Pennsylvania Voluntary Compliance Program
Michael J. Fleming is the founder and president of Sales Tax and More, a full-service consulting and solutions firm with a passion for state tax. He is one of the country's leading authorities on sales tax issues such as consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers.
Michael is a renowned writer and speaker, and he regularly presents on webinars. He is also the host of the Sales Tax and More podcast, where he shares his wisdom and learnings with his audience in order to help them navigate the tricky world of taxes.
In this episode…
A lot of sellers have been getting letters from Pennsylvania indicating that the sellers have nexus in PA due to inventory and that they should take advantage of the special, voluntary compliance program.
So, why is Pennsylvania sending these letters?”
Pennsylvania, like the majority of states, believes that when you have inventory in their state this creates enough of a link or connection to create nexus. Once you have nexus the state can then require you to collect their sales tax or pay their income tax.
Here’s a glimpse of what you’ll learn:
Why are Amazon sellers receiving this letter from Pennsylvania?
Is income tax a new issue?
Does this letter only apply to Amazon sellers?
Do we recommend that sellers take advantage of this program?
Connect with Michael
Episode Transcript - Audio Version
[0:10] Intro: Welcome to Sales Tax and More, your go-to resource for all things state tax-related. Now there is your host Michael Fleming.
[0:28] Mike: Hi everyone, Mike Fleming, founder of Sales Tax, and More and today's co-host of the Sales Tax and More podcast where we talk about everybody's favorite topic, which is of course sales tax. Today my co-host Ellie Moffat is going to be interviewing me about the Pennsylvania voluntary compliance program. But before we get started let's introduce you to Ellie.
[0:50] Ellie: Hey everyone, great to be here. Mike, great to be on the podcast with you today. Before I jump in here on all these questions I have for you, I want to do a quick introduction for Sales Tax and More! Sales Tax and More is a full-service consulting and solutions firm. We have a really great team here of experienced tax professionals who are very dedicated to fulfilling your state tax and related needs. We do a lot of sales tax returns, sales tax registrations, audits, consulting, research, and like our name states more. So if you have questions about our services or you'd like to work with us, please reach out and ask. We will give you plenty of ways to do so, and we would love to hear from you. Mike, I'm going to jump right in here and start grilling you about this voluntary compliance program. A lot of sellers have been getting letters from Pennsylvania indicating that the sellers have nexus in PA due to inventory and that they should take advantage of the special, voluntary compliance program. Can you explain why Pennsylvania is sending these letters?
[1:50] Mike: Sure Ellie, Pennsylvania, like the majority of States out there believes that when you have inventory in their state when you own that inventory this creates enough of a link or connection. We call this link or connection nexus, where they can then require you to collect their sales tax or pay their income tax. So if you have inventory in Pennsylvania, they believe that you should have been collecting their sales tax. You should have been paying their income tax. So they're using the carrot and the stick method, and they've done this quite often in the past. They're offering the carrot and saying, Hey we've got this great program. It's really gonna work well for you, and you need to pay two years’ worth of back tax, sales tax. You need to pay two years of income tax, and then pay both taxes or collect and pay the tax going forward and we're going to waive everything prior to January 1st of 2019, that's the carrot. The stick is. They're saying, if you don't take advantage of this program, we know who you are and we're coming after you. And if you're an Amazon seller, the first Amazon warehouse opened back in 2010, they could be coming after you going all the way back to 2010. Two years is a heck of a lot better than, 10 years or 12 years, 11 years can't do math today. So that's why they're sending this letter, this letter is the carrot. They want you to pay their income taxes on a going-forward basis, collect their sales taxes on a going-forward basis if you have a responsibility to do so. And they're reminding you that inventory in their state does create nexus. So they're being serious about this. And historically, If you don't take advantage of their carrots, they come out with a big stick and they make examples of people. They add extra penalties and interest on there because they said, Hey, we were a nice guy. You didn't listen to us. You didn't believe us. We warned you we were coming. And that's why these letters are going out. This is part of the carrot right now.”
[4:06] Ellie: Mike, I'm glad that you brought up Amazon because the number of the sellers that received these letters are FBA sellers, fulfillment by Amazon sellers. And Amazon has been collecting tax in Pennsylvania since April of 2018. So why are they getting this letter?
[4:22] Mike: A couple of things. Ellie, number one, while Amazon is collecting and remitting the sales tax, they are not paying the income tax. The income tax comes out of the seller’s pockets. Pennsylvania is telling you that we want the income tax from everybody who should be paying the income tax and Amazon sellers. If they've got inventory in Pennsylvania are subject to the income tax. So that's number one. Number two, even though Amazon is collecting and remitting, the tax, the inventory in the Pennsylvania warehouses still create nexus. So if you're selling on Shopify or WooCommerce or big commerce or your own website, then Pennsylvania is telling you, even if you're underneath the thresholds, a hundred thousand dollars, pretty big threshold, but you have inventory here and that's a physical presence. So physical presence is always going to override an economic presence, Therefore you should be collecting and remitting tax on all of these other platforms. Now, if you're only selling on a marketplace like Amazon or eBay or Etsy, or walmart.com, then you don't have to worry about the sales tax here, but you still have to worry about the income tax.
[5:42] Ellie: Okay. Mike. Talking about FBA sellers a little bit more here. They say a lot of them have been saying, it's debatable that inventory creates nexus and it's not settled. So do we want to touch base on that quick?
[5:55] Mike: Yeah and this is an argument that FBA sellers speak about quite often. Unfortunately for them, I believe this is a very well settled area or fairly well settled. The argument that FBA sellers make is that they did not move their inventory into the state that Amazon moved it. None of the states say, Hey, you have to have moved your inventory here. They say if you own inventory in our state. And I don't think there's any question that the FBA sellers still own this inventory. Now since Amazon began collecting, some states have changed their position on Amazon on inventory stored in an Amazon warehouse. If that inventory is only used to fulfill Amazon sales those states most notably being Arizona, Illinois, and Texas, but the vast majority of states still believe that inventory in an Amazon warehouse is nexus creating. So number one, if you own inventory, and I don't think there's any argument that these FBA sellers own the inventory, that's the position the states think. Fairly well settled. That's been the issue for all companies, not just e-commerce companies for years. The second issue is that FBA sellers sometimes want to make the argument that, “Hey, we shouldn't have had to pay the tax looking backward.” This is like a consignment sale and in a consignment sale, Amazon is the one making the sale. So therefore they should be paying the tax. It's pretty much a moot point at this point, looking forward because Amazon's collecting the sales tax almost everywhere now. But if you're making that argument, if you're saying Amazon is like a consignment sale, then you're giving up the nexus argument because most states say that consigned inventory is nexus creating. So if you want to say that this is a consignment sale. Great. But you give up that nexus argument. You can't have your cake and eat it too. You can't say, Hey, this is a consignment sale, but Oh, our consigned inventory doesn't create nexus. So I think that, at least from a nexus point of view, this is very well settled. I think that who should have been collecting the tax. That's an argument that it's a good argument. It should be made. But as far as whether inventory creates nexus, I think that's a very well-settled issue.
[8:17] Ellie: Okay. I think that sort of makes sense here, but let's also circle back to the income tax. We touched on that a little bit ago, but this appears to be an altogether new issue.
[8:31] Mike: It may seem new and, a lot of FBA sellers like to, and anytime they don't hear something or their local accountant doesn't tell them of something. They like to say, this is new in the states picking on me, but this is an issue that's been around since 1959. And in 1959, we had a U.S Supreme court case where the U.S Supreme court said, Hey, states can pretty much tax, interstate income, anyway that they want. And this was an income tax case. And of course, I'm paraphrasing here, but Congress got really upset. And so did companies and they said, Hey, this nexus is so confusing. This is going to send the country into another depression. And back in 1959, we're a lot closer to the great depression. So this was a big fear. So Congress moved very quickly and they passed what's called the interstate income act of 1959 or public law, 86-72. And it really nullified the US Supreme court's position. And what this public law says is that if your only activity in a state is the sales of tangible personal property. And that's what, FBA sellers do. They sell tangible personal property, and those orders are approved outside the state and then they're fulfilled from a point outside the state. The state's not allowed to impose a net income tax. Now for FBA sellers, most of the sales are approved at a point outside the state, the problem is they're not fulfilled from a point outside the state. If there's inventory inside the state, at least some of the sales are going to be fulfilled from a point inside the state. And it's all enough to bring protection. You can't say I only had a hundred sales fulfilled from inside the state and I had 500 sales fulfilled from outside the state. It doesn't work that way. It's all or nothing. So this is not new. It's been around since 1959. Now your local accountant may not have thought about this. But it's been around forever. And by the way, for those of you who are waiting for Congress to step in, I find this pretty amusing when Congress passes so quickly, they said that nexus is so complex and so confusing. This is only a temporary solution. We need to form all sorts of committees and do all sorts of studies before we can come up with a permanent solution. Now that was 62 years ago and we still had this temporary antiquated solution that is about to protect no one. Whether you're an FBA seller or not. And we'll talk about that, a little bit here, but we may say Congress is a do nothing Congress the last four years or the last eight years or the last twelve or twenty years. In some areas, they've been a do-nothing Congress forever and in 1982, the US Supreme court, after having decided a number of nexus cases said to Congress, Hey, the ball's in your court here. We've decided on a number of issues. This is really your job to figure this out. So 1959 Congress tells us this is a temporary solution. They're going to be working on this, get us a permanent solution any day now. The U.S Supreme court in 1992 reminds them that this is their job. 25 years later, Congress has still done nothing and we have the Wayfair decision. Maybe our great-grandchildren will get some benefits out of what Congress does, but, I just can't put my faith in, anything that's going to help any of us in the short term here, when it comes to the sales tax. I could be wrong, but those are my feelings and history seems to prove me correct. I want to say one more thing, besides this not being a new issue. It's really being advanced forward now for a couple of reasons. Number one, the states are hurting for cash. This pandemic has not just hurt companies and individuals it's hurt states too. So their coffers are very low. They have all of this. cash should they need to pay out to their citizens and they've got nowhere to pay it from. So they've got to make up some of this lost revenue and we've seen California reach out and start pursuing FBA sellers for income tax. Now we see Pennsylvania, there are a number of other states, California with C corporations getting a lot more aggressive, Puerto Rico, Nebraska. So a lot of these states that we've never heard about coming after companies before for income tax, all of a sudden are. And there's a third reason and it's Wayfair itself. Wayfair has really gutted the protections of public law 86-272. So if you don't need a physical presence and a lot of the protections of public law 86-272, are based on physical presence. If you don't have a physical presence, then you're protected while the multistate tax commission has come out and rewritten their guidance on what creates nexus. Anything that emails, chats, cookies, all of these things, that we all pretty much do nowadays with our websites. All of that is nexus creating. It nullifies the protections of public law 85-272. So not only, are FBA sellers in the state’s targets, I think they're going to be the first group, because they're low hanging fruit, but over the next 6 to 18 months, I think all e-commerce sellers are going to start to really experience issues with income tax. It's all those things, Ellie, it's e-commerce sellers are in my opinion, in for a rough ride, the new battle for e-commerce sellers is going to be income tax.
[14:35] Ellie: Thank you so much for touching base on that, Mike. I want to make sure…we've been talking a lot about Amazon. I want to make sure we touch base on this, is this only about Amazon sellers?
[14:47] Mike: No and I'm sorry to make it sound like it is. It's about anyone who has inventory in Pennsylvania. Now, the reason we've been talking so much about Amazon sellers is because somehow Pennsylvania got on a list of people who have inventory, a list of Amazon sellers who have inventory in Pennsylvania, sort of like California did. So that's why most of these letters are ending up in Amazon sellers’ hands. If you didn't get a letter, you are not scot-free. This is about anyone that has inventory in Pennsylvania. The program ends on May 8th. You don't want to find out that the state knew about you but just didn't send you a letter. State's under no obligation to inform you that they know who you are. They're just, they're not under any obligation. You can play Russian roulette with whether the state knows about you or is going to find you, or you can take advantage of this program.”
[15:44] Ellie: All right. Thank you so much, Mike. So are you recommending that sellers take advantage of this program and why or why not?
[15:51] Mike: I really am Ellie, couple of reasons, number one, this program is very special and it goes back only to January 1st of 2019. So it's two years plus the current year now the state wants their sales tax and income tax but if you were to do a normal VDA the lookback period is three years plus the current year for sales tax. So you're saving a year there and five years plus the current year for income tax. So you're saving three years there. So I think that this is as far as VDA's go, this is a great program. It also waives any penalty or interest, excuse me, waves, any penalty, you still have to pay the interest in that. From that period forward from 2019, anything older than 2019, you don't have to worry about at all. So compared to a normal VDA, I think this is a great program. Now, the second reason, I think that sellers need to take advantage of this, especially those who got this letter. State's telling you, they know who you are. They're saying, Hey, take advantage of this program. Now, if you don't take advantage of that program then the state could go back all the way to 2010 if you're an Amazon seller and have had inventory there. There is a whole lot of exposure there. And remember this, Amazon started collecting in April of 2018. So if look back only to January 1st of 2019, you don't have to worry about the Amazon sales for sales tax whatsoever. But if you don't take care of this program and they go back 10 years, now you've got 8 years’ worth of Amazon sales that you get to worry about. And that's a lot of exposure for a lot of sellers. That's one of the big reasons. A lot of people that we're talking to say we're going to wait and see about this lawsuit by the online Merchant scale. Lawsuits take forever. If they're filed in the right venue and, typically you want to file this type of lawsuit in the state courts, not in federal courts. My basic feeling is this is going to get thrown out of federal court at some point down the road. And then I have to start all over again in federal court. And by that point, this program is going to be long over. Even if it stays in federal court, you're not going to get an answer by May 8th. So this program is going to be long gone, and Pennsylvania is going to be pursuing very aggressively while you're waiting for an answer that may come two, three, or even four years down the road. I don't think Congress is stepping in. I don't think this lawsuit's going to be helpful and Pennsylvania is just telling you. Here's what we plan on doing: we're coming after everybody who has inventory in Pennsylvania and the risk-reward is just not there. They're saying it's just two years of tax and Amazon's not even included in that two years. None of the marketplaces for the most part will be included in that two-year period, maybe eBay, they were a little bit late to the party, but for the most part, it's just going to be your sales through Shopify and websites like that. When I'm looking at what the risks are versus what the rewards are. There's just too much that says you got to take care of this. But the biggest one is if you got this letter from Pennsylvania saying, I know who you are, so why in the world are you going to tempt fate? That's just my view, Ellie.”
[19:30] Ellie: Yeah. Thank you so much. I think we covered a lot there. But Mike. What I want to do right now is I want to go over a quick recap of the program itself. So can you give us a quick recap?
[19:40] Mike: Yeah, absolutely. So the program began on February 8th. It runs through May 8th. So it's 90 days, a pretty short program. The lookback for both sales and income tax is 1/1/2019. Via the income tax, depending on what type of entity you are, you really only have one year, including the VDA cause the second year may not even be due yet. It's not that bad, not that onerous. Now if you've already gotten a letter you will not be able to take advantage of any VDAs in the future. This is the only shot that you have. Any period older than 2019 the state is going to say we don't care about what we're going to, not even look at those for the periods after, the tax that you do pay, whether it be the income tax or the sales tax, they're going to waive the penalty. You still have to pay the interest, still have to pay the back tax. And Oh, big one here. This program is only available for sellers who are not registered. If you have already registered, you cannot take advantage of this program.
[23:50] Ellie: Thank you, Mike. And if you are like me and a written transcription is easier for you to touch base on that. We do always put our transcriptions in the podcast page of our website. So you can find that there.
[24:09] Mike - Are you saying I'm confusing listening to it?
[24:11] Ellie - I'm saying that for me, it's easier to see it written down. Not confusing, obviously
[24:18] Mike - A lot of information we went over today, so very, we can get lost in the details. I apologize if I'm coming across like a fire hose here.
[24:30] Ellie: Yeah. That's how sales tax is so often, and that's why so many people come to us. Mike, if the program is only available to sellers who are not registered though, why are some sellers who are already registered getting these letters?
[24:47] Mike: That's a great question. It's one that I had. And we actually contacted the state of Pennsylvania and their answer, Clerical error. What they've told us is to just provide the sales tax number on that form that they sent out. Don't put any other information on there. Just send it back with that number on it. That's what we're going to be doing for our clients and see if Pennsylvania holds true to their word. But that's what they told us. It was a clerical error in one who's working on that particular account. When you give them the sales tax number, they see that you have been registered and they should close the case. Now a lot of people are registered for sales tax, but not for income tax. They haven't told us what they're going to do with that yet. But as far as sales tax is concerned, you should be covered.
[25:46] Ellie: Thank you so much, Mike, and this has been a really valuable episode. There's lots of really great information in here. So please share it around with anyone that you think it could help. And if anyone needs help with this program, please reach out. or if you need help with other sales tax services as well, but we'd love to hear from you. We'd love to work with you. Also, Mike, I'm going to add in here, You can reach me directly at emoffat@salestaxandmore.com. That's emoffat@salestaxandmore.com. You can also visit our website salestaxandmore.com. And just want to touch here in addition to our services, we offer an entire series of free webinars that offer CPE credit. We have this podcast, we have lots of blog posts. We have free resources on our website, state tax charts, lots of matrices, and the paid portion of our website as well. So Mike, anything else you want to add in here?
[26:54] Mike: Yeah, just, we appreciate you listening in today, watching us and we hope to see you on the next episode of the Sales Tax and More podcast. Thanks, everyone. Bye-bye.
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