Shop app: How does it handle sales tax and is it a marketplace facilitator?

One critical tool to eCommerce back office is the checkout tool, and the best of such checkout tools evolve as e-commerce evolves. Good ones must be nimble, able to handle all the details of sales tax and grow as their platform grows. Sales tax can be such a confusing field, however, it can be difficult to keep up.

Shopify, for example, has become is one of the most popular e-commerce platforms, claiming that more than 1.7 million businesses have made over $200 billion in sales with the Ottawa, Ontario-based company’s websites.

Shopify uses the Shop App

A marketplace facilitator is a business or organization that contracts with third-party sellers to offer goods and services on its platform, while also facilitating retail sales. Marketplace facilitators enable these sales by listing products, taking payments, issuing receipts, and in some cases, managing shipping and logistics.
Well-known examples include Amazon, eBay, Walmart Marketplace and Etsy.

All states with sales tax also have marketplace facilitator laws requiring marketplaces to collect sales tax for their sellers, seeing that that platforms were charging sales tax on the sale of their own or certain third-party sales but not on all sales. This produced a gap in tax collection. Marketplace facilitator laws also sprang from the idea that a state could collect all the required sales tax from one entity rather than from thousands of smaller companies (easier from the states’ perspective).

Shopify differs than sites considered marketplace facilitators: It does not create a centralized storefront where sellers sell products and it has little control over the operations of sellers on its platform. When you visit the Amazon website, for example, you’re greeted with a homepage that displays product categories, shopping suggestions – and items from third parties.

The Shopify website does allows individual sellers to set up their own storefronts using the platform’s tools. The platform does help sellers complete such tasks as inventory management and process payments, but historically Shopify has not been considered a marketplace facilitator and hasn’t collected and remitted sales tax for its sellers.

Starting this year, “the Shop channel will automatically collect, remit and file taxes for all orders shipping to or within the United States,” Shopify says. “Shop collects taxes on orders in all states (plus the District of Columbia) that administer statewide sales tax, as well as Alaska local sales tax.”

Real users speak

The term “marketplace facilitator” has existed in the e-commerce industry probably relatively only a few years, facilitator sales tax laws even less than that. How sellers should think of the Shop app might be clearest, at least for the moment, coming from those who have used it.

Says one user on a Shopify board, “Does this mean Shopify is taking sales tax from the order payout for the cost of the products the customer purchased from my online store? I am a bit confused about this because I don’t charge the customer sales tax. For any online purchases that are in the state I reside I pay sales tax monthly for those orders. For online orders placed from states outside of mine the customer is supposed to indicate and pay when they file taxes annually.”

“How are they charging and then deducting from our payouts, I’d like clarification on what happens when an order is placed through the Shop app from a state that I do charge sales tax for already and remit on my own.

Another got DIY. “I’d recommend searching your products on Shop.app and going through the checkout process. Add an address (don’t actually buy anything) and then tax and shipping costs should appear. Is the tax there being added?

For the moment, it seems safest to remember that platforms can call themselves platforms and facilitators can call themselves facilitators, but in the end, states are going to demand sales tax compliance.

Said another user. “Never a dull moment in sales tax land!”

Never a dull moment indeed. Sales tax is more complicated than ever, and everyone who says they’re simplifying sales tax is still leaving the hardest parts – and the liability – up to you. Contact TaxConnex to learn what it means to UPSOURCE your sales tax compliance.