Avalara Tax Changes 2023: Marketplace facilitators
Third-party marketplaces are expected to account for 59% of global ecommerce by 2027, and their success is inspiring many retailers to operate marketplaces of their own. Opening a marketplace can be financially rewarding, but running one also brings unique sales tax compliance challenges.
Most marketplace transactions are subject to sales tax in most states, and marketplace facilitators are generally liable for collecting and remitting the tax due. Increasingly, marketplaces are also being held responsible for other taxes and fees, such as occupancy taxes or 911 fees.
Getting tax wrong can be costly for any business, but particularly for marketplace facilitators with a high volume of sales. Unless a marketplace facilitator can demonstrate that a failure to collect and remit applicable taxes was due to receiving incorrect information from marketplace seller(s), facilitators will generally be held liable for uncollected or under-collected tax, plus penalty and interest charges. (Washington law offers an example.)
These five guiding principles can help marketplace facilitators get sales tax compliance right.
1. Keep marketplace facilitator regulations and economic nexus laws top of mind
Sales tax registration requirements for marketplace facilitators are governed primarily by marketplace facilitator and economic nexus laws. Though these vary by state, like other sales tax laws, they can be broadly defined as follows.
Marketplace facilitator laws make the marketplace facilitator the retailer responsible for tax on all transactions made through the platform — both direct sales and sales by third-party sellers. These rules typically apply to marketplace facilitators that have a physical presence in the state, such as a fulfillment center, and to marketplace facilitators that have economic nexus with the state, though marketplace facilitator laws in some states or jurisdictions (e.g., Washington, D.C.) don’t reference physical presence or economic nexus.
Economic nexus laws base a sales tax collection obligation on economic activity in the state rather than physical presence. However, not every remote business is subject to every state’s economic nexus law because all economic nexus laws provide an exception for businesses selling under the state’s economic nexus threshold.
Economic nexus thresholds vary by state
Examples of economic nexus thresholds include:
California: $500,000 in total combined sales of tangible personal property delivered into the state by the retailer and all persons related to the retailer in the current or previous year
Florida: $100,000 in taxable sales of tangible personal property delivered physically into the state in the current or previous calendar year
New York: 100 transactions and $500,000 in cumulative total gross receipts from taxable and nontaxable sales of tangible personal property delivered into the state (including software as a service) in the immediately preceding four sales tax quarters
Marketplace sales may or may not count toward economic nexus thresholds
It’s important for marketplace facilitators and sellers to understand which sales count toward each state’s economic nexus threshold; some states count specified digital products or exempt transactions, some do not. States generally require marketplace facilitators to count all sales made through their platform, but some allow marketplace sellers to exclude sales made through a registered marketplace.
Thresholds and other aspects of both economic nexus and marketplace facilitator laws are subject to change. Maine is one of several states that’s eliminated its transaction threshold (while keeping the sales threshold); South Dakota may do the same. And while the first iteration of Nevada’s marketplace facilitator law didn’t specify how it applies to delivery network companies, Nevada has been working to refine that and other aspects of the law. The Nevada Department of Taxation now says food delivery services are marketplace facilitators.
2. Register for sales tax where required, when required
Marketplace facilitators that have physical presence or economic nexus with a state must register for a sales tax permit (also known as a seller’s permit, etc.). Once registered, they may need to certify to marketplace sellers that they’ll collect and remit sales tax on their behalf; this is required in Texas.
Some states, like Idaho, require marketplace facilitators to obtain separate permits for third-party sales and direct sales. In other states, only one permit is needed. Connecticut allows marketplace facilitators to report their sales together with third-party sales, or to obtain a separate tax registration sub-number for marketplace sales. See our state registration requirements for marketplace sellers for more details.
Understanding how soon you need to register after establishing economic nexus with a state is critical. In some cases, the state mandates registration as soon as the economic nexus threshold has been crossed, as in, by the next transaction. Other states give businesses a bit more time to register, such as 30 or 60 days. Most want sales tax collection to begin as soon as possible.
3. Assign the right sales tax rate to each transaction
Once registered for sales tax, marketplace facilitators must ensure all products sold in that state are assigned the proper sales tax rate. This can be a time-consuming task because marketplace facilitators tend to sell a variety of products across numerous states. Furthermore:
- Different products can be subject to different tax rates
- 37 states have local sales taxes on top of state sales tax (and Alaska has local sales tax but no state sales tax)
- Rates are subject to change
Examples of product taxability complexity: Certain sweetened beverages are subject to a higher rate of tax than non-sweetened beverages in the city of Seattle — and throughout the entire state of Vermont — and what does and doesn’t qualify as a sweetened beverage may surprise you. Clothing priced less than $110 is exempt from state sales tax in New York but may be subject to local sales tax. In Texas, taxable information services are taxed at 80% of the billing amount, rather than 100%. And so on.
Another complicating factor is that more than 15 states typically hold one or more sales tax holidays each year. Numerous normally taxable items are temporarily exempt during these tax-free periods, which usually last from one day to one week but can run much longer. Florida offered a slew of overlapping sales tax holidays in 2022, some of which exempted only a portion of the sales price of a variety of items, not the full cost. Getting tax compliance right during sales tax holidays can be extremely challenging without the use of sales tax software.
Marketplace facilitators need to track and comply with all such sales tax regulations and requirements. In addition, they must validate any exempt sales made through the platform by collecting and maintaining a valid exemption certificate from the purchaser, then keep all documents straight.
4. Remit sales tax to the proper tax authority
Once sales tax has been collected as required, it must be remitted on time with a sales tax return to the proper tax authority. Filing requirements vary by state, and in some states, by locality.
Some states require marketplace facilitators to identify their own sales separately from third-party sales on their sales tax returns. That’s the case in Georgia and Tennessee. Wyoming allows it but doesn’t require it. And Washington allows marketplace facilitators to file separate returns for direct and third-party sales but doesn’t require it.
Sales tax is administered by the state tax authority (e.g., the New York State Department of Taxation and Finance) in most states, but in some home rule states, local governments may require remote businesses to register, remit, and file returns with the local tax administrator. Compliance in these states is extremely challenging for remote sellers or marketplace facilitators with a high volume of sales nationwide.
For example, marketplace facilitators are now responsible for collecting West Virginia’s hotel occupancy tax, which must be remitted to the county or municipality because the state doesn’t administer hotel occupancy tax. In Louisiana, sellers and marketplace facilitators that have a physical presence in the state may need to register and remit to numerous local tax authorities in addition to the state taxing authority.
Home-rule states are working to streamline compliance for remote sellers. To that end, Alabama created a Simplified Sellers Use Tax (SSUT), Colorado developed a new Sales and Use Tax System (SUTS), and local governments in Alaska built a remote sales tax information portal.
But change takes time. While Louisiana’s Sales and Use Tax Commission for Remote Sellers does ease the burden of compliance for some businesses, Louisiana will likely need to amend its state constitution to further simplify state and local sales tax compliance.
5. Comply with a world of tax requirements
In addition to navigating tax requirements throughout the United States, global marketplace facilitators must understand and comply with growing tax requirements in other countries.
The United Kingdom made marketplace facilitators the deemed supplier liable for collecting, remitting, and reporting VAT on certain sales effective January 1, 2021. The European Union followed suit starting July 1, 2021. In the EU, the deemed supplier rule affects two types of cross-border transactions:
- Goods valued below €150 imported by EU or non-EU sellers and sold to EU customers
- Goods of any value sold by a non-EU seller to an EU customer
Marketplace facilitators based outside of the EU can streamline VAT compliance for low-value goods by using the EU’s new electronic portal, Import One-Stop Shop (IOSS). Using IOSS can expedite customs clearance and streamline logistics, among other benefits. Yet to take advantage of IOSS, non-EU businesses need to appoint an approved EU-established intermediary to represent them and fulfill their VAT obligations.
Any company that sells internationally also needs to assign the proper Harmonized System (HS) code to every product sold. The more than 180 countries using the HS each add their own identifying numbers to the first six digits, which are the global standard. Assigning an incorrect HS code to a shipment can cause delays at the border.
The above just scratches the surface of what marketplaces are dealing with today. They’re also facing ongoing supply chain issues and growing demands to do more to prevent people from selling stolen goods through the marketplaces.
To learn more about these and other issues affecting sales tax compliance for marketplace facilitators, check out our annual report, Avalara Tax Changes 2023.
Updated for 2023.
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