The U.S. Supreme Court’s holding in South Dakota v. Wayfair, Inc. (Wayfair) had sweeping impacts on businesses, specifically remote sellers, by introducing new or heightened sales and use tax obligations.
Following their enactment of Wayfair-related economic nexus legislation, most states enacted legislation impacting online marketplaces’ sales and use tax obligations. Marketplace facilitator laws were intended to help states’ tax authorities collect more sales tax from fewer entities. By mid-2020, 41 states had enacted economic nexus laws.
Wayfair and marketplace facilitator laws impact multiple parties in the distribution channel, including providers of the marketplace, sellers using the marketplace, customers purchasing goods and services on the marketplace, and third parties that deliver goods purchased on the marketplace. The impact of this legislation was felt by businesses across most industries and distribution channels.
Below learn about certain considerations facing marketplace facilitators in the retail, food, and beverage industries; marketplace facilitator laws in California, Texas, and Washington; and a list of certain items you can consider when assessing your company’s obligations under marketplace facilitator laws.
Who’s a marketplace facilitator?
The definition of a marketplace facilitator varies by state. However, generally, a marketplace facilitator is an entity that uses its own physical or electronic marketplace to facilitate sales between third-party buyers and sellers.
Commonly known examples of marketplace facilitators are eBay, Etsy, and Amazon. The marketplace facilitator is generally an entity that provides services in the following categories:
Payment processing services
Marketplace infrastructure that connects customers and service providers and engages in taking orders
Marketplace infrastructure that connects customers and service providers and receives a referral fee
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
Many states’ marketplace facilitator laws exclude certain businesses or industries from their definitions. For example, advertising services and payment processors are often omitted.
Compliance complexities
Marketplace facilitators face several challenges that can impact their ability to meet their obligations under states’ marketplace facilitator laws. The following isn’t a comprehensive list of issues, but it highlights certain key considerations for marketplace facilitators.
Limitations in system capabilities
Many marketplace facilitators can’t collect and remit sales and use taxes because their systems aren’t capable of capturing the necessary data to comply with certain marketplace facilitator laws. Specifically, many marketplace facilitators have systems that lack the sophistication and complexity to determine the taxability of their marketplace sellers’ products and services in multiple jurisdictions.
Often, marketplace facilitators aren’t able to update their systems to comply with marketplace facilitator laws due to the costs of adopting and integrating new technology necessary to make the required tax determinations. These marketplace facilitators could face increased audit risk and out-of-pocket tax exposures because their systems don’t allow them to calculate and collect the correct sales and use tax.
Lack of certainty in marketplace facilitator laws
Most tax legislation is specific to the state and local tax authorities that impose sales and use taxes. However, state and local tax authorities have provided very limited guidance on certain key considerations related to a marketplace facilitator’s rights and obligations under marketplace facilitator laws.
As a result, marketplace facilitators in certain states have difficulty complying with their obligations under marketplace facilitator laws, which are overly broad and lack inclusive definitions.
For example, a marketplace facilitator may lack sufficient information or transparency into a marketplace seller’s transactions, which prevent it from evaluating the taxability and appropriate tax rates for goods or services in a transaction. Also, the marketplace facilitator laws lack guidance on the components of the sales tax base, including whether certain service and delivery fees are subject to tax.
Additional purposes for marketplace facilitator laws
Many states have enacted marketplace facilitator laws that address issues and obligations other than the collections and remittance of sales tax. For example, a state’s marketplace facilitator law could:
Extend to tax liability beyond sales and use tax
Exclude certain parties, such as delivery companies
Introduce a waiver process to prevent shifts in sales tax responsibilities
Offer class action protection
The above items often vary by state and result in a requirement to understand the nuances of the tax law beyond merely collecting and remitting sales tax.
States continue to issue more-specific guidance about marketplace facilitator laws, and further clarification is potentially on the horizon. However, guidance from the tax authorities is currently limited. As a result, marketplace facilitators and sellers are left to interpret marketplace facilitator laws, which increases their audit risk and tax compliance costs.
Liability for sales taxes
Marketplace facilitator laws generally aren’t clear about the liability of a marketplace facilitator and marketplace seller for uncollected or unremitted sales or use tax.
In most states, marketplace facilitator laws don’t explicitly address whether the marketplace facilitator and marketplace sellers are jointly and severally liable for uncollected sales and use taxes, or if the marketplace facilitator is instead solely responsible for these taxes.
Due to this uncertainty, contractual relationships between these parties must address certain issues, including sharing of financial and tax information to comply with state tax law and information requests by state tax auditors as well as indemnifications for sales tax liabilities.
Tax obligations other than sales and use taxes
In certain states, marketplace facilitators are responsible for taxes other than sales and use taxes. For example, North Carolina requires marketplace facilitators to collect the scrap-tire disposal tax, white-goods disposal tax, dry-cleaning solvent tax, and the 911-service charge for prepaid wireless telecommunications service.
Other states — such as Indiana, Minnesota, North Dakota, Wisconsin, Utah, and Vermont — apply their marketplace facilitator laws by using a survey published by theStreamlined sales tax governing board. Depending on the state, a marketplace facilitator’s tax obligations can extend beyond sales and use taxes because of the guidance provided in this survey.
As a result, a marketplace facilitator faces additional costs to comply with marketplace facilitator laws because it must understand and address taxes other than sales and use taxes.
State-by-state examples
California
As of Oct. 1, 2019, a marketplace facilitator is responsible for collecting and remitting California sales and use tax on retail sales made through their marketplace for delivery to customers within the state.
A marketplace facilitator is considered to facilitate sales for the seller’s products by:
Transmitting the offer or acceptance between buyer and seller, providing the infrastructure or virtual currency, or performing research and development activities
Providing payment processing services, completing fulfillment or storage, supplying product listings, setting prices, branding sales, taking orders, providing customer service, or accepting returns and exchanges
Local merchants
California provides an exclusion for delivery-network companies that maintain a website or mobile application used to facilitate delivery services for the sale of local products — within a 75-mile range — between customer and merchant.
A local merchant is a third-party merchant, such as a restaurant, grocery store, or other retail store that:
Isn’t under common ownership or control with the delivery network company
Offers some relief to delivery companies
California limits its marketplace facilitator law to tangible personal property.
Texas
Texas law defines a marketplace facilitator as a person who owns or operates a marketplace and directly or indirectly processes sales or payments for marketplace sellers.
Effective Oct. 1, 2019, marketplace facilitators are required to:
Certify to each marketplace seller that the marketplace facilitator assumes the rights of a seller with respect to sales made by the marketplace seller through the marketplace
Collect and remit sales tax on sales made through the marketplace
In Texas, a marketplace facilitator may request a waiver so its tax responsibilities can be handled by the marketplace seller. Texas allows remote sellers to use a single local tax rate; however, this isn’t available to marketplace facilitators. While it’s been discussed, Texas hasn’t yet amended its marketplace laws to exclude delivery networks.
Washington
Washington’s marketplace facilitator definition is similar to California’s definition. Washington requires transmission of the offer between buyer and seller and requires the facilitator supply the transaction infrastructure. The marketplace facilitator must also provide payment processing and fulfillment, price setting and listing, order taking, and branding or customer service.
Washington provides an exclusion for marketplace facilitators that facilitate purchases for lodging at hotels or travel agency services, but the definition otherwise applies to taxes beyond sales and use taxes.
Key considerations
It’s important to consider the potential impacts of marketplace facilitator laws on your company’s operations to manage both costs and tax exposure. You can get started by determining if your company is subject to a particular state’s marketplace facilitator law. Key questions to consider in this determination are:
Does my company allow online ordering through its own website, or does it use a third party?
Does my company provide its own delivery services, or does it use a third party?
Next, entities that are marketplace facilitators in one or more states will need to:
Determine how to calculate, bill, collect, and remit applicable taxes on behalf of marketplace sellers.
Maintain appropriate documentation.
Determine which actions to take and decisions to make to limit exposure.
Create contracts and agreements with sellers to limit the impact of new legislation.
