Alcohol Marketplaces 2.0 Part 2: Collect sales tax from marketplaces or comply with alcohol guidance?
Only businesses holding a license to sell alcohol at retail can sell alcohol to consumers. That simple fact complicates matters for unlicensed entities such as online marketplaces, delivery apps, and delivery services that would like to create or enhance platforms to facilitate alcohol sales. Marketplace platform providers, alcohol licensees, and alcohol and tax regulatory agencies all have different goals and concerns when it comes to the sale of beverage alcohol products.
In this Alcohol Marketplaces blog series, Rebecca Stamey-White, partner at Hinman & Carmichael LLP, and Jeff Carroll, general manager of Avalara for Beverage Alcohol, will explore the multiple issues surrounding alcohol marketplaces and propose a compliance framework to meet the goals and concerns of different stakeholders.
Disclaimer: This post may constitute attorney advertising and is not intended to provide or be relied on as legal advice. Perform independent legal research and consult your lawyer.
Little did we know that $1.25 billion would be invested in alcohol marketplaces and delivery apps in the exact same week we were planning on launching this series. These investments in Vivino and Drizly will certainly not only accelerate the substantial shift to digital commerce for the alcohol industry that we’ve seen over the last year, but also shine the compliance spotlight on unlicensed third-party providers (TPPs) as the battle for online consumers heats up.
In our first post of this series, we broke down the standard operating procedures for TPPs set in place by a 2011 California ABC advisory. In a nutshell, licensees must control all aspects of the sale of beverage alcohol products, and 100% of funds must flow into the control of the licensee. TPPs must notify the consumer about which licensees they can buy from, and the selected licensee would be responsible for compliance verification and tax reporting and remittance.
That simplified TPP model was upended shortly after the landmark South Dakota v. Wayfair, Inc. Supreme Court decision in 2018. The Wayfair decision gave states new authority to compel out-of-state sellers and marketplaces to register for sales tax, even if those businesses didn’t have any physical presence in the state. Wayfair was a catalyst that resulted in a wave of state legislation across the country to establish economic nexus and marketplace facilitator rules ensuring the collection of state sales taxes. States recognized it was much easier to collect sales tax revenue directly from a marketplace like Amazon than it was to go after hundreds or thousands of individual sellers.
Marketplace facilitator laws now exist in 42 of the 45 states that collect general sales taxes, and Florida, Missouri, and Kansas will all consider adding new laws this year. Over the last year or so, alcohol marketplaces and delivery apps have started waking up to the fact that they are indeed marketplaces under these laws and must register to collect and remit sales tax in states where they exceed thresholds.
In their 2011 advisory, the California ABC stated that a TPP “cannot independently collect the funds, retain its fee, and pass the balance on to the licensee. The Third Party Provider should pass all funds collected from the consumer to the licensee conducting the sale, and that licensee should thereafter pay the Third Party Provider for services rendered.” In other words, TPPs must pass 100% of the funds directly to the licensee. But with these new Marketplace Facilitator Act (MFA) laws, the TPP is responsible for collecting and remitting the sales tax portion of the transaction, so do they collect the sales tax, or do they comply with the California ABC’s TPP flow of funds guidance?
In response to this conflict, the California ABC published an Industry Advisory in July 2020 to provide updated guidance. This Industry Advisory states that although the California MFA law designates marketplaces as the “seller” of record, and that concept conflicts with ABC’s position that only licensees can sell alcohol, ABC is taking the position that the marketplace is effectively only the seller “for the purpose of the collection and remittance of the sales tax.” Further, the advisory clarifies that marketplace sellers (licensees) “may allow for segregation of the sales tax component of the sales transaction and provide for those funds to go directly to the marketplace facilitator. This means that the actual sale revenue (less sales tax) must still be directed to a channel controlled fully by the licensee.” It seems the California MFA law didn’t take the 2011 TPP advisory into consideration and the ABC was forced to adjust its framework, making it harder for marketplaces and licensees to meet their respective legal responsibilities. Rebecca separately wrote about the ABC’s July 2020 Industry Advisory in her Hot Topics for Alcohol Delivery 2020 blog post here.
California is the only state that has addressed this conflict between MFA laws and alcohol laws to date. The revised guidance changes the model TPPs were using prior to the Wayfair decision and creates a wrinkle that’s both technically and operationally challenging. Other states will now have to ponder this same question, and we expect many but not all to follow California’s lead. What this means for marketplaces is a more complicated flow of funds procedure to ensure compliance with MFA laws and each state’s TPP guidance, which could signal a future retooling of the TPP guidance. For our next post in the Alcohol Marketplaces 2.0 series, we’ll dive into one of the key aspects of this guidance, the flow of funds, in detail.
Have tax or compliance questions? Contact Avalara's Beverage Alcohol team
Have legal or regulatory questions? Contact Hinman & Carmichael LLP
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