Marketplace facilitators responsible for sales tax in five more states in early 2020
On January 1, 2020, Hawaii, Illinois, Michigan, and Wisconsin began requiring marketplace facilitators to collect and remit sales tax on behalf of third-party sellers. North Carolina will hold them liable for sales tax starting February 1, 2020. Close to 40 states, including Washington, D.C., now consider the marketplace facilitator — not the marketplace seller — to be the dealer responsible for sales tax.
What is a marketplace?
A marketplace is some type of forum that enables multiple sellers to market and sell to customers. Physical marketplaces have existed for thousands of years: Today, you can visit ruins of the ancient agora at the Acropolis in Athens then explore the bustling Varvakios Agora and various street markets frequented by modern Athenians.
In the age of ecommerce, electronic marketplaces are the natural extension of physical marketplaces. Some, like Amazon, eBay, and Etsy, sell a wide variety of products or services to all consumers. Others, like Teachers Pay Teachers, cater to a specific audience and may even require membership.
Marketplaces may be antique malls, auction houses, consignment stores, or even shopping networks. It all depends on the state, since different states define “marketplace” differently.
Marketplace facilitator vs. marketplace seller
States also have different definitions for “marketplace facilitator” (or “marketplace provider”) and “marketplace seller.”
At its most basic, a marketplace facilitator is a person who has an agreement with another person(s) to directly or indirectly facilitate a sale. Approximately 20 states define the term narrowly, so that a business must collect payment from the consumer and transmit it to the seller to be considered a marketplace facilitator. Simply referring a customer to a seller may be enough to qualify a business as a marketplace facilitator in states that define the term more broadly.
A marketplace seller is what you’d expect: a person selling or offering for sale products through a marketplace. Some states specify that the facilitator and seller must be unrelated or unaffiliated, while others have different rules and responsibilities for affiliated facilitators and sellers.
The fact that states have different definitions, regulations, rules, and requirements for marketplace facilitators and sellers complicates sales and use tax compliance for these businesses. This is especially true if they’re remote sellers (i.e., don’t have a physical presence in the state).
Economic nexus laws
All but two of the 45 states (plus D.C.) that have a statewide sales tax have adopted economic nexus, meaning they base a sales tax collection obligation on a remote seller’s sales in the state. Aside from Kansas, these states all provide safe harbor for remote small sellers: Once their sales into the state surpass a certain threshold, they must register to collect sales tax.
Each state has a unique economic nexus threshold, and even those that appear the same at first glance can be quite different.
For example, in the five states listed above, the threshold is $100,000 in sales or at least 200 transactions. Yet Illinois’ threshold includes exempt sales, including exempt sales of property sold incident to a service, but not exempt services or sales for resale. In North Carolina, exempt sales and exempt services are included in the threshold, as are digital property and taxable services sourced to the state. This state-by-state guide to economic nexus laws provides more details for these and other states.
These details are important. Failure to collect sales tax as required by law can lead to big assessments in the event of an audit, along with penalties and interest fees.
Marketplace facilitator laws
Marketplace facilitator laws add a layer of complexity to economic nexus laws.
When calculating the economic nexus threshold, marketplace sellers must include sales made through a marketplace that collects sales tax on their behalf in some states. In other states, those sales should be excluded from the threshold calculation.
Marketplace sellers must register and file returns in some states even if they only sell through collecting marketplaces. In other states, registration isn’t required in such cases.
Similarly, facilitators are required to file separate returns for direct sales and indirect sales in some states, while in others they can file one return for all sales into the state.
Educating yourself about different state requirements is the first step toward compliance. These state-by-state guides to marketplace facilitator laws and registration requirements for marketplace sellers are a good place to start.
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