The exploding world of eCommerce has put a new player front and center: the marketplace facilitator.
They’re platforms where third-party sellers of any size and geographic area can facilitate retail sales, including the collection/processing of payments, in exchange for compensation. They’ve been around for years, and today some of the biggest names are Amazon, eBay and Etsy.
Marketplace facilitators are required to charge sales tax where they have nexus (the connection between a tax authority and a company). If the facilitator meets the economic nexus threshold (in many states, these thresholds are the same as for sellers who aren’t marketplace facilitators), the facilitator must calculate and charge tax on those sales that it processes and facilitates.
The dam breaks
Sales tax obligations start with nexus, the concept that enables state and local governments to require businesses to collect and remit sales tax on the products and services they sell.
For some 50 years we operated under a physical presence test for sales tax obligations (including, say, having sales or service personnel or maintaining inventory in a state). Then came 2018’s South Dakota vs. Wayfair, in which the U.S. Supreme Court ruled that the state of South Dakota could require businesses with no physical presence in a state to collect and remit sales tax.
The ruling opened the door for South Dakota – and, over the past four years, every other state with a sales tax – to rake in tens of millions of dollars annually in revenue from out-of-state sellers. Wayfair also unleashed a pent-up desire to attack the Amazons of the world and, after the ruling, states not only enacted remote seller rules but cast the net wider to include marketplace facilitators.
Good news and bad
Thresholds to ignite sales tax reporting obligations – the dollar amount of or number of sales into a given state in a year, for instance – are generally the same for marketplace facilitators as for online sellers. The good news for sellers: In states with these laws in place, for the most part, sellers don’t have to worry about collecting sales tax for sales through the marketplace. The marketplace facilitator is responsible for doing this.
You do need to monitor these sales if you are also selling through avenues outside of a marketplace, such as your own website, resale and so on. Even though the marketplace is collecting and remitting that tax, these sales need to be accounted for to determine whether you have reached certain economic nexus thresholds and may need to collect and remit sales tax on your own website. In most states, these gross receipts can and usually do count toward economic nexus thresholds – and gross receipts of sales through a marketplace facilitator can be a significant portion of sales for a seller.
For online sellers, another concern regarding facilitators is inventory. Marketplace facilitators can maintain inventory for a seller in many different states, creating potential physical nexus and sales tax obligations – sometimes completely unknown to the online seller.
Nothing’s ever simple in sales tax.
(Check out our webinar Multi-Channel Selling & Your Sales Tax Obligations.)
If you need help understanding your sales tax obligations and whether you should be collecting sales tax, get in touch. TaxConnex has experts to help answer these questions and to help you establish an ongoing process to ensure you remain compliant – even with the frequently changing rules of sales and use tax.