Marketplace Facilitators:  Economic Nexus Extends Reach into eCommerce

As ecommerce has exploded over the last two decades to become a pillar of our global economy, state and local taxing authorities have fought to expand the tentacles of sales tax as an effective and lucrative means of growing tax revenue with an expansive reach from coast to coast. With the advent of economic nexus after the Wayfair Supreme Court ruling, state taxing jurisdictions have expanded their taxing authority through marketplace facilitator legislation. These laws take aim at ecommerce and, specifically, at online marketplaces. With state purses filling up with the extra revenue realized from the success of taxing the largest online marketplaces like Amazon, Etsy, eBay, and Walmart, state revenue departments are now pursuing further income streams from any and all online marketplaces which are being used by third-party direct sellers and meet bright-line thresholds. Controversially, one state is even seeking compliance in sales tax collection and remittance for any online marketplace selling into the state and has a zero-dollar threshold in the name of fairness for brick and mortar stores competing with online shopping.

This publication provides the basic knowledge needed to understand just what marketplace nexus really is. For more details on your state’s approach to marketplace nexus, see Allyn’s complimentary interactive resource on our website: Click here!

 

The Basics: States with Marketplace Facilitator Laws

Defining ‘Marketplace Facilitator’

Marketplace facilitators are the operators of online marketplaces (although operators of physical marketplaces may fall within the definition in some instances). This type of economic nexus attaches to such a marketplace facilitator who provides access and use of the online marketplace to direct sellers for the purpose of commencing retail transactions for profit. Marketplace facilitators generally enter into a contractual arrangement with direct sellers, who pay the marketplace facilitator for utilization of the online marketplace and perhaps for services such as payment processing. When an online marketplace facilitates these types of transactions, the marketplace facilitator in most states is now required to collect sales tax on behalf of the direct sellers and remit those amounts back to the state taxing jurisdictions. This concept marks the first time in US history where a third party, outside of the buyer and seller, could be held liable for unpaid sales tax.

39 States and Counting

The following 39 states have enacted variations of marketplace facilitator legislation: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming. Washington, D.C. has also enacted marketplace facilitator legislation. Although most of these states began enforcing their marketplace facilitator laws in 2019, a few have gone into effect in the early part of 2020 including Georgia, the most recent addition, which goes into full effect on April 1. Out of the eleven remaining states with no marketplace facilitator law on the books, five have no state sales tax. However, the other six states (Florida, Kansas, Louisiana, Mississippi, Missouri and Tennessee) are likely to follow suit and enact similar marketplace facilitator laws by the end of 2020.

For more details on each of these states’ approaches, follow this link to Allyn’s complimentary interactive resource on our website: Click here!

Bright-line Thresholds

With one exception (Kansas), states with marketplace facilitator laws enforce sales tax collection duties upon online marketplaces exceeding varying threshold amounts of retail or gross or qualifying sales into the state in the current or previous calendar year or perhaps during the past twelve months. The most common threshold for sales amount is $100,000 while the most common threshold for transaction volume is 200. Meeting either of these thresholds in most of the participating states will trigger a duty to register in the state for sale tax collection, report sales and use tax, and remit these taxes to the state.

Trends to Watch

Changes in Thresholds

The basic idea of nexus considers whether a business has enough of a connection with a state to constitutionally fall under the taxing authority of a jurisdiction. As part of the Wayfair SCOTUS ruling, economic nexus was upheld on a rationale involving a number of factors including thresholds designed to not unduly burden smaller businesses in interstate commerce. However, the U.S. Supreme Court did not set a concrete threshold retail sales amount or transaction count as constitutional. Rather, the Court ruled that the thresholds under consideration in South Dakota were constitutional in that instance. While most states have implemented similar or same threshold levels, larger states seem to believe that perhaps economically larger states should have higher thresholds to withstand constitutional challenge.

For this reason, Texas has a higher threshold sales amount of $500,000. California recently changed its threshold from $100,000 to $500,000. In a similar vein of thought, Oklahoma raised its abnormally low threshold from $10,000 to $100,000. In line with this trend, Colorado lawmakers are currently considering increasing the state’s threshold from $100,000 up to a higher, unidentified threshold. These changes reflect a desire by states to permanently secure their newfound revenue from online marketplace facilitators and other qualifying economic nexus situations. These adjustments also suggest a trend among states to tweak their marketplace facilitator laws to the unique characteristics such as economic size and population of the individual state. Nonetheless, Kansas is the one state bucking this trend as it announces a zero-dollar threshold, which is backed by the Kansas Department of Revenue and the governor while being criticized as unconstitutional by the state attorney general.

Retroactive Sales Tax

While states have openly embraced placing the tax collection responsibility on marketplace facilitators dealing with third-party sellers, signs are appearing that a few states are aggressively pursuing every avenue of sales tax collection. California is one such state as it aggressively seeks sales taxes from third-party merchants dating back all the way to 2012. Reports of such tactics have started appearing with third-party sellers in other states being sent bills for past due sales tax in the amount of tens of thousands. One case in Pennsylvania saw a third-party seller of clothing, shoes, and groceries receiving a sales tax bill in the amount of $1.6 million. While the California state treasurer stepped in to suggest that California couldn’t seek back taxes from merchants going back more than three years, the controversy continues. If left unchecked, as it currently is, other states may soon seek to recoup sales taxes going back years from direct sellers that have sold merchandise through an online marketplace platform.

South Carolina is going down a similar route as it now seeks back taxes from Amazon for sales tax not paid by third-party sellers going back a number of years. This case has now ended up in the court system. Any decision here could have far-reaching ramifications for marketplace facilitators and third-party sellers across the nation. Without further legislative guidance or court action, states may increasingly push the limits of economic nexus and marketplace facilitator laws as far as legally permissible.

Retailers Seek Level Playing Field

With 2020 barely begun, four states (Hawaii, Illinois, Michigan, and North Carolina) will start sales tax collection duties for marketplace facilitators. These states like the many before them in 2019 are jumping on the bandwagon for increased state revenue and a so-called “leveled playing field” for brick-and-mortar stores that collect and remit sales tax while competing with online marketplaces. In Florida, brick-and-mortar stores are pushing the state government to require marketplace facilitators to collect sales tax as it remains one of the few states without marketplace facilitation legislation. The momentum of marketplace facilitator legislation across the nation now continues into 2020 with few, if any, states to resist the urge to shore up revenue in the face of the impact of ever-increasing ecommerce shopping.

Tips for the Taxpayer

In trying to mitigate unforeseen sales tax issues, a great place to start is to conduct a thorough nexus review, both economic and physical, while taking into consideration new implications of your digital footprint in ecommerce and with online marketplaces. If your business does operate a platform that qualifies as a marketplace facilitator or even if you are a third-party seller on one of the many such websites out there, you should carefully consider your reporting, collection, and remittance responsibilities connected to those arrangements and activities. Having a carefully crafted system and set of procedures in place to track retail transactions and vendor arrangements will be crucial. Once your business meets any of the definitions for marketplace facilitators and thresholds for sales, action must be taken to register with the appropriate taxing jurisdictions and to collect and remit sales tax as required by the individual states. Part of this process necessitates the maintenance of accurate and thorough records to rebut possible audits and an uncertain and changing sales tax landscape. Various options also exist such as amnesty programs and voluntary disclosure arrangements that can be useful in limiting prior tax liability. All of this will require a substantial effort to stay up-to-date with changes in legislation and pending court cases, which will have a substantial impact on your business’ tax obligations.

How Can We Help?

Allyn’s tax team is staffed with seasoned tax professionals experienced in all aspects of Federal, multi-state, and local tax compliance and consulting for large US and global corporations. Allyn performs sales and use tax nexus reviews routinely for businesses located or with sales throughout the US. Allyn tax professionals are well-versed in technical sales tax regulations, procedures, and practices. We use that experience to your advantage.

Allyn has the experience and wherewithal necessary to identify your business’ true nexus impact and the wisest next steps when nexus is identified – voluntary disclosure agreements, taxability reviews, registrations, and more. Our team will ensure that you are in complete compliance with state and local tax law while reducing your tax liability to your fair share and nothing more. 

It is very simple and easy for a company to engage Allyn in sales and use tax nexus consulting. Just reach out to us, and we will only require minimal data from you to get us started. We minimize the time that you will spend on sales tax issues while we focus on the details and keep you apprised of the progress and findings. Further, we do it all with our recognized dedication to customer service, rated over 350% higher than current industry averages.

Contact us and we can provide a customized cost-effective solution to meet your company’s needs. For further information on Allyn Tax services, please contact: tax@allynintl.com.

For More Information

If you are interested in learning more about this topic or other tax topics, please visit our Tax Publications under News & Publications at www.allynintl.com.

Contributor: Stephen R. Wilhelm

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About Allyn International

Allyn International is dedicated to providing high quality, customer centric services and solutions for the global marketplace. Allyn's core products include transportation management, logistics sourcing, freight forwarding, supply chain consulting, tax management and global trade compliance. Allyn clients range from small local businesses to Fortune 500 firms. Allyn conducts business in more than 20 languages and has extensive experience in both developed and emerging markets. Highly trained experts are positioned throughout North and South America, Europe and Asia. Allyn’s regional headquarters are strategically located in Fort Myers, Florida, U.S.A., Shanghai, P.R. China, Prague, Czech Republic, and Dubai, U.A.E. For more information, visit www.allynintl.com.