Marketplace facilitators and sales tax: What you need to know
The rise of marketplace facilitators in the digital economy has transformed the way businesses operate. Platforms like Amazon, eBay and Etsy have created new opportunities to connect buyers and sellers while also making sales tax compliance easier for those sellers. To successfully conduct business in such a system, it’s important to understand the tax implications of the platforms you work with.
Not all platforms are equal when it comes to sales tax remittance, and laws vary by state. Fully understanding the tax landscape and the role your platforms play in it is essential to keeping up with your business’s obligations.
What is a marketplace facilitator or marketplace provider?
All states with a sales tax now have a marketplace facilitator (or provider) law that requires the marketplaces to collect sales tax on behalf of their sellers. The definition of a marketplace facilitator or provider can vary by state but generally, a marketplace facilitator is a business that facilitates the sales of its marketplace sellers, advertises on behalf of the sellers and processes the payment from the purchaser.
Other activities may make a business a marketplace facilitator, such as confirming transactions between buyers and sellers, providing fulfillment services, handling customer returns or setting the prices of the products or services sold by sellers through its platform.
How does sales tax apply to sales through marketplace facilitators?
Marketplace facilitators, such as Amazon, eBay and Etsy are required by all states that have a sales tax to charge and collect sales tax on behalf of the sellers who sell products or services through their platforms, regardless of whether the sellers have a physical presence or economic nexus in the state. This is intended to simplify sales tax compliance for sellers and to help ensure that the states collect the tax revenue from the growing online commerce.
What are the differences between marketplace facilitators and nonmarketplace facilitators?
A common misconception is that all online selling platforms are marketplace facilitators. However, that is not true. Some platforms, such as Shopify, WooCommerce and Wix, are not marketplace facilitators, meaning they only provide the tools and software for sellers to create their own online stores but do not facilitate the transactions between sellers and buyers.
These selling platforms may have tools available that calculate the sales tax. However, they do not collect and remit sales tax on behalf of their sellers unless they have a separate agreement to do so. Sellers who use nonmarketplace facilitators are responsible for their own sales tax compliance and must register, collect and remit sales tax in the states where they have nexus.
What should you do as a seller?
If you sell your products or services through a marketplace facilitator, you should check the sales tax policies and requirements of the platform and the states where you make sales. You may need to register with the states where the marketplace facilitator collects and remits sales tax on your behalf or where you have other sales activities that create nexus, such as storing inventory in the facilitator’s warehouses.
If you sell your products or services through another method outside of marketplace facilitators, such as your own website, a physical location or through in-person salespeople, you should determine your sales tax nexus and obligations in the states where you make sales and register, collect and remit sales tax accordingly. Your sales through marketplace facilitators may create an economic nexus that would require you to collect sales tax on sales made outside of the marketplace.
Marketplace facilitators are generally responsible for correctly applying sales tax on sales made by sellers through their platforms. However, sales made outside of marketplace facilitators’ platforms still remain the responsibility of the seller for sales tax purposes, so it is important that you fully understand the arrangement with any third-party marketplace facilitator platform or e-commerce platform to avoid problems with undercollected or uncollected, sales tax.
It’s also important to review your sales tax settings when using nonmarketplace facilitator platforms so that sales tax is not collected in states you did not intend to collect because you do not have nexus in those states.
How Wipfli can help
The state and local tax landscape can be complicated, but our dedicated team of professionals can simplify things and help ensure that your business is in compliance. If you’re unsure about your exposure or want to stay ahead of any changes in local laws, we can help. Our tax advisors can help clarify complex tax situations, offer insights to keep your business running smoothly and help plan long-term strategies that align with your goals. Contact us or learn more about our state and local tax services.
