It is a well-known fact that states and local governments have been grappling with falling sales tax revenues in recent years. The decline in sales tax revenue is a result of a shift in consumer habits trending towards more frequent online shopping and purchases of personal services. These shifts in purchasing habits directly affect sales tax collections because historically online vendors lacking physical presence were not subject to state sales tax requirements. Furthermore, services are typically not subject to sales tax.
There have been various attempts by the states to circumvent the physical presence nexus standard. Some of the creative schemes include affiliate nexus, click-through nexus, cookie nexus, drop-ship rules, and onerous notice and reporting requirements used to influence consumer’s use tax reporting.
The inability to tax sellers without a physical presence is no longer an obstacle. In June 2018, the U.S. Supreme Court ruled in South Dakota v. Wayfair that a taxpayer may have substantial nexus, and thus a sales tax filing requirement, even absent a physical presence in a state. The states quickly reacted to this decision, reversing 26 years of precedence. It has been just over a year since the decision, and in that short time, all but two of the states with a statewide sales tax have adopted economic nexus provisions imposing sales tax on remote vendors with a specified amount of activity in a state. The threshold is most often $100,000 of in-state receipts or 200 separate transactions in a year.
Wayfair and the subsequently enacted economic nexus laws and regulations provided the states a mechanism to collect some of the previously untouchable sales tax revenues from online sales.
Now that the states have the ability to tax out-of-state vendors, they are onto their next quest to capture more sales tax revenue from online sales by shifting the burden of sales tax collection and remittance from sellers to marketplace facilitators. There are approximately 35 states with specific marketplace facilitators and others that interpret their existing definitions of vendor or seller to require marketplace facilitators to collect and remit sales tax on behalf of their sellers.
This probably sounds like a welcome simplification, particularly for smaller sellers that utilize online platforms. However, consistent with all things sales tax, there is little uniformity in the marketplace facilitator requirements amongst the states. The new rules leave marketplace sellers, facilitators, and tax practitioners alike riddled with questions about how the various state laws apply. The following provides a closer look at why taxing marketplace facilitators is so complex.
Defining Marketplace Facilitator
First, the definitions of marketplace facilitators vary greatly by state. For example, Arizona has a specific clause requiring “Online Lodging Marketplaces” to collect and remit tax on behalf of its sellers. Most other states have remained silent on this issue. Similarly, California’s statutes explicitly state that a “Delivery Network Company” (think a food delivery service) is not a marketplace facilitator. On the other hand, Iowa has recently issued guidance indicating that a delivery network company is required to report as a marketplace facilitator.
Who is the Responsible Party for Marketplace Facilitator Tax Compliance?
Secondly, it is often challenging to decipher which vendor bears the ultimate risk for errors or non-compliance. A common characteristic of the marketplace facilitator laws is a provision to limit liability or penalties for marketplace facilitators if the errors are a result of erroneous or untimely information regarding the location or taxability of a sale from the seller. Unfortunately, not all of the states have provided such protections, leaving marketplace facilitators with an undue burden to pay the tax in the event of a future audit.
States implemented these requirements with very little notice to allow marketplace facilitators to comply. In some circumstances, companies that historically did not have sales or sales tax procedures are now scrambling to implement sales tax processes and software for countless sellers and types of products. Maryland may waive penalties and interest incurred before Jan. 1, 2020 associated with these taxes if the facilitator can demonstrate that it creates a hardship to implement a sales and use tax program timely. Most other states do not provide a similar waiver, and even Maryland’s only provides three months of potential waivers from the effective date of the marketplace facilitator requirements.
Applying Economic Thresholds
Taxpayers must also consider whether the economic nexus thresholds for marketplace facilitators apply to gross receipts, retail sales only, or some defined combination of receipts earned from the sale of tangible personal property, products delivered electronically and services, or simply taxable sales. Additionally, some of the thresholds apply to the aggregate amount of receipts earned by the marketplace facilitators’ direct sales plus the sales of its sellers, and other thresholds appear to apply to the direct sales only. Ohio’s law has a twist-the direct sales of the facilitator and sales of its sellers that do not maintain a business location in the state are included in the economic nexus test.
Prospects for a Marketplace Facilitator Tax Solution
There are various other nuances and unanswered questions about the application of the marketplace facilitator laws. Given how quickly the states drafted and adopted the laws, and the resulting frustrations, we can expect forthcoming edits to these laws. The Multistate Tax Commission has formed a work group to identify common faults in the existing laws and propose solutions and recommendations for uniformity.
Meanwhile, if you are a marketplace seller do not cease all sales tax collections in states with marketplace facilitator laws without fully understanding the requirements for sellers, particularly if you have separate sales through another platform. Many marketplace sellers still require a sales tax registration to report tax on its own web sales.
Stay Tuned for More Developments
While we can expect revisions or clarifications to the current marketplace facilitator laws, the states will likely begin pursuing sales tax collections by broadening the sales tax base to include taxation on services next. Just when we get the hang of the marketplace facilitator requirements as they apply to sales of tangible personal property, new challenges will arise as the states apply tax to services and marketplaces for service providers.
For more information about how marketplace facilitator laws may affect your business, please contact us.
- Understanding the Post-Wayfair Tax Landscape
- Colorado and the Problem with Sales and Use Tax ‘Simplification’
Ann Brown is a Senior Tax Manager in the New England State and Local Tax Practice. She can be reached at email@example.com or 617.761.0658.
Tarra Curran is a Leader of the State and Local Tax Practice in New England. She can be reached at firstname.lastname@example.org or 401.626.3240.
© Copyright 2019 CBIZ, Inc. and MHM. All rights reserved. Use of the material contained herein without the express written consent of the firms is prohibited by law. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.