back to your customers and ask them  
to pay the sales tax you never collected. If you add penalties and interest on top of the back  
taxes you could be looking at $40k – $60k in total owed, typically due in one lump sum. If you  
multiple this by the number of additional states that you sell into you can see very quickly that  
your tax liability could be huge. Additionally, this liability attaches personally to directors,  
officers and potential members of your business. So even if you claim bankruptcy, the sales tax  
liability would still be owed. Also, if you don’t file sales tax returns in a particular state there is  
no statute of limitations. This means the state can come after you for back taxes indefinitely.

Contrast this with collecting the sales tax from the beginning. Your customers would have paid  
the sales tax up front and you would only have to remit the taxes. Your expenses would be  
limited to the cost of filing sales tax returns and other compliance related costs – which are  
relatively small compared to paying the back sales taxes plus penalties and interest. Back sales  
tax liability can easily put a company out of business so tread with caution here. In the case of  
My Pillow they settled with state of New York for $1.1M in back sales taxes and penalties.

The tide has turned and now is potentially a great time to get compliant. States are losing out on sales  
tax revenue as more and more commerce is done online. States are quickly catching on that they need  
to be aggressive in collecting sales taxes from online sellers if they want to stay afloat. Just 3 years ago  
state sales tax audits for Amazon fba sellers were virtually unheard of. Today, states are starting to audit  
online sellers more and more and we believe this will only continue.

**The most aggressive states** – Washington, California, Pennsylvania  
In many cases these states are finding noncompliant online sellers by making a purchase on Amazon and  
checking to see if the seller is collecting state tax in their shopping cart. If they are, then they typically  
abandon the shopping cart and move on to the next seller. If they are not collecting sales tax, they will  
try to figure out who the seller is. The best way to counter this is to collect sales tax in the states where  
you believe you have sales tax nexus.

**Nexus defined**  
To understand your sales and state income tax obligations as an online seller, it is critical that you first  
understand where you have nexus. You likely have nexus if you have a link or a connection to a state.  
Unfortunately, the definition of nexus and what is considered a taxable product or service can vary from  
state to state. There are also differences in the definition of nexus as related to sales tax versus state  
income tax or franchise tax. Following are a few examples of situations that may create nexus if your  
online business engages in any of these within a particular state:

 An employee of your company resides in that state  
 An agent or someone selling for you or helping you maintain a marketplace in that state. This  
could be an employee who does sales, and independent contractor or a manufacturing rep who  
even represents other companies.  
 A company sales person travels to that state  
 Your company participates in tradeshows in that state  
 Your company does substantial advertising within a state  
 Affiliates – Click through nexus. If you have affiliates located in those states who refer business  
to you.  
 And of course, if your business has a warehouse or other physical presence. For many Amazon  
fba sellers nexus is created when their inventory is stored in an Amazon warehouse. The date  
your inventory first lands in a warehouse will typically be the beginning of sales tax nexus in that  
state, assuming you don’t have any other type of nexus generating activities.

The rules to determine nexus for sales tax are typically harder to reach vs. income tax. So, if you have  
nexus for sales tax you most likely have nexus for state income tax.  
**What about the argument that if I sell on Amazon fba I still don’t really have nexus in the state?**

Virtually all states, with the exception of New York, have weighed in on this argument and they believe  
having your property stored in a third-party warehouse creates nexus for sales tax purposes in their  
state.  
**States have 2 factors from case law backing them up:**

1. Does the company in that state act as your agent – helping you establish or maintain a  
marketplace?  
2. Property located in the state  
It’s our recommendation to assume all states with Amazon warehouses will potentially create nexus  
unless you hear something directly from the state to the contrary.

**State income tax nexus strategy**  
In many cases people forget that if they register for sales tax in a state they will most likely have to  
register their business entity (in the case of an LLC or Corp for example) in that state and must complete  
state income tax returns. In the case of a partnership or other pass through entities there may be state  
K1’s which will need to be included in one’s personal income tax returns as well.

**Example**: Let’s say you are required to file state income tax returns for your LLC taxed as a  
partnership in 10 states. It’s possible you could also receive 10 different state K1’s causing you  
to also file 10 state tax returns with your individual tax return and pay taxes in those states as  
well.

State income tax compliance is typically more expensive than sales tax compliance by itself. You’ll want  
to speak with your tax advisor to understand what the additional fees will be for filing multiple state  
income tax returns.

In some cases, it could make sense to file for sales tax but not income tax in a state. This will depend  
upon how large the state tax exposure would be to reduce filing fees.  
Currently, there are 5 states that automatically register you for income taxes as well as sales tax when  
you register for a sales tax permit in those states. These are;

 Washington  
 Texas  
 Illinois  
 Kentucky  
 South Carolina

**Sales-use tax trap – Colorado and Vermont**  
Colorado and Vermont recently passed a new law “Amazon Tax” for online sellers who sell products into  
their states but do not collect sales tax. If you do not collect sales tax in their state the law stipulates  
that you are to inform the customer at checkout that they are responsible for remitting use tax to the  
state. If you fail to do this, there is a $5 penalty per occurrence. Additionally, on 1/31 of each year you  
are required to mail a notice to customers who purchased $500 or more in combined sales for the year  
and remind them to remit use tax. Lastly, the states want you to send them your customer list. We feel

this law is unfair but it is currently the law until repealed. Some sellers are registering for sales tax in  
these states just to avoid the hassle of sending out notices.

**Sales tax amnesty program strategy**  
In general, you should have a solid strategy in place to help determine when and where you apply for  
the sales tax amnesty program. Without a well thought out strategy you could end up creating a  
potential nightmare for yourself.

**Steps to consider**

1. Sales tax liability – it’s important to get an idea of what you potentially owe to each state you  
have nexus in. You can run a report on Seller Central under Fulfillment Reports or use a tool like  
TaxJar to estimate your potential sales tax liability. Be sure to figure out if any exemption for  
what you sell is offered in that state. Groceries, supplements and clothing do have some  
exemptions in various states.  
2. Reference amnesty states – Once you have your list, you’ll want to cross reference with the  
states that currently offer amnesty.  
You can view the list and more information on the program here:  
[http://www.mtc.gov/Nexus-Program/Online- Marketplace-Seller- Initiative](http://www.mtc.gov/Nexus-Program/)  
3. Consider the voluntary disclosure application (VDA) for those states – the application can be  
completed on the MTC website.

**Here are some pitfalls to look out for:**  
**No prior contact with state** – VDA works best in cases where you have not registered in that state  
and/or they have not contacted you in the past. Under these circumstances, if you submit the VDA, you  
could wind up getting your application denied and having to pay back taxes and penalties.  
**Online market place only** – Amnesty only applies to nexus created by an online marketplace such as  
Amazon or other marketplaces. If you have other nexus generating activates in the state such as sales  
people or affiliates then this would be grounds for denial of your application.  
**Make sure states offer full amnesty**– Some states offer full amnesty (back taxes owed plus penalties)  
while others only offer amnesty on penalties. Make sure you know the state specifics before you apply.  
**Be compliant going forward** – Once you get your application accepted you’ll want to setup a sales tax  
account in the state by the deadline and, on a go forward basis, pay and remit all sales tax.  
**State income tax compliance**– All states except for North Carolina will require you to register and file  
both state income tax and sales tax returns going forward. They will not allow you to cherry pick one  
over the other.  
**Collect sales tax on all channels** – Let’s say you start collecting in the state of Florida. You will also need  
to make sure you collect sales tax from all sales channels (i.e. website, Ebay, Etsy, Amazon). Nexus is  
created for the business , not just one channel.  
**Materiality** – You may decide it doesn’t make sense to collect sales tax or be compliant in all states  
depending upon what your sales are in those states. For example, if you make $500 sales in one state,  
the cost of collecting the sales tax and filing state tax returns would cost more than cost of back taxes  
and penalties so you’ll want to exercise good judgement here.  
**Collect going forward** – In certain cases you may want to collect sales tax going forward to stop the  
bleeding. This may make sense in states that don’t offer a VDA. Just keep in mind that if you do have  
past sales tax exposure the state could still, in theory, come to collect back taxes later.  
**Online application, exercise caution** – You’ll want to exercise caution when answering questions on the  
online amnesty application. If you provide incorrect responses you could automatically disqualify  
yourself from this program. We highly recommend you seek professional advice when it comes to  
approaching the amnesty program. Also, it is generally not a good idea to have yourself listed as the  
contact if you want to remain anonymous.

**Bottom Line:**  
We recommend online Amazon (FBA) sellers consider **8 states** for the MTC Online Seller Sales Tax  
Amnesty Program:

 Connecticut  
 Florida  
 Kansas  
 Kentucky  
 New Jersey  
 North Carolina  
 Tennessee  
 Texas

Remember, you’ll need to act fast if you want to participate in this program. Applications are being  
accepted only through **October 17, 2017**. Once your application is accepted you must register no later  
than **December 1, 2017** and be compliant going forward with all sales tax collection and filing. We  
suspect that states will start stepping up their enforcement after this program. The classic carrot and  
stick approach.

**** Disclaimer, this blog post should not be construed as actual tax advice. We recommend you consult**  
**with your tax advisor about how to best address your particular situation ****

[View full post](https://www.profitwiseaccounting.com/blog/online-marketplace-seller-voluntary-disclosure-initiative-may-be-silver-bullet-for-back-sales-tax-issues)

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