The sales tax environment continues to evolve, mostly to the detriment on small business online sellers.  Sales taxes are growing increasingly complex and impose great burdens on just about any business that must comply.  The situation is indeed untenable, and a simpler solution is needed.  But in the meantime, here is a discussion on the latest about Marketplace Facilitators and their role in sales taxes for online sellers.

What is an Online Marketplace Facilitator?

First, exactly what is a Marketplace Facilitator?  Marketplace Facilitators have been around for a long time now and allow sellers near and far to list their products, execute an online sale with a buyer, collect receipts, and perhaps assist in marketing, warehousing and shipping. A Marketplace Facilitator contracts mostly with product sellers as third parties to sell on its platform and otherwise assist in online retail sales.  The big ones are household names – Amazon (including Amazon FBA), eBay, Etsy, Overstock, New Egg and many more).  And at least in this article marketplace facilitator laws and regulations concern legislation about their sales tax responsibilities versus that of their clients: small business online sellers.

A recent trend in this area involves the increasing number of states that have legislated new regulations requiring that Marketplace Facilitators take responsibility for the collection and remittance of sales taxes on behalf of third-parties who are selling on their platform.  State regulators like these new laws since they are now collecting from huge numbers of transactions that were recently not taxed at all.  (Actually, most states have Use Tax laws which require buyers to report purchases made from out-of-state sellers, but compliance has historically been very low, and was estimated to cost states from $10 billion to upwards of $30 billion in lost revenues per year).  The new Marketplace Facilitator regulations turn this around. 

There are not many benefits for online sellers since the “new” taxes will result in fewer sales, however one benefit is that compliance will be a little easier.  In any case, not much is simple about the unfolding drama of online sellers and sales taxes.

Why Is Everyone Looking at Marketplace Facilitators for Sales Taxes?

There has been much pressure since the advent of online sales to level the playing field by requiring that all sellers – not just in-state firms with a local sales tax nexus (google it!) – collect taxes on most online sales, then file, and remit these amounts to states.  But this was not required until the South Dakota v. Wayfair, INC opinion in June 2018.  Before this every third-party seller on any Marketplace Facilitator was responsible for collecting and reporting to all in-state transactions, but not sales in states where the seller did not have a nexus.

Before South Dakota v. Wayfair third-party sellers on Amazon and other online marketplaces were not required to collect or report sales tax for out-of-state sales.  And the state then lost the associated revenues. Vendors in that state were also at a disadvantage since their bottom-line pricing often rendered them uncompetitive compared to far-away sellers who did not need to charge sales taxes.

The South Dakota v. Wayfair, INC opinion now means that previous concerns like nexus and physical presence no longer apply, and that the states may now enforce sales tax laws on any seller above a “reasonable” minimum amount of sales or sales transactions.

So, what is a Reasonable Minimum?

Smaller sellers and startups are thrown a bone in South Dakota since the “Reasonable Minimum” is $100,000 per year in revenues OR 200 separate annual transactions. This means that sellers who do not meet either minimum are exempt from collecting and reporting sales tax.  Many other states have come up with similar “Reasonable Minimums” and many more are contemplating the same.

By placing the responsibility of sales tax compliance on the Marketplace Facilitators (who tend to be much larger than most online sellers) these new regulations are resulting in much wider compliance – the states and localities are collecting much more in sales taxes, and at a lesser compliance cost than before. For state and local governments who charge sales taxes, happy days are here again.

What Else Should Online Sellers Know?

For sellers, the increasing number of Marketplace Facilitator regulations means collecting and remitting sales taxes in states where the “Reasonable Minimum” has been met is now the problem of the Marketplace Facilitator – not the third-party online seller.  But expect fewer sales than before since overall prices will be significantly higher to buyers.

What About Sales Tax Permits?

And what about sales tax permits?  Should these be kept current?  This is one of the few questions where the answer is simple: “YES.”  There are several reasons, but the most important is that Marketplace Facilitators are only involved in sales through their platforms – if products are sold in other venues, such as your Shopify e-store, then Marketplace Facilitator’s are not involved.  There are literally tens of thousands of products and localities across the U.S. who impose sales taxes, and each online seller is responsible for all of these compliances, so don’t take a chance by letting these permits expire, even if most sales-tax returns are all zero’s.

The best way for online sellers to comply when looking for consumers nationally is to either hire a battalion of sales tax accounting experts or consider online solutions such as TaxJar or Avalara.

Sales Tax Regs – More Change is Coming

This area of sales taxes is constantly and frequently evolving, so online sellers much constantly be on the alert.  If you are somehow in compliance today, do not be complacent – many more changes are coming!

Help with Quickbooks and Sales Tax?

Does your business need help with sales taxes?  Many accounting systems such as QuickBooks Desktop and QuickBooks Online offer increasing capabilities in these areas.  But like payroll taxes, income taxes, city taxes etc, these program extensions must still be administered by knowledgeable accounting professionals.  We have much experience in all versions of QuickBooks and sales taxes here at QB-LA QuickBooks Los Angeles and would like to talk to you more about this.  Note that spillover effects may also involve income taxes. The time to act is now while we can still recover earlier period liabilities, and minimize compliance costs, penalties and interest.