Prime Day, marketplace providers, and state efforts to tax marketplace sales
Update 7.28.2017: Washington has enacted the nation's second tax on marketplace providers. It takes effect January 1, 2018.
Amazon Prime Day 2017 is July 11, though some deals start the night before. Like many sales, Prime Day creates a buzz and gets people talking, and ideally, buying. Last year on the second annual celebration of Amazon’s birth, consumer orders reportedly increased by 60 percent overall. Sales by marketplace sellers — smaller businesses that sell their products on Amazon — also grew. While some third-party sellers saw either no change or reduced sales, others tripled their sales over Prime Day 2015.
The biggest winners seem to be those who partnered with Amazon to offer special Prime Day deals. Marketplace sellers cannot market directly to Amazon customers; as one retailer notes, “the customers do not belong to us.” So, many third-party sellers celebrate any boost in sales on the day of, and hope Prime members discover and remember them.
The risks of exposure
Prime Day can increase exposure, which is normally a plus for retailers. Yet exposure can also bring risk, especially for marketplace sellers. Although Amazon now collects sales and use tax in all 45 states with a general sales tax, plus the District of Columbia, sales by marketplace sellers aren’t taxable unless the sellers have nexus, traditionally defined as a physical presence, in a state.
Knowing where nexus exists can be complicated because Amazon has fulfillment centers and warehouses throughout the nation. Third-party sellers who let Amazon warehouse and ship their goods — Fulfillment by Amazon (FBA) sellers — don’t necessarily know which states house their products. Even if they do, it’s a moving target because Amazon moves products as it deems necessary.
To avoid negative audit findings, FBA sellers must know where and for how long their goods are stored, and they must understand state nexus laws.
Until recently, marketplace sellers have largely flown under the radar of state tax authorities, who know they exist but lack the will or resources to go after them. But now, a growing number of states are interested in taxing marketplace sales.
Minnesota enacts first tax on marketplace providers
Last month, Minnesota enacted the nation’s first tax on marketplace providers — online platforms, like Amazon, eBay, and Etsy, that help smaller sellers access larger markets.
The new requirements in Minnesota only affect marketplace providers with a physical presence in the state, which Amazon has. About half of the items on Amazon.com are sold by “sellers, small businesses, and entrepreneurs,” and Amazon doesn’t currently collect tax on these sales unless a small seller asks it to. It doesn’t have to: If a state decides a small seller has a tax obligation, the small seller is liable for the tax, not Amazon.
Under Minnesota’s HF 1, marketplace providers with nexus in Minnesota must collect and remit tax for all retailers that sell in the state through the marketplace, excluding those that qualify for a small seller exception.
What this means for FBA sellers
According to the Wall Street Journal, third-party sellers say “they aren’t able to easily track where their goods are held and sold, and don’t necessarily know what might trigger the need to collect and pay sales tax in states outside where they’re based.” The more warehouses and fulfillment centers Amazon builds, the greater a problem this is likely to become. Furthermore, this new effort “is likely to create a logistical headache for third-party sellers, opening them up to problems if a customer returns an item directly, for example.”
It could also increase their exposure in other states. Because states have information sharing agreements, once Minnesota identifies marketplace sellers, other states will too. Ultimately, a tax on marketplace providers could dramatically increase the audit risk of third-party sellers.
Tax on marketplace providers takes online sales tax battle to another level
Minnesota’s marketplace provider law is the newest tactic in a long-standing battle over tax revenue between states and non-collecting remote sellers. Under precedent upheld by the Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), a state cannot impose a tax collection obligation on a business unless it has a substantial connection to the state, defined as a physical presence. This excludes many internet sellers.
A growing number of states are seeking a viable way to tax sales by out-of-state sellers, taxing businesses that generate revenue from relationships with in-state affiliates (affiliate or click-through nexus), or those with a certain amount of economic activity in the state (economic nexus). Minnesota’s decision to tax sales by marketplace providers is in line with these efforts.
Yet, Minnesota is being cautious. The effective date of its policy is contingent and will take effect at the earlier of July 1, 2019, or when the Supreme Court of the United States modifies its decision on Quill. Congressional action could also impact its future.
Congress could grant states the authority to tax remote sellers (click here for information about the most recent versions of the Marketplace Fairness Act and the Remote Transactions Parity Act, two bills that would allow states to tax remote sales). It could also codify Quill, definitively prohibiting a tax on remote sales (click here to learn more about the No Taxation Without Representation Act of 2017). Yet despite ample opportunity, so far it has done nothing.
Small online sellers should expect more state efforts to tax their sales
Although Minnesota is the first state to enact a tax on marketplace providers, it is unlikely the last. Indeed, New York Governor Andrew Cuomo proposed a similar tax earlier this year, and a tax on marketplace providers is being deliberated in North Carolina and Washington.
One thing is certain: States are not going to abandon efforts to collect more tax revenue from remote sellers. There’s too much to gain. Prime Day 2016 was the “biggest day in the history of Amazon,” with a peak sales rate of 398 items per second. More than twice as many third-party sellers participated in Prime Day 2016 over the previous year, and that number could increase this year. States want — need — every bit of tax revenue from those sales.
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