Few consumers are aware of the role that marketplace facilitators plays in their online shopping experience. These entities, whose exact definition varies from state to state, are generally described as any business or organization that works with third-party vendors to sell their goods and services on its own platform. The most obvious examples of marketplace facilitators are companies like Amazon, Etsy, Walmart.com, Rakuten, Alibaba, Newegg and eBay, but these types of sellers can vary in scale.
Considering the sheer number of marketplace facilitators in the United States, it comes as no surprise that laws taxing these businesses on sales made are being swiftly proposed and enacted. Over 10 states have already created legislation that requires marketplace facilitators to collect and remit sales tax on resulting from transactions tied to their third-party sellers, and several additional states are slated to consider similar legislation this year.
This trend has been growing since the U.S. Supreme Court’s 2018 landmark ruling in South Dakota vs. Wayfair, vacating a long-standing physical presence rule to create tax nexus for out-of-state merchants. Prior to the Wayfair ruling, only a handful of states required marketplace facilitators to collect and remit tax on all sales into the state, but they generally allowed them to opt out by complying with notice and reporting requirements.
Now that states are no longer prohibited from taxing remote sales, they’re looking for the most efficient ways to bring in that new sales tax revenue. Approximately 35 states have adopted economic nexus laws, which impose a sales tax collection obligation on businesses with significant economic activity in the state. Such economic nexus laws generally provide an exception for small sellers, which are also defined differently from state to state.
Many marketplace sellers qualify for these small seller exceptions, meaning they’re safe from the long arms of the tax authorities. But states that require marketplace facilitators to collect and remit sales tax on behalf of their sellers still reap revenue from those transactions. It’s a win-win for states, which is why we can expect to see marketplace facilitator sales tax laws proliferate.
It’s important to note that marketplace sellers aren’t necessarily freed from all responsibilities under these laws. In fact, these laws can complicate matters because they change the rules. Ordinarily, businesses that don’t have nexus within a state (i.e. an obligation to collect sales tax) don’t have reporting requirements.
Up to this point, expansion of these marketplace facilitator tax laws has left sellers and businesses of all sizes confused, and for good reason. Complying with this rapidly changing legislation can be a complex process rife with nuance and intricacies.
So how can merchants best react to this wave of marketplace facilitator tax laws? First, they must familiarize themselves with each state’s specific laws to find out if they apply to them. And, if they are selling into a state that has not yet instituted such laws, they must ensure that their internal processes can handle the added burden of collecting and remitting sales taxes there should a law be passed in the future.
Preparation is often the name of the game in responding to ever-changing tax legislation, and it’s no different when it comes to marketplace facilitator taxes. Staying abreast of updates to your state’s sales tax code can ensure that your business stays compliant and successful.
Scott Peterson is Vice President of U.S. Tax Policy and Government Relations at Avalara