US Marketplace Facilitator Sales Tax Laws: everything you need to know
This article was originally published on the Quaderno blog. Click here to see the original one and access bonus content with it.
Sales tax laws for marketplace facilitators are quickly covering the United States, holding online marketplaces responsible for calculating, collecting, and remitting sales tax for transactions made on their site.
These new laws affect all the major players in e-Commerce: Amazon, eBay, Etsy, WalMart, and more. In fact, the laws potentially affect other third party services you use to sell your digital products or physical goods in the US. And ultimately, they affect your business, too.
This article is here to explain everything you need to know, including answers to following questions:
- What exactly is a “marketplace facilitator?”
- How do marketplace tax laws work?
- How do those laws affect you as a seller?
- Which US states have enacted such laws?
Let’s get down to business!
General function of marketplace facilitator tax laws
Marketplace facilitator laws require businesses like Amazon and Etsy 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 quality for economic nexus
If none of the above are true, marketplace facilitators do not have to bother with sales tax, but they may have to abide by use tax and the “Notice & Report” rules. This means they must notify buyers of their tax obligation and report the data to each state’s department of revenue.
All in all, it’s a whole lot more work for the big companies that are helping you sell your products. But which ones? What exactly is considered a marketplace facilitator?!
What is the sales tax definition of a marketplace facilitator?
As with anything in the US sales tax system, there’s no single or simple answer.
Definitions of a “marketplace” or “marketplace facilitator” vary among the states’ tax policies. There are elaborate definitions designed to cast a wide net and catch as many forms of the “online sales platform” as possible. A good example is Washington’s, who enforced this law early on and whose language many other states are copying.
“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”
There are more simple definitions, designed only to catch household names (Amazon, etc.) who bring in the big bucks. Here’s the language from the other Washington… DC:
“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.”
And there are also special provisions, tacked onto some states’ policies, which hook online platforms for specific ways of selling or accepting payments. The main one so far is the special provision for virtual currencies. If a business allows customers to pay with virtual currency, that business is considered a marketplace. This includes obvious sites like Overstock.com, which lets buyers use BitCoin. But it also ensnares video games systems like PlayStation or Xbox, whose users purchase upgrades and other products through “credits.”
According to Bloomberg, at least 16 states have this virtual currency provision in place: Alabama, California, Idaho, Iowa, Massachusetts, Nevada, New Jersey, North Dakota, Ohio, Kentucky, Rhode Island, Utah, Vermont, Virginia, Washington, and West Virginia.
The benefit for state governments
Ever since the Supreme Court’s Wayfair decision, state governments have been passing new sales tax legislation that applies to remote sales and online marketplaces. Why? The digital economy is booming; there’s a lot of potential tax revenue to bring in. Of course, it’s all about the Benjamins.
According to old definitions of US sales tax nexus, out-of-state sellers couldn’t be held accountable for local sales taxes. The states were missing out on that revenue. Then, with the post-Wayfair introduction of economic nexus, small online businesses still wouldn’t sell enough to hit nexus. The collective sales of these small businesses represented a big chunk of potential revenue. The states were still missing out.
So, the states turned their attention to the online marketplaces where all of the individual retailers actually sell their products to in-state customers. A marketplace would surely have physical nexus from a warehouse or fulfillment center. Or, when measured in total, it’s sales would surely hit the economic threshold.
And now the state governments can recoup tax revenue that was never available before.
Complications of the laws
As smooth as that little narrative sounded, the reality of these laws is a much rockier road. Here are just a couple of the complications that make it difficult for you (and me, and the marketplace facilitators, and probably even the Departments of Revenue) to understand exactly how the laws work.
- Marketplaces operate differently from each other. Amazon FBA is different from Etsy. Each marketplace has its own adaptations and processes to comply with the law, and each will have its own specific requirements of you, a seller.
- A single marketplace will operate differently across states, according to state laws. So once you know how Amazon FBA handles Idaho, it might be altered for Iowa. And then again for Texas. Here’s a telling excerpt from Etsy’s statement: “These laws continue to be introduced in various states, creating a patchwork of requirements for us and our buyers and sellers. Because each state has their own set of rules and requirements, Etsy must make a determination about how to proceed on a case-by-case basis.”
Which states have a marketplace facilitator tax law?
Finally, where in the US do these laws actually apply? Not everywhere, but new legislation is coming out nearly every month. We’ll keep this list updated so you always have a current report.
For now, states that have enacted marketplace facilitator tax laws include:
Alabama — effective January 1, 2019
Arizona — effective October 1, 2019 (amendment pending)
Arkansas, effective July 1, 2019 (amendment pending)
California — effective October 1, 2019
Colorado — effective October 1, 2109
Connecticut — effective December 1, 2018
District of Columbia — effective April 1, 2019
Hawaii — effective January 1, 2020 (amendments pending)
Idaho — effective June 1, 2019
Indiana — effective July 1, 2019
Iowa — effective January 1, 2019
Kentucky — effective July 1, 2019
Minnesota — effective October 1, 2018
Nebraska — effective April 1, 2019
New Jersey — effective November 1, 2018
New Mexico — effective July 1, 2019
New York — effective June 1, 2019
North Dakota — effective July 1, 2019
Oklahoma — effective April 10, 2018 (amendments pending)
Pennsylvania — July 1, 2019
Rhode Island — effective July 1, 2019
South Carolina — effective April 26, 2019
South Dakota — effective March 1, 2019
Texas — effective October 1, 2019
Utah — effective October 1, 2019
Vermont — effective June 7, 2019
Virginia — effective July 1, 2019
Washington — effective January 1, 2018 (amendments effective March 15, 2019)
West Virginia — effective July 1, 2019
Wyoming — effective July 1, 2019
How marketplace tax laws might affect online sellers
It’s still very hard to tell how these new laws might affect you. From our research, we’ve put together a list of important points and practices, FYIs and suggestions, which will help your business through the confusion.
- 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 likely hear about it from the marketplace facilitator, who would offer you a chance to opt out and to manage taxes 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, no matter what.
These transactions are still your business, and you should keep records of the tax information just in case. 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.” Facilitators must send this report to you by the 15th of each month. - Make sure you have exemption certificates, where needed.
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. As an example, here’s Arizona’s marketplace facilitator exemption certificate. - You may have to pay a fee to the marketplace for their tax management. Stay aware of changes to service cost.
- Stay alert for news and instructions from the marketplaces where you sell. They might instate new rules or settings for tax compliance, and you don’t want to be left out of the loop!
Resources
- US Sales Tax for eCommerce: How to comply
- Sales tax in the US for digital products
- How US sales tax works with Amazon FBA
- The difference between US Use Tax and Sales Tax
- What You Must Know About Sales Tax if You Have Customers in the United States
* At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or accountant.
