Who should collect tax on online marketplace sales?
Instead of showcasing the collection of one seller, antique malls and similar venues bring numerous sellers together with their wares. They make it easier for people to browse diverse inventories and also relieve vendors of the burden of always manning their booths, thereby benefitting both vendors and customers. An online marketplace — also called a virtual or ecommerce marketplace — works in a similar way. It creates a single platform on which third party vendors sell their goods and services.
Sales tax and the marketplace
In a physical marketplace, sales tax is collected either by each individual vendor or the marketplace itself. Most marketplaces handle sales and sales tax for all sellers. However, a marketplace may require individual vendors to manage their own sales and use tax.
Dealing with sales tax in an ecommerce marketplace is more challenging. Vendors, customers, and the marketplace itself are often all based in different states, and since sales tax rates and rules vary by state, it can be difficult to know which state’s rules apply to each transaction. A changing tax landscape adds to the complexity: many states are altering their sales and use tax laws and policies in an effort to capture additional sales and use tax revenue.
As with physical marketplaces, an ecommerce marketplace can either manage sales and sales tax for individual sellers or function as a platform through which vendors handle their own sales and taxes. For example:
- Amazon Marketplace offers both options. Marketplace Professional sellers and Amazon Webstore sellers may (but are not obligated to) use Amazon’s tax calculation and remittance services for a fee, the sellers maintain certain responsibilities, including “reviewing and determining the correct product tax codes, calculation settings and all related information for … products and for documenting and paying all taxes to appropriate taxing authorities.” Alternatively, sellers must deal with sales tax entirely on their own, with no support from the Amazon Marketplace (but no additional fees).
- Etsy sellers must themselves determine where they have nexus (an obligation to collect tax) and how much tax they owe. They must then collect sales tax from customers and remit it to the proper tax authorities. See the Etsy Seller Handbook for more information.
Airbnb, another marketplace seller, is increasingly looking to collect and remit all applicable sales and occupancy taxes on behalf of its hosts. Its policies vary by state, city, and county: some areas don’t permit Airbnb to handle taxes for its hosts, while some require it to do so. See the most up-to-date list of areas where Airbnb collects and remits occupancy taxes here, but beware: state and local policies change frequently.
Sales tax and electronic marketplaces
For marketplace vendors of digital goods and services such as e-books, game, movies, and software, sales and use tax compliance can be even more complex. As with tangible goods, vendors, consumers, and the marketplace can all be based in different states; but with intangible goods, the location of the servers used to store and transfer electronic goods must also be considered. In addition, product taxability rules in all states are subject to change as new technologies emerge.
States have been relatively slow to adopt their sales tax laws to electronic products and services. Many rely on department of revenue rulings to establish precedent, while others use rulings to adapt existing policies to new situations. Uncertainty over tax policies even arises in states with laws and policies in place, such as Indiana.
For example, the Indiana Department of Revenue recently released a ruling in response to an inquiry by a company (“Company”) that “develops and markets a wide range of software, services, and digital products … [and] operates a marketplace for third-party software, games, apps, movies, books, and other digitized products.” Products sold through the marketplace are then electronically downloaded to “personal computers, tablets, game consoles, phones, and other devices.”
Indiana taxes specified digital goods, prewritten software, and telecommunications services, and the Company currently collects Indiana sales tax on behalf of its marketplace sellers. Nonetheless, it was seeking clarification on the following points:
- Would the third party vendors ever be required to collect Indiana sales tax on sales made through the marketplace and taxed by the Company?
- Could the Company accept exemption certificates from customers listing it as the seller, thereby relieving both the Company and the third party from any tax collection responsibility?
The Department of Revenue concluded that the inquiring company was right to collect sales tax on behalf of its marketplace sellers, which relieves the third party sellers of any sales tax collection obligation: “once Company collects sales tax from a customer, an ISV [Independent Software Vendors] must not also collect sales tax on that sale.” No sales tax should be collected on transactions with a properly completed exemption certificate. Learn more about the taxability of goods and services transferred electronically in Indiana.
A growing market
Online marketplaces are growing and they’re likely to continue to grow. Wal-Mart Stores Inc. started allowing third-party merchants to sell products through its online marketplace back in 2009, and after a slow start, it’s now adding new sellers at a fast clip and is expected to have 1,000 marketplace sellers by the end of 2016. For many a business, it simply makes better economic sense to sell products through one or more marketplaces rather than their own web store (Internet Retailer).
Yet it’s important for retailers to educate themselves on their sales and use tax obligations in all markets, and to be clear on the tax policies of each online marketplace. Assuming sales tax will be properly handled without confirming that it’s so can lead to unexpected tax assessments, penalties, and interest.
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The 2021 sales tax changes report: midyear update
Your guide to navigating the complicated world of tax compliance and preparing for the future
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