E-retailers could face sales tax liabilities even in states where they are not physically present. Here’s how new laws might reduce that burden.
By John Hayashi, Managing Director, Tax
With 2020 being the biggest single-year increase on record, online sales continue to grow each year, and not just because of COVID-19. E-commerce has grown by 407% since 2010, reaching a total value of more than $861 billion in 2020. This surge in online sales for goods and services has led many retailers seeking new channels for revenues to launch online businesses.
This growth in online sales has created difficulties for state governments over the years. Until recently, sellers were not obligated to collect sales tax on sales made in states where they had no presence. So, a small, local t-shirt maker based in Kansas City, MO, was not required to collect and remit sales tax if the purchaser lived in another state like Idaho. As e-commerce grew, however, states took note of a corresponding decline in their sales tax revenues. However, they were powerless to force tax on out-of-state orders due to the burdens it would impose on interstate commerce.
That is, until a 2018 U.S. Supreme Court ruling revolutionized the e-commerce landscape for sales taxes. In South Dakota vs. Wayfair, the Court ruled that states and cities could force an out-of-state seller with no in-state presence to collect tax on sales to its residents. The ruling confirmed the constitutionality of a South Dakota law that used sales volume tests ($100,000 of sales or 200 transactions) to determine whether a business had an “economic nexus” with the state. While a win for states, the ruling foisted upon many small businesses the complicated burden of following the sales tax protocols of each and every state where they sell in order to collect and remit the proper amount of sales taxes. With many businesses realistically unable to accept the burden, something had to give. Enter: Marketplace facilitator laws.
What is a marketplace facilitator?
State tax authorities soon realized the magnitude of the burden to collect sales tax being imposed on thousands of small businesses. They began listening to other options from these businesses. The result: All 46 states imposing sales taxes either have marketplace facilitator laws in place currently or will see them go active soon.
A marketplace facilitator is a multi-sided platform like eBay, Amazon, Etsy, or Apple's App store that connects small business sellers with buying customers around the country or globe. Due to their large size, these platforms offer numerous businesses opportunities to list their products, process their payments, and maybe even help with shipping their goods sold. Most importantly from a tax perspective, a qualifying marketplace facilitator must collect and remit the sales tax in place of the business. This frees businesses that partner with marketplace facilitators to focus on their core business instead of spending valuable resources on sales tax collections. It also makes the state's enforcement easier since the number of businesses they may need to audit is reduced. States also receive sales tax revenues promptly on all transactions instead of waiting for smaller companies to reach that state's economic nexus threshold before collecting and remitting sales taxes on their sales.
Leveraging Marketplace Facilitators Can Help Small Businesses Grow
In the wake of the Wayfair decision, many small businesses became wary, if not afraid, of interstate sales and the additional business expense needed to avoid potential tax liabilities. However, now these businesses can develop relationships with marketplace facilitators, which can alleviate the stress of sales and use tax obligations in the following ways:
- No legal responsibility to collect or remit sales tax
- Not needing to track and analyze future sales tax law changes. Doing so could be the responsibility of the marketplace facilitator, which typically has entire teams including outside consultants devoted to the activity. As such, businesses can be confident the right amount of tax is being collected from their buyers.
- No concerns about future audits of sales activity since the marketplace facilitator is the subject of the audit. However, sellers may be required to show an auditor the sales volume processed by the marketplace facilitator(s).
- Only simplified tax returns are often required since businesses using marketplace facilitators to sell in other states may not themselves have taxable sales and therefore may have no tax to remit.
Businesses need to be aware that any direct sales to consumers that do not go through a marketplace facilitator should be subject to collection and remittance of sales tax if they exceed a particular state's economic nexus threshold.
For In-Depth Assistance With Your Marketplace Facilitator Questions, Turn to BPM’s Consumer Business Specialists.
Sales tax law is a deceptively complex issue for any business. All companies that do business online should review the impact that marketplace facilitator legislation in a state could have on their administrative burdens.
The SALT professionals in BPM's Consumer Business Industry Group are standing by to assist businesses with how marketplace facilitators will affect their unique state sales tax obligations. BPM's SALT team has extensive experience assisting e-commerce businesses that operate across multiple states and local jurisdictions to stay in compliance while avoiding penalties and overpayments alike. With the help of BPM's SALT team, you can meet your tax collection requirements in the most efficient manner possible. To learn more about how BPM can assist your e-commerce enterprise, visit our Consumer Business page or contact John Hayashi, Managing Director in our Tax Practice, today.