Who should collect tax on marketplace sales?
- Sales and Use Tax
- Oct 11, 2017 | Gail Cole
Twenty-five states are currently offering a tax amnesty program for online marketplace sellers (e.g., Fulfillment by Amazon, or FBA, sellers) that have inventory in facilities run by marketplace providers (e.g., Amazon). This might lead one to believe there’s no controversy surrounding the tax on marketplace sales, but nothing could be further from the truth. The question of who should collect the tax on marketplace transactions is deeply divisive.
There was a time when it was a given that having a physical presence in a state triggers nexus, an obligation to collect and remit tax. This precedent was upheld by the United States Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). The court ruled that North Dakota couldn’t impose a tax obligation on the Quill Corporation because the company lacked a physical presence in North Dakota. Quill is the linchpin of arguments that states have no right to tax out-of-state sellers.
Online marketplaces muddy the waters. Marketplace providers have an obvious presence in states where they have warehouses and fulfillment centers. But is inventory owned by marketplace sellers and stored at these facilities also an obvious physical presence? If so, who should collect tax when the inventory is sold: the marketplace seller or the marketplace provider? As the Arizona Department of Revenue notes, “It may be unclear who in fact the retailer is for tax purposes as a result of the online marketplace and third-party merchants operating in the same space.”
There are essentially three stances in this debate:
- Tax only applies to marketplace sales in the marketplace seller’s home state
- The responsibility to collect and remit tax falls on the marketplace provider (e.g., Amazon, eBay)
- The responsibility to collect and remit tax falls on the marketplace seller (e.g., FBA sellers)
Tax only applies to marketplace sales in the marketplace seller’s home state
Peruse Amazon’s Seller Central forum and you’ll find sellers seeking advice because they’re “completely baffled by the whole sales tax situation on Amazon.” In response to their cry for information, some sellers in the forum maintain that “you only have to collect and remit the sales tax for the items you sell to buyers in your own state.” Others add that “a physical presence … does not include Amazon’s warehouses.”
Marketplace providers (e.g., Amazon) are liable for the tax on marketplace sales
Some states, including Arizona, Minnesota, and Washington, consider the marketplace provider to be the seller. Lawmakers in New York, North Carolina, and Texas share that opinion but have been unable to enact legislation to that effect. Pennsylvania is inching its way toward imposing a tax on marketplace providers.
Until recently, South Carolina has not been a key player in the remote sales tax debate, although the legislature has considered several bills that would tax sales by out-of-state sellers. However, the South Carolina Department of Revenue now claims Amazon owes the state millions in uncollected tax on its marketplace sales. Amazon is fighting the assessment.
Marketplace sellers (e.g., FBA sellers) are liable for the tax on marketplace sales
The obligation to collect and remit tax can fall on the marketplace seller rather than the marketplace provider. States could argue that storing inventory in a state is an undeniable physical presence that triggers nexus.
As of June 1, 2017, “the ownership of inventory stored at a Virginia warehouse or fulfillment center will give rise to an out-of-state dealer’s obligation to register and to collect retail sales and use tax on its sales to Virginia customers” (Virginia Department of Taxation Tax Bulletin 17-3).
More interestingly, on Aug. 31, 2017, Massachusetts ordered Amazon to identify third-party sellers that have stored taxable goods in any facility in the state owned or operated by Amazon or its affiliates since Jan. 1, 2012. If Massachusetts obtains that information, the state will use it to determine those vendors’ sales and use tax liability and will contact sellers it finds owing.
Experts weigh in
In a recent webinar on this issue, state tax attorney Jordan Goodman highlighted the fundamental question: “Does [storing inventory in a marketplace provider facility] create nexus for you? Are you the seller?”
He explains that this is a gray area because “states all have different laws, different interpretations of the law.” Sometimes the seller will be held liable, sometimes the provider. “It comes down to each state’s law as to what a seller is, what a retailer is, … who has control of inventory, who has risk of loss, who has title….”
Attorney Paul Rafelson, who works with FBA sellers, asserts that Amazon is the true seller for all its marketplace sales. He tells FBA sellers, “You are not the responsible party for this tax, Amazon is.”
“There’s lots of thoughts and ideas on why a state shouldn’t be able to [tax a marketplace seller],” concedes Michael J. Fleming of Peisner Johnson & Company. But, he asks, “What do you do when a state does pursue you?” He notes a growing trend among states to hold marketplace sellers liable for tax. Three years ago, he couldn’t name any marketplace sellers who’d been audited by a state and found noncompliant. Last year, he knew of about 60 sellers who were held liable for uncollected sales tax, and he says the numbers are tracking even higher this year.
Furthermore, says Scott Peterson, Vice President of U.S. Tax Policy and Government Relations at Avalara, “What can’t be left out of this debate is that FBA sellers are most definitely sellers. There may be some who only sell via Amazon, but there are also very many where Amazon is just one platform among many platforms.” And with marketplace sales surpassing $1 trillion worldwide in 2016, more businesses are likely to want a piece of that action. Toys R Us Inc. has already announced its intention to launch an online marketplace in 2018.
These are uncertain times for ecommerce businesses in general and marketplace sellers in particular. Although many consumers may have trouble imagining life without the convenience of Amazon and other online sellers, ecommerce is still a relatively new phenomenon in the world of tax. States are still trying to determine the best way to generate tax revenue from online sales, and how they’ll do that is still in doubt. What is certain is that they want that tax revenue and will not stop until they figure out a way to get it.
For online sellers, the best course of action is to plan for growth and choose a tax solution that’s equipped to handle any eventuality.