When determining nexus with a state, retailers need to be aware if marketplace sales are included in the economic nexus threshold calculation or not. Exceeding the economic nexus threshold in a state that includes marketplace sales may require retailers to register with the state taxation department and file reports reflecting zero tax due. Retailers should verify that a marketplace provider has met a state’s economic threshold, is collecting sales tax, and always collects and maintains documentation from the marketplace provider that can verify the collection of sales taxes in case of an audit.
Small Retail Businesses & Marketplace Providers: An Avenue for Growth
What is a marketplace? Merriam-Webster defines marketplace as “an open square or place in a town where markets or public sales are held.” In our increasingly virtual world, popular websites such as Etsy, eBay, Amazon, and Wayfair have forever changed the definition of marketplace and the sales tax landscape.
Simply put, a marketplace is a venue for connecting sellers with buyers.
Transactions on a marketplace involve three parties — the seller of the goods, which sometimes can be the same party as the marketplace provider; the marketplace provider or facilitator, which provides the venue for sales and facilitates the transfer of payment and goods sold; and the customer, who purchases items on the marketplace that are then shipped to their location. This begs the question, who is responsible for collecting and remitting sales tax in these three-party transactions — the seller or the marketplace provider?
MARKETPLACE NEXUS LAWS
Marketplace nexus laws began emerging around 2017, after states noticed that Amazon, (which began voluntarily collecting and remitting sales tax in all states that have sales tax,) only collected sales tax on the sales of its own products, and not sales by third-party sellers. In one of the first attempts to capture these sales, the Arizona Department of Revenue issued a ruling which held that if a business already had nexus with Arizona for transaction privilege tax purposes, it must remit tax on its gross receipts from marketplace sales. Other states followed suit and quickly began to enact marketplace facilitator rules of their own.
The efforts to capture marketplace sales came to a head after the US Supreme Court’s historic Wayfair vs South Dakota decision in June of 2018. Currently, all states that impose a sales tax have adopted rules regarding marketplace sales and have generally placed the responsibility for collecting and remitting sales tax squarely on the shoulders of the marketplace providers when the provider meets the state economic threshold.
Participating in a marketplace can have its advantages, especially for small businesses. Retailers who sell products on a marketplace have easy access to a larger market that may not otherwise be available. Selling through a marketplace provider also comes with the added benefit of minimizing the administrative burden of sales tax compliance, offering sales tax calculations, collection, and remittance that otherwise would require investment into sales tax software and point of sale systems. However, selling on a marketplace may not relieve a retailer from collecting and remitting sales and use taxes, as retailers need to pay attention to potential pitfalls, and understand each state’s marketplace facilitator laws.
WHEN DETERMINING NEXUS…
When determining nexus with a state, retailers need to be aware if marketplace sales are included in the economic nexus threshold calculation or not. Exceeding the economic nexus threshold in a state that includes marketplace sales may require retailers to register with the state taxation department and file reports reflecting zero tax due. Some states, such as Nebraska, require marketplace sellers who meet the sales threshold to register and report all sales even if the marketplace provider is collecting and remitting the tax due. Additionally, non-marketplace sales, such as through a retailer’s website, mail orders or telephone orders are taxable when economic nexus thresholds are met even if they are a very small portion of total sales into a state. Failure to comply with a state’s reporting and remittance requirements can result in penalty and interest assessment.
Retailers should verify that a marketplace provider has met a state’s economic threshold, is collecting sales tax, and always collects and maintains documentation from the marketplace provider that can verify the collection of sales taxes in case of audit. Some states, such as Arizona, can issue tax assessments to retailers that do not maintain sufficient documentation showing sales tax was paid by the marketplace provider. Retailers should also ensure that complete transaction information is provided to the marketplace provider and avoid shipping products outside the provider’s platform.
Several states have provisions that place the sales tax liability back on the retailer if insufficient information is provided to the marketplace provider for the collection and remittance of sales tax. Under a sales and use tax audit, the burden of proof that sales tax was properly collected and remitted falls on the business under audit. Therefore, it is critical that accurate and complete records are maintained.
WE WELCOME YOUR SALES TAX QUESTIONS
For more in-depth sales tax guidance regarding the web sales, contact your sales tax experts at REDW’s state and local tax (SALT) group.