Anaya Nolan
Marketplace facilitator laws are a set of regulations that govern the collection and remittance of sales tax by businesses that provide a platform for third-party sellers to connect with customers and facilitate transactions. These laws have emerged as a response to the rise of e-commerce platforms and online marketplaces, such as Amazon, Etsy, and eBay, where a significant portion of sales were going untaxed. The laws aim to shift the burden of tax collection from individual sellers to the marketplace facilitators, simplifying tax compliance for sellers and ensuring that states capture tax revenue from marketplace sales. While the specifics of these laws vary by state and the definition of a marketplace facilitator may differ, the overall goal is to ensure that sales made through these platforms are appropriately taxed.
| Characteristics | Values |
|---|---|
| Who does the tax law apply to? | Marketplace facilitators, marketplace providers, marketplace sellers, and remote sellers. |
| What does a marketplace facilitator do? | Owns, operates, or controls a physical or electronic marketplace and facilitates the sale of a third-party seller's products. |
| What is a remote seller? | A seller that does not have a physical presence in a state but sells products or services for delivery into that state. |
| What is the impact of the tax law on sellers? | Sellers do not have to understand and follow complex sales tax rules in all the states where they do business as the marketplace takes care of this obligation for them. |
| What are the downsides of the tax law for sellers? | Sellers cannot make any manual adjustments to the collection of sales tax on marketplace sales. |
| What are the compliance issues for marketplace providers? | Certain marketplace providers are required to report and remit franchise tax in Texas. Marketplace facilitators registered with California must collect, report, and pay the California Battery Fee or other applicable fees on certain retail sales. |
| What are the registration requirements for marketplace sellers? | Marketplace sellers may be required to register and file returns for sales and use tax purposes in the state. |
| What are the registration requirements for marketplace facilitators? | If a marketplace facilitator has a physical presence in a state, it is generally required to register in that state regardless of the amount of sales. |
| What are the tax laws for vehicle rental brokers? | Vehicle rental brokers are not considered marketplace facilitators and are not responsible for the tax on the rental of passenger vehicles made through their marketplace by another rental company. |
| What is the sales tax rate in California? | The current statewide sales and use tax rate is 7.25%, which includes 1.25% of local taxes (1.00% Local Jurisdiction and 0.25% Local Transportation Fund). |
| How do businesses establish sales tax nexus with a state? | Businesses usually have physical presence nexus with their home states. However, they can also establish nexus through storing inventory in a state, making deliveries in a state, or having employees in the state. |
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What You'll Learn
What is a marketplace facilitator?
Marketplace facilitator laws began to appear when states realized that companies like Amazon were taxing sales of their own products but not charging sales tax on third-party sales. As more than half of Amazon's transactions occur through its marketplace, a significant portion of sales were going untaxed.
A Marketplace Facilitator/Provider is generally a business or person who owns, operates, or controls a physical or electronic marketplace and facilitates the sale of a third-party seller's products. The Marketplace Facilitator/Provider collects the payment from the purchaser and transmits all or part of the payment to the seller.
Marketplace facilitator laws vary by state in their application and definition. For example, in Alabama, marketplace facilitators with sales over $250,000 must collect sales tax on behalf of third-party sellers. In Hawaii, marketplace facilitators without a physical presence in the state must collect Hawaii sales tax when economic nexus is reached ($100,000 or more in gross income or at least 200 transactions).
If you are a marketplace seller, it is important to review a state's laws and other published guidance for specific requirements. A Marketplace Facilitator/Provider may also be a "remote seller", which is a seller that does not have a physical presence in a state but sells products or services for delivery into that state. If the Marketplace Facilitator/Provider has a physical presence in a state, it is generally required to register in that state, regardless of the amount of sales.
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How do sales tax nexus laws work?
Sales tax nexus laws are important for businesses to understand as they outline where they are required to collect and remit sales tax. This allows businesses to accurately calculate the costs of doing business in different jurisdictions and remain compliant with tax laws. Non-compliance can lead to significant financial penalties, reputational damage, or legal action.
A sales tax nexus is generally established when a business's retail activity in a state meets a certain dollar amount and/or number of individual transactions. This is known as an economic nexus. Economic nexus laws set thresholds for sales, transactions, or revenue generated in a state, and if these thresholds are met or exceeded, the business is required to collect and remit sales tax. For example, in California, if your sales of tangible merchandise for delivery in the state exceed $500,000 in the preceding or current calendar year, you have an economic nexus and are required to register. Similarly, in Alabama, marketplace facilitators with $100,000 or more in gross sales of property, products, or services delivered into the state are required to collect and remit local sales taxes on behalf of third-party sellers. Each state has its own unique thresholds and requirements, and these can change frequently, so it is important for businesses to stay up to date.
Prior to 2018, a physical presence in the state was required for sales and use tax nexus. Post-Wayfair, the economic nexus standard, which previously applied to corporate income tax, became the prevailing standard for sales and use tax nexus. A physical nexus is when a business has a physical presence in a state, such as a store, warehouse, office, or employees. However, even if a business does not have a physical presence in a state, it can still have an economic nexus if it exceeds the state's economic nexus threshold.
To help businesses determine whether they have a sales tax nexus in a particular state, tools such as Bloomberg Tax Research offer state-specific analysis and interactive evaluators. Additionally, tech-powered solutions can automate the process of managing sales tax compliance across different jurisdictions.
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Do all states have marketplace facilitator laws?
Marketplace facilitator laws are a result of states' realisation that platforms like Amazon were taxing sales of their own products but not charging sales tax on third-party sales. Since a significant portion of Amazon's transactions are through its marketplace, many sales were going untaxed.
Nearly all states have adopted marketplace facilitator laws that shift the burden of tax collection to the marketplace facilitator. However, these laws vary by state in their application and definition. For example, in California, a marketplace seller located outside of the state that does not sell exclusively through a registered marketplace facilitator is not required to register with CDTFA if they do not have a sufficient physical presence in California or an economic nexus with the state. However, if their sales of tangible merchandise for delivery in California exceed $500,000 in the preceding or current calendar year, they are considered to have an economic nexus with the state and are required to register with CDTFA.
In Alabama, while there is no statewide sales tax, more than 100 local governments levy local sales taxes. These local governments may require marketplace facilitators to collect and remit local sales taxes on behalf of third-party sellers if they meet certain criteria. In Georgia, a marketplace facilitator that makes or facilitates taxable retail sales of $100,000 or more in the previous or current calendar year is considered the retailer for each taxable retail sale it facilitates in the state on behalf of a marketplace seller.
It is important to note that each marketplace is unique, and sellers should work directly with marketplace facilitators to determine the best practice for managing sales tax collection and remittance in a particular state. While this answer provides an overview of some state-specific laws, it is not legal advice, and sellers should consult relevant state resources and legal professionals for specific guidance.
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What are the tax laws for online marketplaces?
The tax laws for online marketplaces, or marketplace facilitator laws, vary across different states and countries. These laws generally apply to online platforms that list goods and services for sale and process payments on behalf of third-party sellers. In the US, marketplace facilitators are required to collect sales tax on behalf of third-party sellers when they reach economic nexus in the state. However, the specific laws and requirements may differ depending on the state.
For example, in California, if you sell or lease tangible personal property, vehicles, or other merchandise in the state, you are generally required to register with the California Department of Tax and Fee Administration (CDTFA) and pay sales tax on your taxable sales. On the other hand, Arizona requires businesses that operate an online marketplace and make sales on behalf of third-party merchants to collect and remit transaction privilege tax on all sales made through the marketplace if their gross retail proceeds exceed $100,000 annually.
In South Carolina, an online marketplace is defined as the retailer of all tangible personal property sold on its website and is required to obtain a retail license and remit sales and use tax on all taxable products sold in the state, regardless of ownership. Similarly, Alaska has local governments that levy local sales taxes, and some of these require marketplace facilitators to collect and remit sales taxes on behalf of third-party sellers if they meet certain thresholds.
It is important to note that these laws are constantly evolving, and online marketplaces should consult with legal and tax professionals to ensure compliance with the specific requirements of each jurisdiction in which they operate.
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How do marketplace facilitator laws impact sellers?
Marketplace facilitator laws impact sellers in several ways. These laws shift the burden of tax collection from the seller to the marketplace facilitator, which can be beneficial for sellers as they no longer have to collect and remit sales tax on sales facilitated through the marketplace. This can also encourage sellers to use the platform rather than selling directly to consumers.
However, sellers may still need to collect, remit, and file sales tax in the state on their own for transactions made outside of the marketplace facilitator's platform. In most states, if a seller does not make any sales outside of those with the facilitator, they are required to file a simple "zero return" or register for non-reporting sales tax status. Additionally, sellers may face challenges due to potential double taxation if marketplace sales tax collection results in discrepancies.
It is important to note that marketplace facilitator laws vary by state in their application and definition, and states constantly update and amend their sales and use tax laws. Therefore, sellers should consult with a qualified legal, tax, or accounting professional for specific guidance.
Furthermore, each marketplace is unique, and sellers should work directly with marketplace facilitators to determine the best practices for managing sales tax collection and remittance in a particular state. For example, in some states, marketplace facilitators with a physical presence or a certain amount of sales in the state are required to register and collect sales tax on behalf of third-party sellers. In other cases, the facilitator may be considered a remote seller, which can impact the tax obligations of both the facilitator and the seller.
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Frequently asked questions
A marketplace facilitator is a business or person who owns, operates, or controls a physical or electronic marketplace and facilitates the sale of a third-party seller's products.
Marketplace facilitator laws require the facilitator to collect and remit sales tax on sales made on behalf of third-party sellers. These laws vary from state to state, and while most states have adopted them, they apply only to states with a general sales tax.
If your business has a physical presence in a state, you are generally required to register as a marketplace facilitator in that state. If your business does not have a physical presence in a state but sells products or services for delivery into that state, you may still need to register as a "remote seller".
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