Marketplace Facilitator Rules in Sales Tax: What You Need to Know
Marketplaces have revolutionized the way companies sell to and transact with customers, providing a valuable platform for businesses to reach a wider customer audience. In recent years, the introduction of tax rules across the world specific to marketplaces, like, for example, marketplace facilitator laws in most states in the United States, has brought about significant changes for these platforms.
With these new rules, so-called ‘marketplace facilitators’ are now required to collect and remit sales tax on behalf of retailers in the US. This article will delve into the crucial considerations and emerging trends that marketplaces facilitating sales to US customers must be aware of to ensure they comply with the applicable rules.
What are the marketplace facilitator rules about?
Marketplace facilitator rules in sales tax refer to regulations that require marketplaces to take on the responsibility of collecting and remitting sales tax on behalf of marketplace sellers (third-party sellers) who use their platform to make sales. Marketplace facilitator rules have been implemented by all states with sales tax.
Marketplace facilitator rules aim to shift the sales tax collection and reporting obligations from individual retailers to marketplace facilitators. While this simplifies the process for marketplace sellers and state revenue departments who receive the tax revenue, it does mean that marketplace facilitators now have to take on the additional responsibility of calculating, collecting, and remitting sales tax on behalf of the third-party sellers on their platform. This can be challenging, especially considering the varying sales tax rates and rules across different states and in more than 11,000 tax jurisdictions across the US.
Who are marketplace facilitators in sales tax?
US state laws have specific definitions for the term "marketplace facilitator." Broadly speaking, a marketplace facilitator is a person or entity that contracts with marketplace sellers (third-party sellers) to facilitate the sales of products through their marketplace platform and collects payment directly or indirectly from the customer. These facilitators include well-known companies such as Amazon, eBay, and Walmart, as well as smaller marketplaces and e-commerce platforms.
However, the exact definition can vary from state to state in the US. It is usually written in a broad manner that encompasses different types of marketplaces, but the criteria for determining whether a business qualifies as a marketplace facilitator can greatly differ between states. Even minor differences in definitions can lead to a company being classified as a marketplace facilitator in one state rather than in another, despite engaging in the same activities. Some states have complex definitions, while others operate with more simple ones. Here are some examples from New York, Florida, and Washington states.
What do marketplace facilitator rules mean for the different stakeholders?
US State Governments
All states adopted marketplace facilitator rules with sales tax after the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc. In this case, the Court ruled that states could require out-of-state sellers to collect and remit sales tax based on their economic activity in the state, even if they did not have a physical presence there. As a result, states enacted economic nexus laws requiring remote sellers to register and collect sales tax after exceeding the economic nexus thresholds.
However, it quickly became apparent that collecting sales tax from each out-of-state seller was inefficient and impractical for states and did not always work out in practice. Many small online businesses did not meet the economic nexus thresholds, and states had to expend significant resources to gather the uncollected tax if the customer did not self-assess use tax on these purchases.
This led to the adoption of marketplace facilitator rules in all states with sales tax, which shifted the responsibility of collecting and remitting sales tax from each individual seller to the marketplaces themselves. For US state governments, the marketplace facilitator rules have significant benefits:
- Pre-Wayfair and even post-Wayfair States were missing out on a substantial amount of potential revenue. Placing sales tax collection obligations to marketplaces increased revenue for states by ensuring that sales tax is collected and remitted on transactions made through marketplaces, which are more likely to exceed the nexus thresholds.
- Secondly, the rules enable states to collect all required sales tax from a single entity, the marketplace facilitator, rather than from thousands of smaller taxpayers. This makes it simpler for states to ensure that sales tax is charged properly and significantly reduces the cost of ensuring compliance both for the state and the underlying marketplace sellers.
- Thirdly, these rules helped to level the playing field for local brick-and-mortar retailers who might have been disadvantaged due to remote online sellers not collecting sales tax, resulting in lower retail prices.
Marketplace facilitator rules mean that marketplace sellers no longer have to worry about collecting and remitting sales tax themselves when transacting through marketplaces, which can simplify their operations. Still, marketplace sellers must provide accurate and up-to-date information to marketplaces about the transactions to ensure that the correct amount of sales tax is being collected and remitted.
Furthermore, it is essential to note that the marketplace facilitators handle the sales tax only on transactions sold through their platforms. For direct sales to end customers (such as through their own webshop, for example), sellers still might need to collect and remit sales tax on their own if they have nexus in the state. The complexity is further compounded by the fact that states determine the economic nexus thresholds differently, with some including all sales (direct and marketplace) while others exclude marketplace sales.
The marketplace facilitator rules in the US created an obligation for marketplaces to collect and remit sales tax on behalf of marketplace sellers. This means that marketplaces are responsible for calculating and collecting the appropriate sales tax amount for transactions made through the platform. It is worth noting that this trend towards placing more obligations on marketplaces to ensure adequate tax collection is part of a more significant shift in tax policies globally, with both value-added tax (VAT) and sales tax moving in this direction (we wrote about it here).
Marketplace facilitators must have a nexus with the state to be subject to sales tax obligations. They can establish a physical nexus if they have an office, employees, or warehouse in a state or an economic nexus if they facilitate sales for marketplace sellers or have their own sales. The thresholds for economic nexus are usually the same for marketplaces and direct sellers. To determine if they meet the transaction thresholds, marketplace facilitators should normally track and combine their own sales on their platform with the sales made by marketplace sellers through their platform. While larger marketplaces may already be registered in all states, smaller marketplace facilitators may have different levels of resources and may find it challenging to keep up with the various state requirements.
In conclusion, the marketplace facilitator rules in sales tax have brought significant changes for marketplaces, retailers, and states alike. While these rules simplify sales tax compliance for some parties, they may also create significant challenges for marketplace facilitators.
How can Fonoa help?
As a marketplace facilitator or a seller having direct sales, managing sales and use tax can be a complex and overwhelming task, particularly with the ever-changing sales tax landscape.
With Fonoa's tax engine, which includes nexus tracking and a built-in feature for marketplaces, you can ensure that you always charge the correct sales tax amount in all the 11,000+ US jurisdictions.
Get in touch to discover how we can help you meet the challenges and take the complexity out of tax.