Marketplace facilitators face new reporting requirements for high-volume sellers

Stopping fraudulent activity on marketplace platforms is starting to resemble a large, global game of whack-a-mole.

After Amazon blacklisted thousands of marketplace sellers in early 2021 for repeatedly posting fake customer reviews, many of the suspended sellers simply set up shop on different marketplaces and carried on business as usual. It's likely only a matter of time before such unscrupulous sellers are sanctioned or suspended from those marketplaces as well, though other marketplaces tend to “have vaguer guidelines” than Amazon.

Convinced marketplace facilitators should do more to prevent a wide array of dishonest business practices, states are starting to set rules. Arkansas was the first state to do so; other states will soon follow its lead.

Arkansas makes first move to safeguard marketplaces

Arkansas enacted the Online Marketplace Consumer Inform Act in April 2021 “to regulate online marketplaces to stop organized retail crime.” The law requires online marketplaces to have more oversight of high-volume sellers and to disclose information “to better inform consumers”

Online marketplaces in Arkansas must require high-volume third-party sellers to provide the following information within 24 hours of becoming a high-volume seller (i.e., having 200 or more discrete sales or transactions resulting in an aggregate total of $5,000 or more in gross revenues during the previous 24 months):

  • Bank account information (or name of the payee for payments if there’s no bank account)
  • Business tax identification number or individual taxpayer identification number
  • Contact information, including working email address and phone number
  • Identifying information
    • For individuals, a government-issued photo ID
    • For businesses, a government-issued record or tax document that includes business name and address
  • Whether the high-volume seller offers the same products for sale through other websites or exclusively through this online marketplace

The marketplace will have three days to verify the above information. It must also require high-volume sellers to certify that the information is accurate at least once annually, as specified in the bill.

In addition to the these requirements, online marketplaces must require high-volume sellers to conspicuously display and disclose certain information to consumers, including:

  • Their full name and physical address
  • Their contact information, including a working phone number and email address
  • Whether they manufacture, import, or resell consumer products
  • “Any other information determined to be necessary”

Certain allowances may be made in the event a high-volume marketplace seller does not have a business address or contact information (e.g., the business address and phone number is also their residential address and personal phone number). However, should such a marketplace seller be suspected of making false representations, the marketplace may require full disclosure of personal identifying information.

Online marketplaces must also provide a mechanism for consumers to report suspicious activity. Additionally, marketplaces that distribute, warehouse, or fulfill consumer product orders must disclose the identity of suppliers for high-volume sellers, if different from the seller listed on the product listing page. 

Other states want marketplaces to do more to stop crime

Other states are also looking to make marketplace facilitators responsible for ensuring high-volume third-party-sellers are valid entities selling legitimate products as allowed per the terms, conditions, and policies of the platform.

Bills akin to Arkansas SB 470 are under consideration in numerous states, including Alabama (HB 318), California (AB 1700, SB 301), Georgia (SB 332), Iowa (SB 1233, SB 3142, HF 2401), Kansas (HB 2731), Massachusetts (H.138), Nebraska (LB 603), New Hampshire (SB 355), Ohio (HB 272, SB 184), Oklahoma (HB 1627), Tennessee (HB 709, SB 528), and Washington (HB 1614, SB 5533).

However, similar measures failed to pass in Florida (HB 1227 and SB 944), Nevada (SB 314), Texas (HB 3852), and West Virginia (HB 2908).

Retailers support more regulation and oversight for online marketplaces

“State retailer associations are pushing this type of legislation” says Scott Peterson, Vice President of Government Relations at Avalara. “They believe marketplaces are the prime method retail thieves dispose of their ill-gotten gain.”

The National Retail Federation says organized retail crime now costs retailers an average of $700,000 per $1 billion in sales. According to Ben Dugan, Director of Organized Retail Crime for CVS, “the problem is growing worse because of a lack of regulations in online marketplaces.” Organized retail crime gangs steal goods then quickly sell them through online marketplaces. “The ease with which online sellers can open and close their sites, especially undetected, is directly related to this increase in criminal activity in our stores.”

For the most part, marketplaces don’t deny there’s a problem. “Organized retail crime is an industry-wide challenge,” says a spokesperson for Meta, parent company of the Facebook Marketplace. And there are good reasons for marketplace platforms to certify the authenticity of all products, reviews, and third-party sellers: Most consumers want to buy from sellers and platforms they trust.

But with close to 50% of online transactions valued at almost $2 trillion occurring through marketplaces in 2020, and more than 1.9 million selling partners on Amazon alone, policing marketplace transactions is an enormous and costly task.

A compliance challenge for marketplaces

Peterson says the information states want marketplaces to obtain from high-volume sellers probably isn’t too different from what marketplaces already gather. “The challenge is keeping it accurate. That will become critical given the liability that attaches when it is out of date.”

Arkansas gives marketplaces just three days to verify third-party seller information is correct, and three days to verify any updates to that information. Ohio is a bit more generous: HB 272, which is being favorably received, gives online marketplaces 10 days to acquire up-to-date information from high-volume sellers.

Another potential challenge is that not all states require all out-of-state marketplace sellers to register with the tax authority. California doesn’t. Peterson wonders if such states would need to change that requirement if these bills become law.

What marketplaces are doing today to stop fraudulent activity

There are hundreds if not thousands of ecommerce marketplaces on the web today: global behemoths like Amazon, social media marketplaces like Facebook, and a host of small, highly specialized platforms. Policies and procedures to ensure third-party sellers legally fulfill promises to consumers are as varied as the marketplaces themselves.

Identify, remove, and prevent fake reviews

Amazon prohibits “any attempt to manipulate reviews, including by directly or indirectly contributing false, misleading or inauthentic content.” It devotes “significant resources to preventing fake or incentivized reviews from appearing in our store,” and was able to prevent more than 200 million suspected fake reviews from reaching the eyes of customers in 2020 alone. It’s “won dozens of injunctions against fake review brokers, compelling them to provide information about who is paying for these fraudulent services.”

Other marketplaces prohibit sellers from offering refunds or other monetary compensation in exchange for positive reviews, or from falsely inflating a shop’s review score or otherwise undermining the integrity of the reviews system.

Identify, remove, and prevent sales of counterfeit goods

Marketplaces must contend with fake products as well as fake reviews.

In 2019, Amazon launched Project Zero “to ensure that customers always receive authentic goods when shopping in our stores.” It says that more than 10,000 brands — “from large, global brands to emerging entrepreneurs” — now use Project Zero to detect counterfeit goods in 20 countries including Canada, Mexico, France, India, the United Kingdom, and the United States. They can even use Project Zero to remove fraudulent listings themselves. 

Walmart has a system for sellers to “report legitimate claims of infringement … including claims of copyright, trademark, patent, publicity and counterfeit.” eBay also has “zero tolerance for fraud.” Esty does not endorse “any content posted by sellers (such as photographs or language used in listings or shop policies),” and members of the community can “flag an item or a shop that violates any of Etsy’s policies.” 

Retail theft is a problem states can no longer ignore

Retail theft has become a problem states can no longer afford to overlook. Photographs of plundered trains in Los Angeles in January of this year shocked consumers around the country (and explained why some of our online orders never arrived). After cleaning debris from the tracks, Governor Gavin Newsom announced, “We are committed to an all-of-government approach to prevent thefts, prosecute the criminals involved, and clean up local communities.”

That’s good news for retailers who have been battling thievery for years, with little recourse. Shoplifting is rampant in California and many other states, and current laws make it difficult to prosecute the crimes. Large retailers are closing brick-and-mortar stores so they can devote their energies to ecommerce, though as the train tracks around Los Angeles remind, selling online comes with its own set of risks.

And of course, many stolen items end up posted for sale on various online marketplaces. 

The current batch of bills mandating marketplace facilitators police high-volume sellers may help reduce the high volume of fraudulent sales; their effectiveness remains to be determined. “How will legislators evaluate whether this type of law deters retail theft?” Peterson asks. “How will they measure success? If they have a measurement tool and this doesn’t meet the standard of success, will legislators repeal the laws?”

Let’s be honest: Thieves are dishonest. If there’s a way for them to sidestep the proposed requirements, they will.

“Avalara solves government compliance problems for businesses,” intones Peterson. As such, “we support solutions that solve the base problem.”

Learn more about Avalara’s compliance solutions.

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