Virginia Targets Out-of-State Retailers Using Fulfillment Centers

out-of-state retailers
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Paul Zee-Cheng was a contributing author to this post.

Effective July 1, 2017, Virginia will require out-of-state retailers to collect Virginia sales tax if they maintain inventory in Virginia. This change, which is estimated to increase annual revenue by $21 million, will mainly impact retailers that rely on third parties to store inventory. For example, many online retailers selling their goods on Amazon also take advantage of Amazon’s fulfillment services. Amazon currently operates three fulfillment centers in Virginia, and recently announced plans to open a fourth to facilitate sales of larger customer items such as big-screen televisions, kayaks, and patio furniture.

Amazon fulfillment centers are just one example of a third party logistics provider available to retailers. Through a simple Internet search, one can find that many more have facilities in Virginia. Out-of-state, online retailers often rely on ‘fulfillment centers’ to take care of the logistics of getting their products to customers more efficiently. The use of these services allows retailers to avoid maintaining offices, employees, business locations, or warehouses in Virginia.

Before the enactment Bill No. 962 on April 5, 2017, retailers were shielded from the obligation to Virginia to collect sales tax if their only presence in the Commonwealth was inventory maintained in a third party fulfillment center. This was made clear in a 2015 ruling where the Department of Taxation concluded that Virginia law did list the maintenance of inventory in Virginia as one of the activities that triggered a sales tax collection obligation. The ruling further reasoned that the performance of such activity by a fulfillment center did not result in the retailer having an agent or representative in the Commonwealth. With the enactment of the new legislation, taxpayers can no longer rely on the Department’s ruling.

Retailers using a third party fulfillment center should take action now, and review their inventory activity within Virginia. If a third party fulfillment center uses a Virginia warehouse without informing the taxpayer, then a retailer may have a sales tax obligation and not even be aware of it. Luckily, retailers who rely on Amazon are able to generate their own reports to track down inventory storage locations.

If you have questions about your company’s sales and use tax compliance, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.

About Michael Colavito, Jr.

Michael Colavito, Jr. has written 55 post in this blog.

Michael L. Colavito, Jr. is a senior manager in Aronson LLC’s Tax Services Group, where he provides multi-state taxation services pertaining to income, franchise, sales and use, and property taxes. Michael’s experience also includes representing clients at all stages of tax controversy, from audit through appellate litigation, and advising them on restructurings, state tax refund and planning opportunities.

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