Out-of-state marketplace sellers and facilitators must collect Connecticut sales tax starting December 1
- Nov 28, 2018 | Gail Cole
Marketplace facilitators and sellers with at least $250,000 in total annual sales are required to collect and remit Connecticut sales tax starting December 1, 2018.
Marketplace facilitators are businesses that facilitate retail sales for other sellers through a physical or online forum or platform. They include sites such as eBay and Etsy, which only facilitate third-party sales, as well as Amazon and Walmart, which also sell their own products. Connecticut law taxes most marketplace sales but imposes different reporting requirements on facilitators and sellers.
- Marketplace sellers that exceed Connecticut's economic nexus thresholds must register and file an annual return
- Marketplace sellers must report all Connecticut sales
- Marketplace sellers must deduct their marketplace sales if a marketplace facilitator collected tax on their behalf
- Marketplace facilitators that sell their own products may obtain two registration numbers: one to report their own sales, and one to report third-party sales
Without exception, every marketplace meeting the economic nexus threshold will be held liable for tax on sales into the state starting December 1. The Department of Revenue Services (DRS) doesn’t have the authority to grant extensions.
New requirements for marketplace facilitators
Whether located in or outside of Connecticut, a marketplace facilitator is required to comply with Connecticut sales and use tax laws if it:
- Facilitated at least $250,000 in retail sales by marketplace sellers during the prior 12-month period (October 1 to September 30) by providing a forum that lists or advertises their sales of taxable tangible personal property or taxable services, including digital goods;
- Directly or indirectly, through agreements or arrangements with third parties, collects receipts from customers and remits payments to marketplace sellers; and
- Receives compensation or other consideration for its services.
All qualifying marketplace facilitators are required to obtain a Connecticut Sales and Use Tax Permit and file Form REG-1 (Business Taxes Registration Application).
Registering as a seller. A marketplace facilitator is considered the seller of each marketplace sale, even those made on behalf of a third-party seller. Thus, marketplace facilitators must:
- Collect and remit sales tax on each facilitated taxable sale shipped to a Connecticut address, even if the marketplace seller is registered (or required to register) with the state;
- Fulfill all obligations imposed by Connecticut sales and use tax laws as if it was the retailer, including timely filing all returns; and
- Keep all necessary records and information, including exemption and resale certificates and other relevant documentation.
To avoid double collection and ensure marketplace sellers aren’t erroneously held responsible for collecting and remitting sales tax on transactions made through the marketplace, marketplace facilitators must either:
- Enter into a contract with the seller that explicitly states the facilitator will collect and remit sales tax on the seller’s behalf on all taxable sales; or
- Provide marketplace sellers with a properly completed DRS Certificate of Collection certifying that the facilitator is registered to collect Connecticut sales tax and will collect sales tax on all the seller’s taxable sales made through the marketplace. Form DRS-055 will be available at the DRS website starting December 1, 2018.
Reporting sales. Each marketplace facilitator may obtain two tax registration numbers: one for itself and one for its third-party sales.
If the facilitator makes no retail sales of its own, all its marketplace sales should be reported under the tax registration number originally assigned by the DRS.
However, marketplace facilitators that sell their own products or services in addition to making third-party sales have a choice:
- Report all sales on their own tax registration number; or
- Report their own sales on their own tax number and obtain a tax registration sub-number for their third-party sales. Permit sub-numbers can be obtained online through the DRS Taxpayer Service Center.
New requirements for out-of-state marketplace sellers
Registering as a seller. A marketplace seller is defined as any person that has an agreement to make sales through a marketplace forum, whether based in or outside of Connecticut, and whether it already has (or is required to have) a Connecticut sales and use tax permit.
Out-of-state sellers are required to register (Form REG-1) and collect and remit Connecticut sales tax if they:
- Have at least $250,000 in gross receipts from annual sales into Connecticut; and
- Make 200 or more retail sales annually into Connecticut.
The above thresholds include all sales by the seller, including those made through a marketplace.
Remote retailers that don’t meet the above thresholds aren’t required to register for sales tax (Form REG-1). However, they may opt to collect Connecticut use tax by completing Form REG-7.
Out-of-state sellers that meet the above thresholds and only make sales through a marketplace are required to register for sales tax (Form REG-1); however, they should select the new box on the form that shows sales are made only through a marketplace facilitator. Out-of-state retailers that only make sales through marketplaces are required to file on an annual basis.
Collecting sales tax. Marketplace sellers are required to collect and remit Connecticut sales tax on their taxable sales into the state unless:
- They can show their sales were facilitated by a marketplace facilitator:
- “with whom the marketplace seller has a contract that explicitly provides that the marketplace facilitator will collect and remit sales tax on all taxable sales it facilitates for such seller; or
- from whom the seller has requested, and received in good faith, a properly completed DRS-055, Certificate of Collection, certifying that the facilitator is registered to collect sales tax and will collect sales tax on all taxable sales by such seller that are facilitated by such facilitator; and
- Any failure of such facilitator to collect the proper amount of tax for such sale was not the result of such seller providing incorrect information.”
New requirements for in-state marketplace sellers
In-state retailers are generally required to register for sales tax (Form REG-1) even if their sales are below the thresholds.
In-state sellers who only make sales through a marketplace facilitator that collects and remits on their behalf should check the box (Form REG-1) declaring that sales are made only through a marketplace facilitator. As with their out-of-state counterparts, in-state retailers that only make sales through marketplaces are required to file on an annual basis.
Finally, in-state sellers making casual or occasional sales only — i.e., not running a business or using a resale certificate — are not required to register for sales tax.
Reporting requirements for in-state and out-of-state marketplace sellers
All retailers that are registered to collect and remit sales tax in Connecticut are required to report their sales into the state, even if all sales are made through a marketplace that collects and remits on their behalf.
All sales should be reported as gross receipts. Sales made through marketplace facilitators should be deducted on the same line as a sale for resale. See Regarding Marketplace Facilitators and Marketplace Sellers for an example and more details.
Making a change
Retailers already registered as a retailer in Connecticut can request to change their filing status from monthly or quarterly to annual if:
- They only make sales through marketplace facilitators; and
- The facilitators are collecting and remitting on their behalf.
Generally, a marketplace facilitator will be held liable for any “audit deficiency assessments” for sales made through its forum. However, marketplace sellers will be held liable if they supply the facilitator with incorrect information. For example, if the seller classifies a physical book (taxed at 6.35 percent) as an electronic book (taxed at 1 percent), and the facilitator consequently undercollects sales tax, the seller and not the facilitator would be liable for the uncollected tax.
Failure to collect and remit the tax due will result in penalties and interest charges. However, the DRS will reduce penalties for a limited period. For marketplace facilitators or sellers found liable for failure to collect the tax due on taxable sales occurring between December 1, 2018, and December 31, 2019, the DRS will reduce the tax liability by 5 percent, reduce the interest owed, and waive associated penalties if the seller can satisfactorily show:
- The facilitator and the marketplace seller are not “affiliated persons”;
- The failure to collect sales tax due was not due to an error in sourcing the sale; and
- The sale occurred on or before December 31, 2019.
Connecticut is one of many states taxing marketplace sales in the wake of South Dakota v. Wayfair, Inc. The June 21, 2018, decision by the Supreme Court of the United States overruled a long-standing physical presence rule, thereby granting states the authority to tax remote sales. Learn more about remote sales tax laws and their potential impact on your business.