Marketplace sales tax laws proliferate in the wake of South Dakota v. Wayfair, Inc.
- Oct 11, 2018 | Gail Cole
Updated 2.13.2019 to reflect the latest state information.
Small sellers that aren’t required to collect and remit tax under economic nexus laws aren’t necessarily off the hook for sales tax. If they sell through online marketplaces, their sales may be taxed under burgeoning marketplace sales tax laws.
Economic nexus policies have been multiplying like bunnies since the Supreme Court of the United States overruled the physical presence rule that once prevented states from taxing remote sales (South Dakota v. Wayfair, June 21, 2018). A sales tax collection requirement is triggered under economic nexus only after a remote seller meets a certain threshold of economic activity in the state, most commonly $100,000 in gross sales or 200 transactions in the state. Thus, small sellers not meeting one or both thresholds generally aren’t required to collect and remit tax.
However, small retailers that sell through larger marketplaces such as Amazon, eBay, or Etsy do need to worry about another rising tide: taxes targeting marketplace sales.
The birth of marketplace sales taxes
Initially, online marketplace transactions weren’t distinguished from other online sales, at least with respect to sales tax: For the most part, all marketplace sales were exempt from sales tax unless the seller had a physical presence in the state.
State lawmakers started singling out marketplace sales only after Amazon started collecting sales tax in all states that have sales tax. It then became clear that while Amazon was collecting tax on sales of its own products, most of its third-party, or marketplace, sales continued to be sold tax-free. Amazon argued that since it wasn’t technically the seller, it wasn’t responsible for collecting and remitting the tax on these transactions.
Virginia and Minnesota were two of the first states to take action. In Virginia, the marketplace seller was determined to be liable for the tax; as of June 1, 2017, Virginia requires any out-of-state dealer with property stored in the state for sale to collect and remit Virginia sales tax.
About the same time, Minnesota enacted the nation’s first tax on marketplace providers. Under its law, marketplace providers (facilitators) with a physical presence in the state (like an Amazon warehouse) are required to collect and remit tax on behalf of their third-party sellers, except those making less than $10,000 annually.
Minnesota’s marketplace provider tax collection obligation was set to take effect on July 1, 2019. However, after the Supreme Court’s Wayfair ruling, Minnesota moved the start date forward. Marketplace providers are required to collect and remit Minnesota sales tax on behalf of their marketplace sellers as of October 1, 2018, unless the seller qualifies for the small seller exception.
Other states were quick to jump on the marketplace sales tax bandwagon. As of this writing, specific sales tax requirements for marketplace facilitators, sellers, and/or referrers have been adopted in the following states (listed with effective dates):
- Arizona, September 20, 2016
- Virginia, June 1, 2017 (seller is responsible, not the facilitator)
- Pennsylvania, March 1, 2018
- Oklahoma, July 1, 2018
- Rhode Island, January 15, 2018 (reporting requirements for retail sale facilitators)
- Minnesota, October 1, 2018
- Washington, October 1, 2018
- New Jersey, November 1, 2018
- South Carolina, November 1, 2018
- Connecticut, December 1, 2018
- Alabama, January 1, 2019
- Iowa, January 1, 2019
- South Dakota, March 1, 2019
- Washington, D.C., April 1, 2019
- Wyoming, July 1, 2019
A growing number of marketplace facilitators are complying with these laws. Amazon collects and remits on behalf of its third-party sellers in Minnesota, Oklahoma, Pennsylvania, and Washington. Online marketplaces eBay and Etsy are expanding their tax collection responsibilities. The tide seems to be turning.
However, Amazon has been battling South Carolina over a similar requirement for years. The two parties are scheduled to argue their cases before the state administrative law court in February 2019 (hat tip to Bloomberg BNA for the update).
Are states on the right track?
Before the Supreme Court repealed the physical presence rule, states strove to tax remote sales by any means necessary. Specific taxes on marketplace facilitators and sellers, which were frequently paired with use tax reporting requirements for non-collecting sellers, were one of many such efforts.
In the wake of Wayfair, some are questioning whether states should continue to pursue marketplace sales tax laws. There are concerns that marketplace sales tax laws are complicating compliance for sellers that make sales through multiple channels.
Confusing or not, taxes on marketplace facilitators and remote sellers are here. Businesses unclear about whether they’re required to comply with remote sales tax laws in one or more states should consult with a trusted tax advisor. Avalara Professional Services can help.