Marketplace sales tax laws explained
- April 16, 2018 | Gail Cole
Update 9.7.2018: The Supreme Court of the United States repealed the physical presence rule in South Dakota v. Wayfair, Inc. (June 21, 2018). Wayfair centered on South Dakota's economic nexus law, not marketplace sales transactions. Nonetheless, the decision gives states a path to tax all remote sales, including those occuring through online marketplaces. Learn more here.
Alabama and Oklahoma recently joined a growing list of states to specifically tax marketplace, or third-party, sales. The new laws have raised important questions about online marketplaces and the businesses that sell through them. Why target these transactions? Which states have marketplace sales tax laws? And who’s responsible for collecting and remitting the tax on marketplace sales: the marketplace facilitator (e.g., Amazon, eBay, and Etsy), or the marketplace seller?
Why target marketplace sales transactions?
Currently, a state cannot require a business to collect and remit sales or use tax unless that business has nexus with the state — a connection substantial enough to merit a tax obligation. The Supreme Court has ruled, most recently in Quill Corp. v. North Dakota (1992), that this connection must be physical in nature, like an office or warehouse. As a result, many online sales are going untaxed.
According to a report issued by the U.S. Government Accountability Office (GAO) in December 2017, state and local governments could dramatically increase their sales and use tax revenue if they were allowed to tax remote sales. Of all remote transactions, the GAO predicts targeting online marketplace sales would generate the most revenue for states, between $3.9 and $6.2 billion in 2017 alone. It estimates only 14 to 33 percent of marketplace sales were taxed in 2017; the rest went untaxed because they fell outside state laws.
The fact that online marketplace transactions were treated differently than other online sales went largely unnoticed until Amazon began collecting and remitting tax in all states that have a sales tax (April 1, 2017). It then came to light that Amazon was only collecting tax on sales of its own products. The company has said it isn’t responsible for the tax on third-party sales because it isn’t the seller. Consequently, states are still missing out on a great deal of tax revenue — roughly half of all Amazon sales occur through its marketplace.
Once that became clear, a handful of states drafted laws to increase marketplace sales tax revenue.
Which states have laws affecting the taxability of online marketplace sales?
As of this writing, Pennsylvania, Rhode Island, and Washington are enforcing online marketplace sales tax laws. Rhode Island’s law took effect August 17, 2017; Washington’s January 1, 2018; and Pennsylvania’s on March 1, 2018 (with collection starting April 1, 2018).
Similar laws have been enacted in the following states and will take effect on the dates listed below:
- Alabama, January 1, 2019
- Minnesota, the earlier of July 1, 2019, or when the Supreme Court of the United States modifies its decision in Quill Corp. v. North Dakota (more on that below).
- Oklahoma, July 1, 2018
In addition, the Arizona Department of Revenue has issued a ruling explaining “when and in what circumstances an online marketplace is the retailer” responsible for collecting and remitting tax in Arizona. And as of June 1, 2017, Virginia requires any dealer owning inventory for sale in Virginia to register for collection of the retail sales and use tax — though law doesn’t specifically reference online marketplaces.
Who’s responsible for collecting and remitting the tax on marketplace sales?
Marketplace sales are tricky because two parties are involved in each sale: the marketplace seller and the marketplace facilitator, or provider. As the GAO puts it, “The rise of e-marketplaces, such as eBay, Etsy, and Amazon Marketplace, has complicated nexus determinations.” The physical presence limitation further complicates the issue.
Every state marketplace law is unique, but most impose notice and reporting requirements on non-collecting sellers to encourage out-of-state sellers to collect and remit sales tax. Learn more about those here.
In Washington, for example, marketplace facilitators with a physical presence in the state, or $10,000 or more in retail sales sourced to Washington (including sales made on behalf of marketplace sellers) in the current or preceding calendar year, must either collect and pay tax on sales to Washington purchasers, or comply with use tax notice and reporting requirements. Marketplace sellers that don’t have a physical presence in Washington don’t need to make that choice because “the marketplace facilitator will do so on behalf of the seller.”
In Pennsylvania, a marketplace facilitator with a physical presence in the state is required to collect and remit sales tax on its own sales and on those made through its forum by any marketplace seller. Yet marketplace facilitators that don’t have a physical presence in the state aren’t off the hook: If they make or facilitate taxable sales to Pennsylvania customers totaling $10,000 or more in the previous calendar year, they must either voluntarily register to collect and remit Pennsylvania sales tax, or comply with use tax notice and reporting requirements.
Under Rhode Island’s law, a marketplace facilitator (called “retail sale facilitator”) with either $100,000 in gross revenue from the sale of taxable goods or services delivered in Rhode Island in the preceding calendar year, or 200 or more separate sales transactions of taxable goods or services delivered in Rhode Island, has to provide the Rhode Island Division of Taxation with the names and addresses of retailers for whom it collects Rhode Island sales tax, as well as the names and addresses of retailers that used its services but for whom it did not collect Rhode Island tax. There are additional notice and reporting requirements for non-collecting retailers and referrers.
These laws are proving successful: Amazon is collecting and remitting in Pennsylvania; Amazon, Etsy, and several other large marketplace sellers are complying with Washington’s law; and in February 2018, Amazon announced that it would share third-party seller information with Rhode Island.
Furthermore, Amazon complied with a request from the Massachusetts Department of Revenue to disclose the identities of its Fulfillment by Amazon (FBA) sellers with inventory in Massachusetts. However, it doesn’t appear to have complied with a similar request in Connecticut. And the company is fighting South Carolina’s assessment on unpaid tax on its third-party sales.
While most states with these laws hold the facilitator liable, Virginia law holds that storage of inventory in the Commonwealth is sufficient nexus to require an out-of-state business to collect sales and use tax on sales to customers in the Commonwealth. That would be the seller, not the facilitator.
Read more about this in Who should collect tax on marketplace sales?
Supreme Court could soon intervene
On April 17, 2018, the Supreme Court will hear a case that challenges the physical presence limitation upheld Quill Corp. v. North Dakota. The case is South Dakota v. Wayfair, Inc., and its outcome could dramatically impact how states can tax sales by out-of-state sellers. This could affect marketplace sellers in many states.
In the meantime, marketplace facilitators and sellers that make sales in any of the states listed above should monitor changing state laws and their potential impact.