• UNITED STATES

    Indirect Tax News - October 2022

Watch out for marketplace facilitator compliance obligations

Most U.S. consumers use online marketplaces, commonly referred to as platforms, for their shopping needs. In 2022, over 75 million U.S. households are expected to subscribe to Amazon Prime, and sales through Amazon—the largest platform in the U.S.—are anticipated to exceed USD 162 billion. Over a billion users visit the Facebook Marketplace platform each month. Consumer demand driven by COVID-19 pandemic lockdowns, the development of novel products and methods of delivery, and increased global connectivity have led to the growth in new international marketplace platforms, which now may have sales in the U.S.

The ability of marketplace facilitators to create a new channel for retailers to reach customers and enable their transactions through platforms comes with certain sales tax responsibilities. Marketplace facilitator laws, now enacted in all states that impose sales tax and the District of Columbia, require facilitators (domestic or foreign) that have nexus with a state to collect and remit sales tax on behalf of retailers selling through the platforms. This article highlights key considerations and trends for marketplace facilitators that have sales in the U.S. through their platform.  

What is a marketplace facilitator?

The term “marketplace facilitator” is defined in U.S. state laws. In general, a marketplace facilitator is a person or an entity, including affiliates, contracting with marketplace sellers to facilitate the sale of products through the marketplace and that directly or indirectly processes or collects the customer’s payment. In a majority of states, a definition of marketplace facilitator includes:

  • Transmitting or communicating the offer or acceptance between the buyer and marketplace seller.
  • Owning or operating the infrastructure, electronic or physical, or technology that brings purchasers and marketplace sellers together.
  • Providing a virtual currency that buyers are allowed or required to use to purchase products from the seller.
  • Developing software or conducting research and development activities related to any of the activities described in the next paragraph if such activities are directly related to a physical or electronic marketplace operated by a person or an affiliated person.

About 15 states further expand the marketplace definition to include the following activities: 

  • Listing products for sale;
  • Providing fulfilment or storage services;
  • Setting prices;
  • Branding sales as those of the marketplace facilitator;
  • Taking orders;
  • Advertising or promotion; and
  • Providing customer service or accepting or assisting with returns or exchanges.

Select industries may be exempt from being a marketplace facilitator. For instance, public utilities in Maine, businesses solely engaged to provide travel agency services in Florida, rental car booking services in Louisiana, hotel booking services in Kansas, payment processors in Maryland appointed by the vendor to handle payment transactions from clients (i.e., credit and debit cards) whose activity is limited to handling transactions between the parties and companies that provide internet advertising services in Virginia are expressly exempt by law from the typical obligations of a marketplace facilitator. Inbound companies facilitating any sales through their platform should review each state’s marketplace facilitator definition and potential exemptions.

Marketplace nexus

To be subject to sales tax collection and remittance obligations, marketplace facilitators must have nexus with the state. While tax treaties may protect foreign companies without a permanent establishment from U.S. federal income tax and, in certain states, from state income or franchise taxes, tax treaties do not extend protection to sales taxes.

A marketplace facilitator with physical nexus is generally required to register in that state regardless of the sales volume made through its platform. Facilitators can establish physical nexus with the state by having an office, warehouse, inventory stored with third-party logistics companies (3PL) or on consignment and having employees or agents in the state providing services on behalf of the company.

A marketplace facilitator can also establish economic nexus with the state if it facilitates sales on behalf of one or more marketplace sellers or has its own sales of tangible personal property, products transferred electronically or provides remote services that exceed a certain monetary or transaction threshold, typically USD 100,000 or 200 or more separate transactions. In determining if either of the transaction thresholds are met, a marketplace facilitator must track and combine its own sales on its platform with the sales made by marketplace sellers through its platform. About 24 states require that either the volume of sales or number of transactions test is met to establish economic nexus, while other states only require that the volume of sales exceed a state-specific threshold.

Marketplace facilitators with U.S. transactions should carefully monitor both their physical and economic nexus.

Registration

A marketplace facilitator that has nexus with a jurisdiction should research and understand its registration and compliance obligations. Foreign businesses without a Federal Employer ID Number (FEIN) issued by the Internal Revenue Service or officers/responsible parties without Social Security numbers—information generally required to complete the registration forms—should prepare for additional scrutiny during the registration process and be able to provide alternative requested information.

Marketplace facilitators file a sales tax return that collectively reports sales made through its platform and its own separate sales with the sales tax collected. The frequency of the filing, generally monthly, will be driven by the volume of sales and tax due. However, certain states, including Georgia and Tennessee, require marketplace facilitators to track their own sales and report them under a separate account or on a separate sales tax return. In addition, certain states, including Texas and Wisconsin, require marketplace facilitators to notify marketplace sellers that it will collect and remit sales tax on their behalf. Inability to register in a timely manner or to follow state-specific compliance requirements can lead to exposures.

Compliance considerations

Marketplace facilitator laws shift sales tax collection and reporting obligations from retailers to marketplace facilitators. This provides remote sellers that transact exclusively through platforms with the ability to comply with multistate sales tax requirements without making substantial investments in the tax compliance function. This centralisation also reduces the number of returns a state may need to process monthly and narrows the audit population to ensure compliance. However, while providing these benefits, marketplace facilitator laws unintentionally create the following new areas of risk:   

  • Marketplace facilitators may not have a full understanding of products being sold on their platforms. This lack of familiarity, or any inability of sellers to timely share this information with the marketplace facilitator, may result in incorrect sales tax being charged if the sales are not properly mapped to the correct taxability classification in the compliance software.
  • Human error in taxability configurations in the compliance software may occur resulting in an incorrect percentage of tax or full tax charged on a certain product or service. Software that is not regularly maintained/updated to take account of changes in the law, including tax rates, becomes obsolete and leads to mistakes.
  • Marketplace facilitators may not have the ability to determine whether an item was purchased by an exempt customer or have a mechanism to submit or collect exemption certificates or direct pay permits. Marketplace facilitators may not know or be able to track where a license to a product, such as software-as-a-service, is used rather than purchased. The location of use may drive taxability and rate decisions, especially in states that have multiple level tax rates (e.g., state and local, city, district, county, etc.).
  • Marketplace facilitators may not understand who is ultimately liable for sales tax if the correct amount was not remitted to the state. States may relieve marketplace facilitators from the consequences of failing to collect and remit the correct amount of sales tax if the facilitator can demonstrate to the taxing authority that the failure was due to incorrect or insufficient information it received from the marketplace seller and the facilitator made reasonable efforts to obtain correct and sufficient information. However, the extent of the relief may be limited by state law (i.e., 5% of total sales), thus exposing the marketplace facilitator, seller and purchaser to liability for unremitted tax.
  • Sellers may initially sell only through marketplace platforms, but then open their own webstores with direct sales to end consumers. In time, their sales may exceed economic nexus thresholds and sellers will become responsible for the collection and remittance of sales tax. Having a mindset that marketplace facilitators are responsible for compliance on all sales by the seller into a state potentially may create exposure.

Responsibilities beyond sales tax

Over the last four years, numerous states have expanded collection and remittance requirements for marketplace facilitators beyond sales tax. In certain states, marketplace facilitators may be responsible for the collection and remittance of electronic waste recycling fees, retail delivery fees, waste tire fees, emergency call services or 911 fees and product-specific excise taxes, among others. Marketplace facilitators should be aware of the products sold on their platforms to ensure compliance with state-specific rules that may pertain to certain products and services. In addition, marketplace facilitators should consider the potential application of state income or franchise tax, gross receipts tax, state employment tax, personal property tax and unclaimed property on their operations in the U.S.

Insights

The difficulty in applying marketplace facilitator rules in the U.S. exists because of the lack of uniformity among states in their nexus standards, definitions, exemptions and scope of facilitator’s obligations for the collection of tax. Nuanced definitional differences can cause a company to be a marketplace facilitator in one state but not in another even while engaging in the same activity. Marketplace facilitators considering doing business or currently operating in the U.S. should be aware of a constantly changing landscape of laws and compliance responsibilities.
 

Angela Acosta
[email protected]

Ilya Lipin
[email protected]