Marketplace Facilitator Laws and Economic Nexus

What You Need to Know

Key Takeaways

  • More and more businesses continue to sell their goods to buyers all over the country on so-called marketplace platforms, e.g., Amazon, Etsy, and individual remote seller sites.
  • In step with the rise of economic nexus laws, states are passing what are called marketplace facilitator laws that shift the burden of collecting sales and use tax to the marketplace facilitator. At the latest count, the number of states adopting marketplace facilitator laws has more than quadrupled in 2019 and 2020 to 35 states and D.C. … and more are expected to be added in 2021. This has escalated during the pandemic because of tax revenue opportunities.
  • “Marketplace facilitators” are defined differently in many states.
  • In a nutshell, these laws generally provide that a marketplace facilitator is responsible for collecting and paying the tax on retail sales made through their marketplace for delivery to state customers.
  • So, are marketplace sellers now off the hook for sales and use tax compliance? Not really. Sellers may still be liable for sales and use taxes under these new marketplace facilitator rules. Here is why:
    • The seller is still responsible for collecting and remitting sales and use taxes on sales not made on the marketplace facilitator platform.
    • The marketplace seller is liable for the tax if the marketplace facilitator can show that:
      • It has made a reasonable effort to obtain accurate and complete information from an unrelated marketplace seller about a retail sale.
      • The failure to remit the correct amount of tax was due to incorrect or incomplete information provided to the marketplace facilitator by the unrelated marketplace seller.

Background

In June of 2018, the Supreme Court in South Dakota V. Wayfair greatly expanded the ability of state and local governments to impose sales and use tax obligations on remote businesses. It did so by replacing the physical presence nexus standard with “economic presence” — the amount of economic activity occurring in the state. Forty-three of the 45 states that impose a general sales tax and the District of Columbia have adopted the Wayfair economic nexus standard. The only holdouts — Florida and Missouri — are expected to fall in line in 2021.

At the same time, many states and D.C. have imposed new rules on marketplace facilitators as well as remote sellers holding online marketplaces responsible for calculating, collecting, and remitting sales tax for transactions made on their sites.

Why have states been quick to impose these new requirements? It’s all about the opportunity to bring in more and more tax revenues … and this has become even more important in the midst of the pandemic when most states saw significant decreases in revenue. Also, the digital economy is booming. Consumers spent $861.12 billion online with U.S. merchants in 2020, up an incredible 44.0% year over year, according to Digital Commerce 360 estimates. That’s the highest annual U.S. e-commerce growth in at least two decades. It’s also nearly triple the 15.1% jump in 2019. And that trend is expected to continue, even after the pandemic subsides.

Not only do these economic nexus and marketplace facilitator laws affect the major players such as Amazon, eBay, Walmart, but they also affect your business as well.

This blog focuses on the key issues concerning marketplace facilitators: how are they defined?; how do the laws work?; how do they affect you as a “seller?”; and, which states have these laws in effect.

Who is a Marketplace Facilitator/Provider?

As with most things in tax law, there is no simple, one answer.  Definitions vary greatly from fairly simple to complex. Washington, DC’s definition is basic and is intended to target the major players such as Amazon: “Marketplace facilitator’ means a person [or company] that provides a marketplace that lists, advertises, stores, or processes orders for retail sales subject to tax […] for sale by such marketplace sellers, and directly or indirectly collects payment from a purchaser and remits payment to a marketplace seller.”

The state of Washington has a much more complex definition that is intended to capture a broad range of businesses, that is typical of one used in many states:

“A marketplace facilitator is a business that does the following three activities:

  1. Contracts with sellers to facilitate the sale of a marketplace seller’s product through a marketplace for consideration.
  2. Engages, directly or indirectly, in transmitting or otherwise communicating the offer or acceptance between the buyer and seller. (This does not include merely advertising.)
  3. Does any of the following activities, directly or indirectly, with respect to the seller’s products:
  • payment processing services
  • fulfillment or storage services
  • listing products for sale
  • setting prices
  • branding sales as those of the marketplace facilitator
  • taking orders
  • providing customer service
  • accepting or assisting with returns or exchanges”

Making things even more complicated, many states have unique provisions that include businesses within the definition of a marketplace that would not otherwise be considered as such. For example, many states consider a business a marketplace if it allows purchasers to pay with virtual currency, such as Bitcoin.

Marketplace facilitator sales tax obligations

Marketplace facilitator laws require businesses like Amazon to collect and remit sales tax on behalf of their vendors if one of the following is true:

  • The marketplace facilitator has a physical presence in the state,
  • Their marketplace sellers (vendors) have a physical presence in the state, or
  • Their collective, annual sales in the state surpass the sales tax registration threshold and they qualify for economic nexus (this applies where states have BOTH a marketplace facilitator law and economic nexus).

How marketplace tax laws might affect online/remote sellers

So, you are a business that is selling your products online on the mega-marketplaces such as Amazon and your own website. You sell into more and more states in which you don’t have a physical presence. What are the main issues/challenges you may face:

Keep in mind that a facilitator handles only the sales tax on transactions sold through its platform.  For sales made through your business website, you still need to collect, remit and file in the state on your own. And in many states, if you don’t do any sales outside of those with the facilitator, you may not need to collect or file any sales tax. But there are instances in which you may be required to file a “zero return” or register for non-reporting sales tax status.

Inventory in warehouses can result in physical nexus. Marketplace facilitator laws may relieve some marketplace sellers from certain sales tax collection obligations, but third-party sellers can have a physical presence and an obligation to collect and remit sales or use tax in states where your goods are held for shipment…even when you aren’t aware your goods are being held there.

You might have the option to collect sales tax yourself. This is on a state-by-state basis. If a state provides this option, you should be informed by the marketplace facilitator, who would offer you the opportunity to opt-out and to comply with the marketplace sales yourself. Whether you actually do want to opt-out depends on whether you’re already registered for taxes in that state, the size and resources of your business to handle tax compliance, etc.

Maintain records of your sales in the state. All sales made whether on a marketplace or your own website represent your business, and you should keep records of the tax information. In fact, some states require facilitators to send you monthly reports, “access to information regarding gross sales made [in the state] on their behalf during the previous month.” In most cases, marketplace facilitators must send this report to you by the 15th of each month.

Get your exemption certificates. Some states require you to retain an exemption certificate, administered by the state Department of Revenue and filled out by the marketplace. This is basically just an official document that confirms the marketplace facilitator is managing sales tax for you on their platform.

States with marketplace facilitator laws

STATEEFFECTIVE DATE
Alabama1/1/2019
Alaska4/1/2020
Arizona10/1/2019
Arkansas7/1/2019
California10/1/2019
Colorado10/1/2019
Connecticut12/1/2018
District of Columbia4/1/2019
Georgia4/1/2020
Hawaii1/1/2020
Idaho6/1/2019
Illinois1/1/2020
Indiana7/1/2019
Iowa1/1/2019
Kentucky7/1/2019
Louisiana7/1/2020
Maine10/1/2019
Maryland10/1/2019
Massachusetts10/1/2019
Michigan1/1/2020
Minnesota10/1/2018
Mississippi7/1/2020
Nebraska4/1/2019
Nevada10/1/2019
New Jersey11/1/2018
New Mexico7/1/2019
New York6/1/2019
North Carolina2/1/2020
North Dakota10/1/2019
Ohio9/1/2019
Oklahoma7/1/2018
Pennsylvania4/1/2018
Puerto Rico7/1/2020
Rhode Island7/1/2019
South Carolina4/29/2019
South Dakota3/1/2019
Tennessee10/1/2020
Texas10/1/2019
Utah10/1/2019
Vermont6/7/2019
Virginia7/1/2019
Washington1/1/2018
West Virginia7/1/2019
Wisconsin1/1/2020
Wyoming7/1/2019

If you have questions, concerns or need additional insight on your situation, you can reach out to author and sales and use tax expert, Mark Friedlich at mark.friedlich@wolterskluwer.com.

NOTE: CCH Incorporated is not engaged in rendering legal, accounting, tax or other professional services. If legal, accounting, tax or other expert assistance is required, the services of a competent professional should be obtained.

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AUTHOR

Mark Friedlich

All stories by: Mark Friedlich