Online marketplaces, such as the ones operated by Amazon, Walmart, Etsy, and eBay, are popular sales channels for many ecommerce sellers and the volume transacted through them has grown dramatically over the last few years. In fact, in 2018 the sales transacted through Amazon’s third party marketplace represented more than 50% of all Amazon sales and roughly 30% of all ecommerce sales in the United States (as estimated by eMarketer).
This sales volume was not left unnoticed by states looking for ways to increase sales tax compliance and at the same time make tax administration more efficient and less costly. Without a marketplace collection law a state would have to collect sales tax from each one of the thousands of third party marketplace sellers, and would typically only be able to collect a portion of the tax owed. Marketplace collection laws shift the sales tax collection responsibility from the third party seller to the marketplace facilitator. They allows a state to collect 100% of the sales tax due on marketplace sales from only one entity – the marketplace facilitator. For these reasons marketplace collection laws have grown in popularity and as of this writing 33 states have enacted such laws, with additional states expected to do so next year.
Marketplace collection laws are definitely a win for the states, but they are also a win for the majority of third party sellers, who are relieved from the burden of tax collection on sales conducted through a marketplace. Most third party sellers also benefit from the leveling of the playing field that results from the marketplace facilitator collecting tax on all sales. Without a marketplace collection law third party sellers would have to collect tax only if they have nexus with the state, with the result of small remote sellers (who have not yet exceeded the state’s economic nexus thresholds) having the competitive advantage of not being required to collect tax.
Below are five things that third party sellers should know about these laws.
1. What is a “marketplace” or “marketplace facilitator” anyway?
Generally, a marketplace is an online or offline platform or physical space that brings buyers and sellers together. The most well-known online marketplaces are the ones operated by Amazon, EBay, Etsy, and Walmart, but there are numerous smaller and more specialized marketplaces as well that are affected by these laws. Think of Uber Eats, Groupon Goods, and potentially even marketplaces like Fiverr or Upwork in some states.
As with all things sales tax, the definition of “marketplace” and “marketplace facilitator” varies from state to state. Some states define the term(s) narrowly. For instance, the new Arizona marketplace collection law (H.B. 2757) specifies that a marketplace facilitator is a person that not only facilitates the sale, but also collects the payment from the purchaser.
Other states define the term “marketplace facilitator” more broadly. California’s A.B. 147, for example, includes in the definition persons who don’t collect the payment from the purchaser (as long as they engage in one of the other activities specified in §6041(b)(2)). That means that more types or marketplaces and aggregators can be required to collect tax in CA and other states that have adopted similar definitions.
2. Which states require marketplace facilitators to collect sales tax on third party sales?
As of June 2019 thirty-three states have enacted marketplace collection laws. See the map linked below for details. Please note that some of these laws are not in effect yet (hover over the state to see the effective date of their marketplace collection law).
3. Are all marketplace facilitators collecting tax in the states that have enacted marketplace collection laws?
Most marketplace facilitators are collecting tax as required, but some have not started collecting for third party sellers yet. You should check with your marketplace facilitator for specifics.
Amazon is currently collecting tax for third party sellers in all states that have enacted marketplace collection laws (except in Rhode Island, where until 07/01/19 the marketplace facilitator can choose to comply with collection or notice and reporting requirements). Please click here for a listing of the states where Amazon has begun collection on third party sales.
Etsy is collecting tax on third party sales in a number of the states with marketplace collection laws, but has delayed collection in several states. Please see this link for details.
Similarly to Etsy, EBay has delayed collection in several states, but is beginning to collect in a large number of states as of July 1st. Please click here for details.
4. If the marketplace facilitator is collecting tax on marketplace sales, do marketplace sellers still have to file returns?
The answer to this question will depend on the state. Some states (e.g. Nebraska) require marketplace sellers to continue filing returns, reporting the sales on which the marketplace facilitator collects as gross sales, and then subtracting the same sales as allowable deductions. Other states (e.g. Minnesota) instruct marketplace sellers to exclude marketplace sales from their returns (provided that the marketplace facilitator is collecting the tax).
And of course, marketplace sellers who also sell though their own website (or through other non-marketplace channels), are always required to file returns.
5. If a state has enacted a marketplace collection law, are marketplace sellers completely off the hook?
Unfortunately that is not the case in the vast majority of states. In most states (e.g. Alabama, Iowa, and Washington) the marketplace collection law does not relieve the third party seller from liability if the marketplace facilitator doesn’t collect the tax. If the marketplace facilitator fails to collects, for whatever reason, the state could go after the third-party seller for the uncollected tax.
Additionally, many states relieve marketplace facilitators from liability when their failure to collect tax is the result of incorrect or incomplete information provided by the third party seller. Therefore, it is very important for third party sellers to correctly categorize the products and services they sell through a marketplace. If they don’t do so, the marketplace facilitator can potentially claim that tax was not properly collected due to an error of the third party seller, shifting the liability to that seller.
If you have questions about marketplace collection laws (or about any other sales tax related topic) feel free to reach out to me at Antoaneta@antoanetaarchercpa.com.
If you’d like to explore working together please email me at Antoaneta@antoanetaarchercpa.com or simply click here to schedule time to chat.
Disclaimer
This post is for general discussion purposes only and does not constitute tax or legal advice. If you need help with a sales tax issue please contact us so that we can assist you based on your specific facts, circumstances, and time periods involved. I am not an attorney and do not give legal advice. For legal questions please refer to an attorney specializing in sales tax matters.