Two years ago, the U. S. Supreme Court shook up the sales tax world with their decision in South Dakota v. Wayfair, Inc., handing states broad flexibility to implement new economic nexus legislation. This allowed them to recoup sales tax revenue from all sellers, online and otherwise, regardless of physical presence in a respective state.
While the impact of economic nexus laws has been wide-reaching, it didn’t take states long to get more creative, starting with going to the place where sellers congregate: Marketplaces.
The Rise of Marketplaces and Their Tax Laws
In the U.S., state taxing authorities have long known where the money is, in aggregate, and so the marketplace facilitator laws caught on like wildfire, requiring Amazon, Etsy, eBay and others to collect and remit sales tax on behalf of their third-party sellers. The laws began appearing in 2017 when states recognized that major marketplaces were facilitating millions in 3P sales without collecting taxes. Since then, states have adopted their own bespoke versions of the law to capture revenue from marketplace sales. To date, more than 40 states and the District of Columbia have implemented marketplace facilitator laws.
Globally, France became the first member of the European Union (EU) to require marketplaces to collect and remit value-added tax (VAT) on sales by non-EU 3P merchants earlier this year, while countries like the U.K. and Germany have similar legislation. The move toward marketplace facilitator laws across Europe is largely due to efforts by governments to reduce ecommerce VAT fraud, causing an estimated at $8 billion tax loss annually.
The Future of Marketplace Tax Laws
Moving forward, one thing is certain: Marketplace facilitator laws will continue to evolve. We’re already seeing some changes in the U.S., with Louisiana taking additional steps to verify the identities of high-volume 3P sellers as ecommerce spikes during COVID-19. But states won’t stop at traditional marketplaces. They’ve gone to great lengths to identify other platforms hosting 3P sellers, including lodging (Airbnb, Vrbo, et al), communications (Apple’s App Store, Google Play, Roku, Amazon, etc.), and, for sheer tax complexity, food delivery (that’s right, Grubhub, Postmates, Uber Eats, etc.).
A quick glance at alternate lodging starts with recognizing the considerable growth over the past decade as marketplace platforms have expanded. However, legislation directed at these providers has focused primarily on the collection of state taxes on behalf of short-term rental (STR) hosts. We can anticipate over the next few years that states will adopt laws requiring lodging marketplaces to collect state and local lodging taxes, thereby relieving STR hosts of their tax collection obligation.
To reach that point of compliance, local governments must change the imposition of their taxes to apply to an entity (the marketplace) other than the lodging facility operator. Even after this is done, the country will resemble a patchwork of state and local requirements. Like all marketplace laws, lodging platforms will contend with different tax bases, tax names and places where there are local but not states tax.
We’re seeing a shift in how people use and consume data and media on communication platforms, increasing the complexity of how these services should and can be taxed. For example, a consumer can download Hulu in a variety of ways, including:
- From the Apple App store, Google Play, or another application store – all of which are functioning as a marketplace connecting 3P sellers with consumers
- From the Hulu website, creating a direct billing relationship
- Through Sprint as a “free” service within a tiered package system, creating a direct billing relationship in which Sprint is classified as a reseller
Similar to ecommerce merchants, application providers are likely selling their product or service through multiple channels, including marketplaces and their website. The key distinction between marketplace facilitators and applications is the complexity of communications tax compliance responsibility, which is in addition to sales and use tax burden. States will ultimately have to overcome these taxability issues to expand marketplace facilitator laws to communications services, but it’s likely that more taxing authorities will explore these options as streaming continues to become more popular.
The Wayfair decision led to new tax requirements on remote sellers and marketplace facilitators alike as states were granted the ability to tax ecommerce regardless of seller location. We’ve seen ample pushback from marketplace facilitators, food delivery services, gig-economy companies and telecommunications providers seeking to lessen the burden of 3P transactions.
As online marketplaces grow as an extension of consumers’ everyday life, it’s likely that more taxing authorities will make adjustments to marketplace facilitator laws that expand business responsibilities. With online buying reaching its tentacles into every aspect of commerce, businesses should expect marketplace facilitator laws to travel alongside.
Megan Higgins is VP and GM, Ecommerce and Marketplaces for Avalara