Hot Topics: Sellers and marketplace facilitators

Every now and then something comes along that transforms sales tax. The 2018 Wayfair decision was such a milestone. Another was the advent of the likes of marketplace facilitators such as Amazon, Etsy and eBay, among others.

States’ definitions of a “marketplace facilitator” vary almost as much as states’ sales tax laws themselves. Generally, a marketplace facilitator is a business or organization that contracts with third parties to sell goods and services on its platform and facilitates retail sales. Marketplace facilitators enable these sales by listing the products, taking the payments, collecting receipts and sometimes assisting in shipment.

Laws governing marketplace facilitators popped up when states began to realize that platforms like Amazon were taxing sales of their products but not necessarily charging sales tax on third-party (aka “marketplace”) sales.

How do states handle facilitators?

States seem to believe that marketplace facilitators – most of which are much larger than most retailers – constitute a rich source of tax revenue. Take Iowa, where marketplace facilitators who generate $100,000 or more in sales must get an Iowa retail sales tax permit and file sales tax returns.

Facilitators also differ from sellers in compliance obligations. In Iowa, if a marketplace facilitator did not meet the small remote seller exception threshold in a calendar year and the marketplace seller exceeded the thresholds in that year, the marketplace seller must collect Iowa sales taxes on retail sales made on the marketplace. Almost all states also make the facilitator, not the seller, responsible for sales tax.

Fulfilling your sales obligations can obviously get complicated for facilitators and their sellers, especially if many states and local tax jurisdictions get involved. For sellers, consider that roughly 40 states factor in gross sales for determining whether you have economic nexus or not. In other words, sales made via both the retailer’s own website and through a third-party marketplace facilitator count toward the economic nexus thresholds in these states.

Physical nexus questions

For online retailers, one wrinkle concerning marketplace facilitators is inventory. A facilitator such as Amazon might have warehouses in many states and may store the inventory of its sellers in many tax jurisdictions. The problem: Stored inventory can trigger physical nexus for a retailer.

States may, however, be easing off. Beginning in 2021 in Illinois, a remote retailer’s inventory at the in-state location of a marketplace facilitator no longer created physical nexus when the inventory was used exclusively to fulfill orders made over a marketplace.

And the following year, a Pennsylvania court ruled that non-Pennsylvania businesses selling through the Amazon FBA Program and whose connections to Pennsylvania were only shown to be limited to the storage of merchandise by Amazon in one of the facilitator’s warehouses in the state did not constitute physical nexus.

We predict more states won’t pressure companies with only physical nexus over facilitator warehoused inventory.

Next time, we’ll look at developments in taxability and exemptions.

(For more, listen to our “Hot Topics” webinar about the latest developments in sales tax.)

If you think your business may be impacted by sales tax developments, contact TaxConnex. TaxConnex provides services to become your outsourced sales tax department. Get in touch to learn more.