Emerging online marketplaces must consider sales tax compliance

Retail (or ecommerce) is witnessing the evolution of the traditional online marketplace model beyond mega-marketplaces such as Amazon, and even massive retailers like Walmart. Today, new platforms are emerging that allow other established retailers and businesses to launch their own marketplaces with networks of third-party suppliers.

These new marketplaces open a range of distribution channels for sellers of all sizes, from brand-name retailers to distributors of artisanal products.

How does a third-party marketplace work?

A third-party marketplace is an online destination that aggregates, showcases, and sells products and/or services from multiple third parties. This means the marketplace owner processes all consumer purchases, then participating sellers fulfill those transactions and deliver the goods. Essentially, marketplace owners can sell products they don’t own and reap the growth this provides.

For example, SurfStitch is a popular coastal lifestyle shopping site that had been limited in the inventory it could offer because it had only so much storage space. While its website is known as a place to go for anything related to water sports or coastal recreation, the company was missing out on crucial revenue opportunities by not offering high-interest products, like surfboards or kayaks.

By creating a marketplace with third-party suppliers, SurfStitch was able to blend in existing drop shipment with business from those third-party sellers. This allowed SurfStich to extend its traditional product range to homeware and beauty. After all, it makes sense that someone coming to SurfStitch to get swimsuits or surfboards for beach activities might also be interested in new beach towels and sunscreen. 

Why retailers are turning to marketplaces

If you’re a retailer or you run an ecommerce business, developing a marketplace platform allows you to offer new and expanded strategies for a more robust ecommerce stack, which in turn drives improved customer experience and revenue. Simply put, creating a marketplace lets you sell what you don’t own with minimal risk. Key benefits include:

  • Expanding product range without buying the product or finding the capital; this creates a one-stop shop where customers can find and buy products that complement those the retailer typically carries
  • Selling more to existing customers, with new lines and products to encourage customers to increase their spending
  • Acquiring more customers through selling new products: New customers result in higher-value transactions and substantial — rather than incremental — revenue growth opportunities
  • Rapidly pivoting and experimenting with new offerings, testing new products — even entire categories ​​ without any outlay for manufacturing or storing stock
  • Increasing customer engagement through increased site visits as a broader selection of goods, especially focused on a particular interest or topic, encourages repeat visits to a trusted destination site
  • Supporting “endless aisles” that are only limited by the number of sellers on the site, not by shelves or warehouses

Marketplaces require streamlined sales tax compliance

When operating a marketplace and working with a range of third-party sellers, there are important U.S. sales tax compliance regulations to know about and follow.

When you sell your products directly from your own website, you’re responsible for complying with relevant sales tax laws. There are 45 U.S. states that levy sales tax (plus the District of Columbia, Puerto Rico, and some localities in Alaska). Each one has its own set of requirements for when an individual remote seller needs to register to do business and start collecting and remitting taxes.

Most U.S. states also require marketplaces to collect sales tax on behalf of their third-party sellers, which can significantly ease the burden of tax compliance for your sellers but add to the tax compliance workload for the marketplace operators — particularly as your marketplace grows to capture significant sales in multiple states.

Marketplacer, the global technology marketplace platform, has partnered with Avalara to help businesses incorporate sales tax compliance automation into their marketplace strategy, using intelligent software integrations that help ensure tax calculation and collection are handled correctly for each transaction.

You can click here to learn more about the Avarala-Marketplacer partnership and how it can help businesses add tax compliance automation to their marketplace strategy.

 

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