5 Things Marketplace Sellers Need to Know About US Sales Tax
Marketplace sellers are businesses and retailers that serve a larger audience by selling products through an online platform. On the other hand, a marketplace provider is a service provider for the seller; marketplace providers, also called marketplace facilitators, assist in the product listing and facilitating payment channels.
With the changes in laws and regulations, it’s critical to understand the five things that the sellers need to know about US sales tax:
1. Intricacies of online sales tax
The U.S. Supreme Court decision in South Dakota v. Wayfair, Inc., (June 21, 2018) transformed the way sales tax can be collected.
Before the Wayfair decision, states were limited to taxing businesses with a physical presence in the state. Wayfair overturned the physical presence rule, allowing states to tax businesses with no physical tie to the state (remote sellers), including businesses based in other countries. Physical presence in a state still establishes nexus, the connection that enables a state to tax a business, but now states can also base nexus on economic activity in the state (economic nexus).
Every state with a sales tax has an economic nexus law requiring remote sellers to register and then collect and remit sales tax once their sales into the state meet the state’s economic nexus threshold (for example, $100,000 in sales or 200 transactions in the state in the current or previous calendar year). Each state’s threshold is unique: Some are based only on taxable tangible property, and some include services and intangible products like software-as-a-service (SaaS). You can find state-specific details in this state-by-state guide to economic nexus laws.
All businesses that make online sales in the United States need to be aware of economic nexus laws. Businesses that sell through marketplaces also need to understand marketplace facilitator laws.
2. Special considerations for marketplace sellers
Every state with economic nexus also has a marketplace facilitator law that shifts the obligation to collect and remit sales tax from the individual seller to the marketplace platform it sells through (e.g., Amazon, Etsy).
Like economic nexus laws, marketplace facilitator laws vary by state. Some require marketplace sellers to register and file returns even though the marketplace provider is responsible for collecting and remitting the tax. You can find state-specific details in this state-by-state guide to marketplace facilitator laws and state-by-state registration requirements for marketplace sellers.
Businesses that sell through marketplaces and sell directly to customers through their own ecommerce sites need to understand how economic nexus and marketplace facilitator laws intersect. Some states count marketplace sales toward their economic nexus threshold.
Additionally, if you’re a marketplace seller, you may have a physical nexus in states where you store inventory in marketplace fulfilment centres. This would make you responsible for collecting and remitting tax on your direct sales in the state, even if you sell beneath the economic nexus threshold.
Suppose you are an Indian business owner that sells books on Amazon. When you make a sale through Amazon, Amazon collects U.S. sales taxes on your behalf. However, suppose you also sell into the U.S. through your personal Shopify-powered website. In that case, you’ll have to register and then collect and remit sales tax in states where you have physical or economic nexus.
3. Misclassification of products
Sometimes products that are taxable in few jurisdictions, may be exempt in others. Generally, if states sales tax applies to a transaction, then all applicable local taxes are applicable as well. Unless the sale is exempt. Although this may not be relevant in states such as Colorado and Louisiana where local governments have the power to administer local sales taxes.
For example: feminine hygiene products come under Colorado sales tax but are exempt from city sales tax in Denver. However, some local taxes in Denver will still be applicable as they may be subject to Denver’s cultural facilities tax and Regional Transportation District tax.
Another fact that is important if you are an Indian marketplace seller using a platform like eBay, is that bundling can make an otherwise exempt transaction taxable. Suppose both taxable and non-taxable products are sold together, perhaps in the form of gift basket for Diwali, its common for states to make it mandatory for the seller to apply sales tax to entire charge.
4. Remitting appropriate sales tax to the right authority
Once you have established the appropriate mechanism to collect the funds, it is equally important to remit the funds to the right tax authorities. There are unique regulations regarding the sales tax remittance, including keeping track of the due dates of returns, and frequency of returns to be remitted for each taxing authority, and how they should be remitted (physically/digitally).
5. Automation for compliance: Optimize without issues
If you sell to customers in the U.S. through your own ecommerce site, online marketplaces, or both, you need to understand your sales tax obligations and comply with them. Once you’ve figured out where to register and file returns under economic nexus and marketplace facilitator laws, you’ll need to ensure you collect the right sales tax rate on all transactions. That can be hard: There are about 13,000 sales tax jurisdictions in the 45 states with a general sales tax, plus Washington, D.C., and some cities and boroughs in Alaska (where there is local sales tax but not statewide sales tax).
Like all sales tax laws, product taxability rules and rates are subject to change at any time. Staying on top of changing requirements in all states is especially difficult for businesses based in other countries that may have little contact with the states.
Automating sales tax collection and remittance with Avalara AvaTax can minimize errors and help you streamline sales tax compliance.
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