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