FAQ

Frequently Asked Questions for the Online Marketplace Sellers Voluntary Disclosure Initiative

Topics are below:

  • Filing the Application
  • General Information Required for Application
  • Application Deadline and Processing Time
  • Online Marketplace Seller Nexus
  • Choosing the Tax Type
  • Prior Contact with the State
  • IRS Audit Question on Application
  • Income Tax
  • Good-Faith Estimate of Back Tax Liability
  • Sales/use tax Registration
  • Streamlined Sales Tax Centralize Registration System
  • Local Taxes
  • Audit Exposure
  • Participating States

Filing the Application

Question: Do we as a taxpayer representative need a power of attorney to apply on behalf of our clients for voluntary disclosure relief?

Response:  Taxpayer representatives do not need a power of attorney to fill out the MTC application form. When the taxpayer goes through the registration process directly with the state, some states may require a power of attorney.


General Information Required for Application

Question:  Is there any other information generally needed beyond the application for this initiative?  We understand that there are times when states ask for explanations or more detail and that eventually returns and payment will be required. 

Response: For most states, if the application is complete, that should be sufficient information for the state to make the determination to enter into a voluntary disclosure agreement, especially if the state waives back tax liability and requires no lookback period. Some states may request additional information. If a state requires a lookback period, then returns for that lookback period would be required.

 
Application Deadline and Processing Time

Question: Is the December 1, 2017 deadline the last day to apply for the program? Or is that the deadline to be approved for the program and registered in each State? Also, what date would we need to start collecting and remitting sales/use tax, if the company is approved?

Response: Applications for voluntary disclosure relief must be received by MTC staff between August 17 and October 17, 2017, and the taxpayer must be registered with the state and commence collecting/reporting/remitting sales/use tax for the state by not later than December 1, 2017 (sooner is better). Otherwise, the taxpayer will not be eligible for the initiative. The taxpayer must also commence filing income tax returns starting with tax year 2017. The earlier the application to the MTC staff is submitted the better.  We are estimating 30-60 days processing time. If the taxpayer waits until the October 17 deadline to apply, the taxpayer risks there being sufficient time to become approved for voluntary disclosure relief by the state and registered to commence sales/use tax collection by the December 1, 2017 deadline.

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Question:  Once the application is filed, will MTC staff handle interactions between the state and the applicant’s representative? Assuming the application is complete and the applicant is eligible for the program based on the representations in the application, should the applicant expect to receive a formal voluntary disclosure agreement setting forth the terms and conditions for signature?

Response: Once MTC staff receives the application, an MTC staff member will be assigned to the matter and will be available to answer questions throughout the process. MTC staff will send the terms of the draft voluntary disclosure agreement to the applicant/taxpayer representative and get approval. Then, MTC staff will send the agreement to the state for signature. Assuming all is in order, the state will sign it first, return it to MTC, and MTC staff sends notice of the state’s signature on the agreement to the taxpayer/representative. The taxpayer/representative will then have 30 days to register with the state for sales/use tax or other applicable business taxes and return the agreement signed by the taxpayer to MTC staff, who will forward it to the state. All this needs to be accomplished in time for the taxpayer to commence collecting/remitting sales/use tax not later than December 1, 2017 (taxpayers are encouraged to do so sooner if possible).


Online Marketplace Seller Nexus

Question:  Are online sellers who do not facilitate their sales through Amazon or a similar platform but use their own fulfillment center to facilitate sales eligible to apply for voluntary disclosure relief under this initiative?  They do advertise on the web through Google, Facebook and other social media platforms.  They do not have nexus in the states but are selling into the states. 

Answer:  This initiative is focused on online marketplace sellers with inventory in 3rd-party warehouses or fulfillment centers, not those owned/leased/operated by the online marketplace seller. However, the seller can submit an application and disclose the seller’s specific fact situation to the state (the application itself will remain anonymous until a voluntary disclosure agreement is executed), and the state can decide whether to enter into a voluntary disclosure agreement under those circumstances. If the state declines, the seller could then simply withdraw the application. If the state accepts it, the seller could proceed forward through the voluntary disclosure process. Make sure that the factual representations in the application are complete and accurate, as the state could later audit the business to verify that information. Also, for states in which the seller does not have any nexus (either through the seller’s property, or a representative’s activities), the seller could voluntarily register with those states and begin collecting sales/use tax without going through the voluntary disclosure process.

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Question:  I have a client that sells services on Amazon’s marketplace and then also has its own operations where it sells tangible personal property directly from its website and to retail stores that purchase for resale.  Would they qualify for the VDA program?

Response: The initiative is focused on marketplace sellers that have nexus by virtue of having inventory in a 3rd party fulfillment center or through other nexus-creating activities performed by the marketplace provider/facilitator. The fact that your client is also making direct sales would not make it ineligible so long as its nexus in the state is by virtue of inventory in a fulfillment center/warehouse of the marketplace provider /facilitator or activities of the marketplace provider/facilitator.


Choosing the Tax Type

Question: Is registering for income tax a required component of the amnesty program?  Can a business register for sales tax only?

Response: The taxpayer can choose which taxes to register for, so could only register for sales/use tax and not income/franchise tax. That may raise a question from the state: why didn’t the taxpayer register for income/franchise tax? Why does the taxpayer claim it is not subject to that tax? States generally take the position that if an out-of-state seller has inventory located in the taxing state, that activity removes protection for the seller under PL 86-272 (which protects only in-state solicitation activity—storing inventory in the state would go beyond protected solicitation activity). Most of the participating states are offering back tax liability relief for both sales/use tax and income/franchise tax.
 
Prior Contact with the State

Question: I want to confirm that a taxpayer can participate in the upcoming online marketplace seller voluntary disclosure initiative (8/17 - 10/17) for income tax if they are already registered for sales/use tax and vice-versa?

Response: Yes, as long as the taxpayer has not had prior contact with the state concerning the tax type that the taxpayer is seeking voluntary disclosure relief for.

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Question: If a taxpayer has already applied for a VDA with a state directly, can the taxpayer withdraw that application and apply through the MTC initiative?

Response: If the VDA application made directly with the state is still at the stage where it can be withdrawn, then the taxpayer could withdraw it and apply through the MTC initiative, making sure that the prior contact with that state is fully disclosed in the application submitted to the MTC staff.
 
IRS Audit Question on Application

Question: On the application one question asks if the applicant is under an IRS audit--does that mean the applicant, which may be an LLC or corporation, or does that mean the signer of the application individually? And if they are currently under an IRS audit does that disqualify them from the process? I assume past audits that are closed do not matter.
 
Response: The fact that the applicant is being audited by the IRS would not disqualify the applicant for voluntary disclosure relief. States are interested in that information, and once the voluntary disclosure process is completed, the state’s audit department could possibly follow up with the taxpayer on the status of the IRS audit. The question asking about IRS audit refers to a current IRS audit—not a closed one. Also, it would refer to the entity requesting voluntary disclosure relief (i.e., the applicant). It would not refer to the owners of a pass-through entity or individual officer of a corporation, if the pass-through entity or the corporation is the entity requesting voluntary disclosure relief.  
 
 
Income Tax

Question: Will income tax be required to be reported and paid for 2017 or starting in 2018?

Response: Under this initiative, the seller is required to start collecting sales/use tax not later than December 1, 2017, and to commence filing income tax returns for the tax year that includes the date the seller starts collecting sales/use tax. So if the seller’s tax year is the same as the calendar year, the seller would need to timely file a 2017 income tax return when due.

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Question:  I understand that owning inventory in a state would technically be an income tax nexus-creating activity. If a taxpayer registers to collect sales tax through the initiative and obtains a waiver of all past due uncollected sales tax, will this waiver of back taxes be at risk if they do not also register for income tax filings? Do you have any better feel from the states if they are going to assert that the FBA program generates income tax nexus?

Answer: If the state imposes an income tax and the online marketplace seller has inventory in the state, that takes away the protection afforded by P.L. 86-272. The states are assuming that marketplace sellers applying under this initiative will seek voluntary disclosure relief for both sales/use tax and income/franchise tax (assuming the state imposes income/franchise tax). If a seller only comes forward for sales/use tax, the risk is that at some point the state will assess the taxpayer for back tax liability for income/franchise tax, and the voluntary disclosure agreement (which would pertain only to sales/use tax) will provide no protection from that. Participating states that impose income tax will assert that FBA sellers with inventory in their states have income tax nexus, so applying taxpayers should disclose for both tax types under this initiative.

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Question: Will the voluntary disclosure agreement for online marketplace sellers absolve the prior year income/franchise tax liabilities for pass through entities and their owners? 

Response: For those participating states offering waiver of back tax liability, the answer is yes, with the understanding that for owners, the waiver of back tax liability only applies to tax liability attributable to income of the pass-through entity. The owners also will need to be disclosed in the voluntary disclosure agreement.
 
Good-Faith Estimate of Back Tax Liability

Question:  The application requires providing a “good-faith estimate” of the prior 4 years’ back tax liability to the state. Are the sales tax and income tax historical data truly estimates? What if the numbers are wrong or way off?
 
Response:  All that is expected is a good faith estimate—which may prove to be inaccurate later. It is not meant to be the same as reporting income on a tax return. Providing a good faith estimate that later turns out to be wrong should not jeopardize the voluntary disclosure agreement.

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Question: Estimated Tax for IFT (income/franchise tax)  is a concern.
  1. I see one option is for a seller to mark that IFT may not apply, most common will be the example of the public law 86-272. My concern is if the state comes back and disagrees with that statement and charges them the back 4 years of income tax that may be due. On the other hand, if someone says, their IFT tax liability is also $500 (if that is a minimum?) and looks to get that waived the last four years, that seems to say to the state that they are expecting to pay IFT going forward (which is not the case for most Amazon FBA sellers), meaning that is not their understanding.
  2. How do applicants come up with the IFT calculation? Sales Tax is easy, gross sales multiplied by the state sales tax rate to get an estimation. IFT can be difficult if a corporate tax rate because that is a rate based upon net profits which means you have to do accounting for that state to come to a net profit to apply the state tax rate I believe most seller will have NO idea what their IFT liability will be. Perhaps there is no downside to estimating a rate that is off but again, you are putting your toe in the water to say you are looking to waive this but in exchange pay it in the future.
c.       In summary do you believe you owe IFT and will expect to pay it in the future OR do you say it does not apply and risk an audit down the road.
 
Response:  Only a good faith estimate of back tax liability is needed on the application. Keep in mind that PL 86-272 would offer no protection from income tax for an online marketplace seller with inventory in the state. That would be considered activity in the state beyond the scope of solicitation activity (PL 86-272 only protects solicitation activity conducted in the state). So unless some other exemption is available, states would expect the applicant to start filing income tax returns. It would not be wise to state on the application that IFT does not apply, so no back tax liability, if there is a possibility that the state may disagree later in an audit. If the voluntary disclosure agreement only includes sales/use and not income/franchise tax, then it will offer no protection against back income tax liability. If the applicant provides a good faith estimate of back tax liability on the application that later turns out to be inaccurate, then if the state enters into a voluntary disclosure agreement with the taxpayer that includes back income tax liability waiver, the applicant will be protected under the agreement.

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Question: It appears you have to have an estimated sales tax liability of $500 or more to qualify. Is this total liability over 4 years or $500 per year? If in the past year is that from the date you apply (August ) to January 2017 or is it from August 2016-2017?
 
Response: Although the application does state that it will not be processed if the estimated back tax liability is below $500 for the prior 4 years (meaning the total for those 4 years together), that is not being followed with this initiative for voluntary disclosure for online marketplace sellers. We are still requesting that the applicant provide a good-faith estimate of the back tax liability for the prior 4 years. “Year” does refer to calendar year. For an application submitted in August 2017, the back tax liability estimate would include calendar years 2016, 2015, 2014, and 2013. If the applicant’s tax year is a fiscal year, then the prior 4 complete fiscal years would be the time period.
 
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Question:  Estimated tax for back periods - is this still required and how accurate does this have to be?  This could be quite burdensome for companies to figure out on a short basis?  I want to confirm this wouldn’t be used to claim a material fact was misrepresented by the state and void the agreement?  And I assume if nexus was not established (for example income tax in a non warehouse state) then we would just make that amount $0?

Response:  We are asking for a good-faith estimate, and because it is just an estimate, should not be used as the basis for a state to claim that a material misrepresentation has occurred if it later turns out to be inaccurate. For a time period when the taxpayer had no income tax nexus with the state, yes, the estimated tax liability would be $0.

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Question: I understand this initiative provides that my client does not have to pay back taxes for the periods before 12/1/2017 for most of states. Correct? He just needs to collect and remit sales taxes from 12/1/2017? He has to disclose back tax estimates for the past 4 years, but he does not have to pay these taxes if his application is accepted? How does he support these tax estimates? He will be eventually asked to provide what type of supporting documents by states?

Response: Our website provides information identifying the states participating in the online marketplace seller voluntary disclosure initiative, and which ones are offering back tax liability relief for sales/use tax, income/franchise tax, or both, if the seller applies between August 17 and October 17, registers with the state to collect sale/use tax on sales occurring on and after December 1, 2017, and commences filing income tax returns for tax year 2017. Most of the participating states are offering waiver of back tax liability for both sales/use tax and income/franchise tax. Some of the states require lookback periods, meaning the applicant would need to file returns and pay back taxes and interest for the filing periods included in the lookback period. The application does request a “good faith estimate” of back tax liability—even when the state is offering waiver of that back tax liability, assuming the applicant qualifies for the initiative. This is primarily for tracking purposes and an approximate indication of the size of the business.  If the state is waiving back tax liability, it should not require filing returns or providing other supporting documents for the good faith estimates for the time periods covered within the waiver.

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Question: When creating the estimated Sales/Use Tax Liabilities for each year and state on the application for voluntary disclosure, what rates do I use?

Response: The tax rates applicable to the state that voluntary disclosure relief is being sought from should be used. Those should be available on the state revenue department website.

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Question: If the seller believes she has no nexus in a state but would like to voluntary file and go through voluntary disclosure, will the state waive all back tax?   (Do we put $0 for back tax liability?)

Response: If the seller has no nexus in the state, then a $0 estimate for back tax liability would be appropriate on the application. Under that circumstance, some states may respond that the seller should simply register with the state and not go through the voluntary disclosure process. Other states might be willing to still grant the waiver of back tax liability.

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Question:  For purposes of estimating the back income/franchise tax liability of pass through entities and their owners, should we merely use the highest marginal rate times the apportioned taxable income (akin to the withholding amount)?

Response: A good faith estimate is all that is required, so yes, that should suffice.

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Question: If the look back period tax is waived, then why does the application require providing  the amount of tax for the past 4 years for each state?

Response: The purpose of the back tax liability information request on the application is to provide information on the size of the business is in the state. It need only be a good faith estimate, and does not have to be precise.
 
Sales/use tax Registration

Question: Registration for sales tax permits
  1. It appears the latest date to register for sales tax permits is December 1st. Does that mean if you register in a state after December 1st it is possible the state could later say that disqualifies you from the program?
  2. I realize the states would like you to register for a sales tax permit ASAP and not wait until December 1st.
  3. The concern is that foreign sellers who in many states are not able to apply for a sales tax permit online, have to mail in an application and that may take 6-8 weeks to get applied and they may miss the December 1st date.

Response: If the seller is not registered and ready to start collecting sales/use tax by December 1, 2017, then the voluntary disclosure agreement would not become effective. If the circumstances show that the seller submitted the sales/use tax registration application timely and well in advance of that deadline and the state has not yet processed the registration, then that would provide a strong basis for requesting that the state grant an extension to the deadline. Any extension request for such a reason must be made in advance of December 1, 2017. This would be dealt with on a case-by-case basis.

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Question: I have only applied for sales and use tax permits in just 8 states so far.   I just started selling online.  I still need to apply for 13 more states as Amazon is warehousing my product in those states.  The most sales tax due so far is under $100 for the month in those states. Am I eligible for this initiative?
 
Response: The MTC online marketplace sellers voluntary disclosure initiative is geared primarily for those who have been selling online for and have had inventory located in states for some time, creating back tax liability exposure for them. Since you are just starting your business, have already registered with several states, and have only nominal back tax liability (less than $100), you may be just as well off to proceed with registering directly with the additional states you may have inventory in and not apply under this initiative.

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Question: I understand the state registration application comes back to MTC - does that mean we won't do the online registration form with the state?  Some states don't offer a paper form for registration.

Response: Registration for business taxes with a state occurs at the last stage of the voluntary disclosure process, after the state has signed the voluntary disclosure agreement and MTC staff has informed the taxpayer/taxpayer’s representative that this has occurred. Within 30 days thereafter (sooner if possible), the taxpayer/taxpayer’s representative needs to contact the state and register through the state’s online registration process, get a written confirmation from the state that registration with that state has occurred, and send that to the MTC staff along with the voluntary agreement signed by the taxpayer. The MTC staff will not be involved in the taxpayer’s online registration with the state. The taxpayer needs to accomplish that directly. If the state requires completion of its paper registration forms instead of having an online application, then the taxpayer will need to complete the state’s registration forms and return those forms to the MTC staff, along with the signed voluntary disclosure agreement, and the MTC staff will forward all of those documents to the state.

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Question: On the state’s business tax registration form it will ask for date the seller began business in the state - what date will we use for this?  The date we will register or the true date activity began to the best of our knowledge?
 
Response: Information provided by the taxpayer to the state on the state’s business tax registration form needs to be complete and accurate. Otherwise, the taxpayer may have made a misrepresentation that could be grounds for voiding the voluntary disclosure agreement. The true and accurate date that business activity began in the state needs to be disclosed—both in the voluntary disclosure application submitted to the MTC staff and in the state business tax registration application submitted to the state.

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Question:  If we do online registrations with the state, how will we connect an online registration to the voluntary disclosure agreement?
 
Response: The taxpayer completes the state’s online registration after the state has signed the voluntary disclosure agreement. The taxpayer will then provide to MTC staff written confirmation from the state that the taxpayer has registered with the state and will also provide to MTC staff the voluntary disclosure agreement signed by the taxpayer. MTC staff will then forward that information to the state. At that point, the state will be made aware of the taxpayer’s identity and should be able to connect it to the taxpayer’s online registration with that state.

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Question: So if the state still uses paper forms for sales/use, do we send in the form to the state for registration, or do we send the sales/use paper forms to MTC and registration will happen upon them sending in the signed disclosure agreement to that state?

Response:  If the state still uses paper registration forms, those will need to be completed and returned to MTC staff along with the voluntary disclosure agreement signed by the taxpayer. MTC staff will then forward all of those to the state for registration completion. If the state has an online registration process, the taxpayer will need to use that to become registered with the state, and send to MTC staff, along with the agreement signed by the taxpayer, written confirmation that the online registration has been completed.


Streamlined Sales Tax Centralize Registration System

Question: Can a seller use the Streamlined Sales Tax centralized registration system at www.streamlinedsalestax.org to register simultaneously with the Streamlined Sales Tax member states and if so, must the seller register with all of the 24 member states, or can the seller choose which to register in?

Response: When a seller registers through the Streamlined Central Registration System, the seller must register in all 23 of the full member states, but can choose whether or not they want to register in the associate member state (TN). One major advantage to using the Streamlined Central Registration System is that the seller may use certified service provider services that the participating states are paying for. See www.streamlinedsalestax.org for more information.

Local Taxes

Question: Are local “home rule” taxes covered within the online marketplace seller voluntary disclosure initiative?

Response: local “home rule” taxes that are not administered by the state revenue department would not be covered under this initiative.

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Question: Are Alabama local taxes included in this initiative?  What about Alabama’s Simplified Sellers Use Tax program?  Would a taxpayer be eligible to register under that program?

Response:  The Alabama Department of Revenue states: The agreement will only cover state use tax and state administered local use taxes. Non-state administered taxes are not eligible.  However, if the taxpayer qualifies for Alabama’s simplified sellers use tax, Alabama will register them using that account. If the applicant qualifies and is registered for the simplified sellers use tax, then both the state and local  back tax liability would be deemed waived.

Audit Exposure

Question: Does participating in a Nexus Program with MTC increase the likelihood of being audited under the MTC Audit Program?

Response: No. The MTC Nexus Program is separate from the MTC Audit Program. Entering into a voluntary disclosure agreement under the Nexus Program will not jncrease the likelihood of being audited under the MTC Audit Program.
 
Participating States

Question: Is it possible that additional states may join this online marketplace seller voluntary disclosure initiative?

Response: The MTC website will post the most current information on states participating in this initiative. If any additional states do participate, this information will be posted on the MTC website.