Marketplace Facilitator Economic Nexus
Tax & AccountingApril 06, 2021

Marketplace Facilitator Laws and Economic Nexus: What You Need to Know

Key Takeaways

  • More and more businesses continue to sell their goods to buyers all over the country on so-called marketplace platforms, e.g., Amazon, Etsy, and individual remote seller sites.
  • In step with the rise of economic nexus laws, states are passing what are called marketplace facilitator laws that shift the burden of collecting sales and use tax to the marketplace facilitator. At latest count, the number of states adopting marketplace facilitator laws has more than quadrupled in 2019 and 2020 to 35 states and D.C….and more are expected to be added in 2021. This has escalated during the pandemic because of tax revenue opportunities.
  • “Marketplace facilitators” are defined differently in many states.
  • In a nutshell, these laws generally provide that a marketplace facilitator is responsible for collecting and paying the tax on retail sales made through their marketplace for delivery to state customers.
  • So, are marketplace sellers now off the hook for sales and use tax compliance? Not really. Sellers may still be liable for sales and use taxes under these new marketplace facilitator rules. Here is why:
    • The seller is still responsible for collecting and remitting sales and use taxes on sales not made on the marketplace facilitator platform.
    • The marketplace seller is liable for the tax if the marketplace facilitator can show that:
  • It has made a reasonable effort to obtain accurate and complete information from an unrelated marketplace seller about a retail sale.
  • The failure to remit the correct amount of tax was due to incorrect or incomplete information provided to the marketplace facilitator by the unrelated marketplace seller.

Background

In June of 2018, the Supreme Court in South Dakota V. Wayfair greatly expanded the ability of state and local governments to impose sales and use tax obligations on remote businesses. It did so by replacing the physical presence nexus standard with “economic presence” — the amount of economic activity occurring in the state. Forty three of the 45 states that impose a general sales tax and the District of Columbia have adopted the Wayfair economic nexus standard. The only holdouts Florida and Missouri are expected to fall in line in 2021.

At the same time, many states and D.C. have imposed new rules on marketplace facilitators as well as remote sellers holding online marketplaces responsible for calculating, collecting, and remitting sales tax for transactions made on their sites. 

Why have states been quick to impose these new requirements? It’s all about the opportunity to bring in more and more tax revenues…and this has become even more important in the midst of the pandemic, when most states saw significant decreases in revenue. Also, the digital economy is booming. Consumers spent $861.12 billion online with U.S. merchants in 2020, up an incredible 44.0% year over year, according to Digital Commerce 360 estimates. That’s the highest annual U.S. ecommerce growth in at least two decades. It’s also nearly triple the 15.1% jump in 2019. And that trend is expected to continue, even after the pandemic subsides.

Not only do these economic nexus and marketplace facilitator laws affect the major players such as Amazon, eBay, Walmart, they affect your business as well.

This blog focuses on the key issues concerning marketplace facilitators: how are they defined?; how do the laws work?; how do they affect you as a “seller?”; and, which states have these laws in effect.

Who is a Marketplace Facilitator/Provider?

As with most things in tax law, there is no simple, one answer.  Definitions vary greatly from fairly simple to complex. Washington, DC’s definition is basic and is intended to target the major players such as Amazon: “Marketplace facilitator’ means a person [or company] that provides a marketplace that lists, advertises, stores, or processes orders for retail sales subject to tax [...] for sale by such marketplace sellers, and directly or indirectly collects payment from a purchaser and remits payment to a marketplace seller.”

The state of Washington has a much more complex definition that is intended to capture a broad range of businesses, that is typical of one used in many states:

“A marketplace facilitator is a business that does the following three activities:

1. Contracts with sellers to facilitate the sale of a marketplace seller’s product through a marketplace for consideration.

2. Engages, directly or indirectly, in transmitting or otherwise communicating the offer or acceptance between the buyer and seller. (This does not include merely advertising.)

3. Does any of the following activities, directly or indirectly, with respect to the seller's products:

  • payment processing services
  • fulfillment or storage services
  • listing products for sale
  • setting prices
  • branding sales as those of the marketplace facilitator
  • taking orders
  • providing customer service
  • accepting or assisting with returns or exchanges”

Making things even more complicated, many states have unique provisions that include businesses within the definition of a marketplace that would not otherwise be considered as such. For example, many states consider a business a marketplace if it allows purchasers to pay with virtual currency, such as BitCoin.

Marketplace facilitator sales tax obligations

Marketplace facilitator laws require businesses like Amazon to collect and remit sales tax on behalf of their vendors, if one of the following is true:

  • The marketplace facilitator has a physical presence in the state,
  • Their marketplace sellers (vendors) have physical presence in the state, or
  • Their collective, annual sales in the state surpass the sales tax registration threshold and they qualify for economic nexus (this applies where states have BOTH a marketplace facilitator law and economic nexus).

How marketplace tax laws might affect online/remote sellers

So, you are a business who is selling your products online on the mega marketplaces such as Amazon and on your own website. You sell into more and more states in which you don’t have a physical presence. What are the main issues/challenges you may face:

Keep in mind that a facilitator handles only the sales tax on transactions sold through its platform.  Sales made through your business website to, you still need to collect, remit and file in the state on your own. And in many states, if you don’t do any sales outside of those with the facilitator, you may not need to collect or file any sales tax. But there are instances in which you may be required to file a “zero return” or register for non-reporting sales tax status.

Inventory in warehouses can result in physical nexus. Marketplace facilitator laws may relieve some marketplace sellers from certain sales tax collection obligations, but third-party sellers can have a physical presence and an obligation to collect and remit sales or use tax in states where your goods are held for shipment…even when you aren’t aware your goods are being held there.

You might have the option to collect sales tax yourself. This is on a state-by-state basis. If a state provides this option, you’ll should be informed by the marketplace facilitator, who would offer you the opportunity to opt out and to comply on the marketplace sales yourself. Whether you actually do want to opt out depends on whether you’re already registered for taxes in that state, the size and resources of your business to handle tax compliance, etc.

Maintain records of your sales in the state. All sales made whether on a marketplace or on your own website represent your business, and you should keep records of the tax information. In fact, some states require facilitators to send you monthly reports, “access to information regarding gross sales made [in the state] on their behalf during the previous month.” In most case, marketplace facilitators must send this report to you by the 15th of each month.

Get your exemption certificates. Some states require you to retain an exemption certificate, administered by the state Department of Revenue and filled out by the marketplace. This is basically just an official document that confirms the marketplace facilitator is managing sales tax for you on their platform.

 

States with marketplace facilitator laws



State

Effective Date

Alabama

1/1/2019

Alaska

4/1/2020

 

Arizona

10/1/2019

Arkansas

7/1/2019

California

10/1/2019

Colorado

10/1/2019

Connecticut

12/1/2018

District of Columbia

4/1/2019

Georgia

4/1/2020

Hawaii

1/1/2020

Idaho

6/1/2019

Illinois

1/1/2020

Indiana

7/1/2019

Iowa

1/1/2019

Kentucky

7/1/2019

Louisiana

7/1/2020

Maine

10/1/2019

Maryland

10/1/2019

Massachusetts

10/1/2019

Michigan

1/1/2020

Minnesota

10/1/2018

Mississippi

7/1/2020

Nebraska

4/1/2019

Nevada

10/1/2019

New Jersey

11/1/2018

New Mexico

7/1/2019

New York

6/1/2019

North Carolina

2/1/2020

 

North Dakota

10/1/2019

Ohio

9/1/2019

Oklahoma

7/1/2018

 

Pennsylvania

4/1/2018

Puerto Rico

7/1/2020

Rhode Island

7/1/2019

South Carolina

4/29/2019

South Dakota

3/1/2019

Tennessee

10/1/2020

 

Texas

10/1/2019

 

Utah

10/1/2019

 

Vermont

6/7/2019

 

Virginia

7/1/2019

 

Washington

1/1/2018

 

West Virginia

7/1/2019

 

Wisconsin

1/1/2020

 

Wyoming

7/1/2019

 

Mark Friedlich
Author at Tax & Accounting
Mark Friedlich, a CPA & tax lawyer, is the principal international & corporate indirect taxation analyst for Wolters Kluwer Tax & Accounting. He is a member of the U.S. Senate Finance Committee’s Chief Tax Counsel’s Advisory Board, advisor to 14 state taxing authorities, and a member of the American Bar Association’s Tax Section and AICPA’s Tax Section leadership teams. Prior to joining Wolters Kluwer he was a Managing Tax Partner at PricewaterhouseCoopers.