Bait and switch: How a marketplace facilitator’s digital swap program can create surprise sales tax liability for sellers – Wacky Tax Wednesday

Bait and switch: How a marketplace facilitator’s digital swap program can create surprise sales tax liability for sellers – Wacky Tax Wednesday

A marketplace seller can establish physical presence and sales tax liability in Washington state as a result of inventory stored in a marketplace facilitator’s warehouse — even when ownership of the inventory was transferred digitally by the facilitator and the seller didn’t know it had inventory in Washington.

Adding injury to insult, not knowing the inventory was in the state doesn’t preclude a marketplace seller from delinquent penalties or interest on the unpaid tax.

This big news comes from Washington Department of Revenue Determination 18-0255, which was requested by an out-of-state corporation (taxpayer) after it was assessed sales tax, penalties, and interest on inventory stored in a facilitator’s Washington warehouse through the facilitator’s inventory management system.

Marketplace inventory management system: A digital swap

The inventory management system program allows a facilitator to commingle identical products owned by multiple third-party sellers that use manufacturer barcodes to identify and track products (rather than unique barcodes). This can hasten shipping, putting products into the hands of consumers more quickly.

Marketplace sellers that don’t participate in this inventory management system have unique facilitator barcodes for inventory, so their inventory can’t be commingled in this manner. As a result, orders are fulfilled from the warehouse where their inventory is located at the time the order is made. This may take a bit longer because the warehouse may be further from the customer.

Inventory management typically works like this: When a customer orders a product from a seller that participates in the inventory management system, the facilitator fulfills the order from a warehouse close to the customer. If the seller has inventory in that warehouse, the facilitator ships its product. If the seller doesn’t have inventory in that warehouse but another seller in the inventory management program does, the facilitator ships the other seller’s product to the customer instead.

The facilitator does this by digitally reassigning ownership of the property between the two sellers (the seller that took the order and the seller with identical inventory close to the customer). Thus, from the moment the facilitator reassigns ownership to the moment the inventory ships, the out-of-state seller has inventory in the state.

And bam, just like that, the seller has a physical presence in the state, which generally creates an obligation to register with the tax department then collect and remit sales tax.

That’s what happened to the taxpayer in question. It sold approximately 315 products to Washington consumers through a marketplace between 2011 and 2015 but didn’t ship any products to warehouses in Washington. Instead, these orders were fulfilled through the facilitator’s inventory management system, which digitally transferred ownership of the products to the taxpayer in question.

The taxpayer doesn’t dispute the sales or contest the department’s calculation of the tax due (plus interest and penalties). However, it insists it had no nexus with Washington at the time, arguing that a digital swap by the facilitator shouldn’t be considered physical storage in the state.

Essentially, the marketplace seller believes the marketplace facilitator should be liable for the sales tax because the facilitator processes all sales activity and has “complete control” over the taxpayer’s goods once it receives them.

The Washington Department of Revenue (DOR) disagrees.

What you know can hurt you

According to the DOR, the fact that the facilitator had complete physical control over goods once it received them at its out-of-state fulfillment center doesn’t matter. The taxpayer was aware its products could be relocated to fulfillment centers in other states via the digital reassignment process.


  • The taxpayer agreed to let the facilitator manage its inventory
  • The facilitator gave the taxpayer a digital “Inventory Event Detail” indicating the location of the fulfillment centers where its goods were located
  • The taxpayer could opt out and choose to have the facilitator manage its goods separately, with no commingling of digital reassignment

In short, the DOR determined the taxpayer couldn’t prove its goods were sent to and stored in Washington “without its knowledge and consent.”

The fact that the taxpayer had title to the products until they were transferred to the consumer underscores that fact; title never transferred to the facilitator. Contracts signed by the taxpayer “clearly show that Taxpayer agrees it is the seller of record, and Taxpayer is responsible for all taxes due.”

Even a few products stored briefly in a state can create nexus

The marketplace seller also argued that its sales and inventory activity in Washington were “insufficient to be considered significant activity for tax purposes.”

Again, the DOR disagrees: “The fact that goods owned by the Taxpayer were physically stored in Washington until sale, even briefly via digital reassignment of ownership, is sufficient to establish substantial nexus.”

Under Washington Law (RCW 82.04.067), a retailer establishes substantial nexus through having a physical presence in the state. This includes:

  • Having property in the state
  • Engaging in activities, either directly or through an agent or other representative, that are significantly associated with their ability to establish or maintain a market for their products in Washington

For additional details, check out Determination 18-0255.

Other states hold marketplace sellers liable for past sales tax due to inventory

Most states now have marketplace facilitator laws that require marketplace facilitators to collect and remit the tax due on third-party sales. However, these laws don’t protect marketplace sellers from past tax liability, as the Washington ruling shows.

California has also reached out to marketplace sellers over past tax liability. Like Washington, it holds that inventory held in marketplace facilitator–owned warehouses gave these sellers a physical presence in the state long before economic nexus or marketplace laws took effect. Learn more in Is California crushing online sellers with back sales tax?

Other states could follow the lead of California and Washington. According to Scott Peterson, vice president of government relations at Avalara, “Old-school sales tax consisted solely of physical presence and new-school sales tax consists of economic nexus and marketplace facilitators. This Washington ruling proves that the new school did not replace the old school, but instead is just another layer and taxpayers can still be caught by the old school.”

Not sure where you have physical presence or economic nexus? The Avalara Sales Tax Risk Assessment can help.

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