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States have increasingly been setting their sights on varying ways to collect sales tax from online retailers. In this article, Aronson LLC’s Michael Colavito discusses their latest target: marketplace providers.
by Michael Colavito
Michael Colavito is a senior manager at Aronson LLC.
New state laws targeting online marketplace providers, such as Amazon, are changing the sales tax collection obligations of such providers as well as those of the third-party retailers whose products are sold on marketplace providers’ platforms. These laws will likely continue to be relevant regardless of the outcome of the potential landmark decision to be issued by the U.S. Supreme Court in South Dakota v. Wayfairwithin a couple of months. States have been chipping away at the physical presence nexus standard reaffirmed over 20 years ago in Quill Corp. v. North Dakota with various types of legislation aimed at expanding what constitutes a “physical presence.” The potential overturning of Quill will render many of those provisions somewhat irrelevant, assuming the states enact legislation requiring sales tax collection by remote sellers that is consistent with the nexus standard that may be established in Wayfair.
However, the most recent attack by states to expand the scope of sales upon which they can require the collection of sales tax comes from a slightly different angle. Over the last two years, marketplace providers have been the target. Although the goal of increasing sales tax collection on Internet sales is the same, the method used to mandate the collection of the tax is slightly different. Instead of attempting to pinpoint some act by the retailer that may create a physical presence, a typical marketplace provider provision assigns the sales tax collection obligation on the facilitator of the sales.
Granted, the state provisions do vary in the requirements put upon marketplace providers. For example, Rhode Island’s legislation does not require a marketplace provider (i.e. “retail sale facilitator”) to actually collect the tax on a third-party retailer’s sales. However, the state’s law, which went into effect on Jan. 15, obligates the provider to disclose to Rhode Island a list of names and addresses of the retailers for whom the facilitator did not collect Rhode Island sales tax on in-state sales. Amazon released this information to Rhode Island earlier this year.
Amazon has been providing a platform for marketplace sellers to reach customers throughout the world for a number of years, but big-box retailers such as Target and Walmart are now providing the same services to third-party retailers. In providing this service, companies are engaged in two different roles with respect to sales that occur on their websites. When selling their own products, they are clearly the retailer and have the obligation to collect the applicable state’s sales tax if they have a physical presence in that state. However, when providing an online platform, or “marketplace,” for the sale of a third-party’s products, companies like Amazon appear to have generally considered themselves not a retailer with respect to those sales.
For example, Amazon has developed procedures to facilitate third-party retailers’ sales tax collection obligations. If a third-party retailer decides to have its products sold on Amazon, it can elect to handle all of its sales tax collection obligations itself or have Amazon calculate and collect the tax on the third-party retailer’s behalf. In the second scenario, the third-party retailer is responsible for informing Amazon in which states it has a sales tax collection obligation. Amazon will then collect sales tax on sales of the third-party retailer’s products sold through Amazon’s online marketplace to customers located in those particular states. However, Amazon will then provide the collected tax to the retailer, and the retailer has the obligation to remit the tax to the respective state. The Rhode Island marketplace provider law referenced above seems to be consistent with that characterization, as the provision does not place a sales tax collection obligation on the marketplace provider.
However, a handful of states have gone beyond just placing an information reporting obligation on the marketplace provider and are deeming the marketplace provider as the retailer of goods sold on the marketplace. With many big-box retailers now offering an online marketplace for third-parties, states can bypass the physical presence hurdle that makes other types of remote seller legislation, for now, constitutionally questionable. Retailers like Target and Walmart already have a physical presence in most, if not all, states. Even if Quill is overturned, the U.S. Supreme Court will likely still require some threshold of economic presence by remote sellers before a collection obligation is required. For example, if a state’s remote seller legislation requires greater than $250,000 of in-state sales to trigger a collection obligation, many online retailers can still avoid having “substantial nexus.” In contrast, a big-box retailer is already required to collect a state’s sales tax due to its physical presence in the state. Certain marketplace provider laws are placing an additional collection obligation on the sales a big-box retailer facilitates for third parties. This additional collection obligation is not dependent on the in-state dollar amount of sales of any particular third-party retailer.
States that have taken this approach include Arizona, Minnesota, Pennsylvania, and Washington. Arizona, by administrative ruling, requires marketplace providers to collect sales tax on third-party sales when on such sales the marketplace provider is the primary point of contact for customer service, processes payments, and controls the fulfillment process. Minnesota’s law ( H.F. 1) also places a collection obligation on the part of the marketplace provider in instances when the third-party retailer has not registered to collect Minnesota sales tax. Both Pennsylvania and Washington require marketplace facilitators with aggregate sales of $10,000 or more in the prior calendar year to make an election to either collect and remit sales tax on third-party sales or comply with notice and reporting requirements.
The obvious impact of these rules will be to increase sales tax collection by larger retailers that now offer a marketplace for third-party sellers. States will benefit from increased revenue in this regard, as most consumers are not remitting use tax on such purchases. Such retailers likely already have sales tax software that will enable them to easily comply with the new rules.
However, smaller businesses that offer a marketplace for specialized goods and services are also impacted by new marketplace provider sales tax collection laws. This is especially the case when factoring in the broadening of the tax base in many states to include more services. Thus, many businesses that likely have not even considered sales tax collection as a potential issue for their business will now need to face unexpected compliance requirements. For example, a company that offers an online marketplace for caterers may need to collect sales tax on the catering fees of its customers for catering services that occur in the state where the marketplace provider is based. This will be the case if the marketplace provider is located in a state that taxes catering services and has enacted a marketplace provider collection obligation provision.
Online marketplace providers need to be proactive to determine if they are impacted by a marketplace provider collection law. These potential collection obligations will have to be integrated into their sales tax collection policy as a whole. Marketplace providers may offer as part of their service the collection of sales tax on behalf of their customer based on the customer’s collection obligation. However, as discussed above with respect to Amazon, offering this service likely includes the collection of the tax and the mere handing over of the funds to the retailer. The retailer in turn then files its sales tax return and makes payment of the tax to the state. Thus, a marketplace provider must be able to manage such collection on behalf of its customers with its legal obligation to collect and remit sales tax on sales that are subject to a marketplace provider collection provision.
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