Out of Control Nexus

BT Stathopoulos Peter 07 24 14Retailers need to take notice. The Multistate Tax Commission has remote sellers, like those who participate in programs like Fulfillment by Amazon, in its crosshairs. By Peter Stathopoulos

Ever since the U.S. Supreme Court upheld a bright-line physical presence test of sales tax nexus in Quill Corp. v. North Dakota, states have been attempting to erode or erase that bright line in an effort to tax remote sellers. One of the latest efforts at smudging that bright line is the Multistate Tax Commission’s (“MTC”) Marketplace Seller Voluntary Disclosure Initiative, sometimes referred to as the Fulfillment by Amazon or “FBA” tax amnesty program. (The MTC is an intergovernmental agency with over 40 full or partial state members, which lists as its goals the promotion of fairness and uniformity in state tax administration.)

Currently, thousands of merchants sell merchandise remotely over the Internet using third-party logistics (“3PL”) providers for fulfillment of orders. One of the largest 3PL providers is Amazon through its “Fulfillment-By-Amazon” service. Under Amazon’s FBA program (and similar 3PL programs), a merchant consigns inventory with Amazon, which is then stored in one or more of Amazon’s hundreds of warehouses throughout the country, as illustrated in the Sept. 27, 2017, Business Insider article titled, “This map of Amazon’s warehouse locations shows how it’s taking over America.” Until very recently, the merchant did not even know where the inventory was stored, let alone exercise any control over the location of the inventory. More recently, merchants are able to determine where their inventory is located, but can’t control its location.

Although merchants may not always know where their inventory is located, states often have superior knowledge derived from auditing a 3PL provider or based on the 3PL provider’s tax returns. For example, South Carolina recently filed a complaint against Amazon, alleging a $12 million sales tax liability that should have been collected and paid on behalf of third-party sellers, as reported by CNBC on Aug. 15, 2017. California and Washington have implemented aggressive nexus discovery programs aimed at merchants with inventory in the state as a result of a 3PL service.

Recently, the MTC launched a state tax collection initiative aimed at merchants who have inventory in member states solely by reason of participation in the Amazon FBA program or the use of a similar 3PL service. The Online Marketplace Sellers Voluntary Disclosure Initiative provides the following benefits for taxpayers that choose to participate in the program:

* In exchange for voluntarily registering to collect and remit sales/use, income and franchise taxes in participating states by Dec. 1, 2017, states will waive liability for some or all prior tax periods (depending on the state);

* States will also waive penalties and interest for failure to file and remit taxes for prior tax periods. There are currently 25 participating states. The initiative applies to most state business taxes, including sales/use, income and franchise taxes. The initiative does not apply to merchants that have nexus in states apart from participation in a 3PL program. 

Legality of Initiative

Although merchants participating in a 3PL service technically have a physical presence in states where their inventory is held by the 3PL provider, the legality of imposing taxes on such merchants is a matter of unsettled constitutional law. Although holding such inventory technically meets the bright-line physical presence test of sales/use tax nexus established by Quill, it may not meet the “minimum contacts” requirement of the Due Process Clause.

The U.S. Supreme Court has held that states may not assert jurisdiction over nonresidents under the Due Process Clause unless the nonresident engages in repeated, purposeful contact with the jurisdiction, as ruled in Burger King Corp. v. Rudzewicz. Merely placing goods into the stream of commerce, where a merchant does not know or control where the merchandise ends up, has been held not to meet the “purposeful availment” standard of the Due Process Clause, and, therefore, can’t be a basis for imposing taxes on the nonresident, which was the precedent set in Asahi Metal Indus. v. Superior Court of Cal., Solano City.

In the Fulfillment-By-Amazon context, courts have not yet ruled on the issue of whether having knowledge of consigned inventory, but no control over the location, satisfies the purposeful availment test. It should be noted however, as ruled in Burger King, that repeated advertising or marketing efforts directed at a particular state are alone sufficient to meet the minimum contacts standard.

Peter Stathopoulos is a partner at Bennett Thrasher LLP, one of the country’s largest full-service certified public accounting and consulting firms, and leads the firm’s State and Local Tax Practice. Brian Sengson, a manager in Bennett Thrasher’s State and Local Tax Practice, contributed to this article. 

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