States Refresh, Reload on Marketplace Provider Taxes

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By Jennifer McLoughlin

Amazon, Overstock, eBay, Etsy and other online marketplace providers may not be on the hook for tax collection on third-party transactions this year.

States’ collective effort to capture lost revenue in the digital marketplace has brought forth a medley of methods to sidestep the U.S. Supreme Court’s restraint on states’ taxing authority over out-of-state sellers from Quill Corp. v. North Dakota, 504 U.S. 298 (1992). The often-maligned 25-year-old case prohibits states from imposing sales and use tax collection obligations on vendors without a physical presence in-state.

While the approaches vary—affiliate, click-through, economic nexus and notice/reporting—states historically have targeted the vendors for sales tax collection.

A growing number of states have started taking aim at marketplace providers. Just this year, at least five states have proposed measures to impose collection obligations on those companies offering online platforms on which third-party remote retailers can peddle their wares. One bill has already died, but other proposals are still winding through their statehouses.

No state has enacted a law holding marketplace providers liable for tax on in-state sales facilitated through their platforms, but many expect that this approach will have mass appeal for states in due time.

“Given the relatively recent proliferation of online marketplaces, state legislatures are still grappling with how to deal with the sales tax implications of this economic model,” Jamie C. Yesnowitz, a Washington-based principal with Grant Thornton LLP’s State and Local Tax practice, told Bloomberg BNA by e-mail. “It will take some time for critical mass to build around adopting legislation in this area, as it has taken several years for the states to address click-through nexus, affiliate nexus and notice and reporting regime concepts.”

Mulling Over Marketplaces

Lawmakers have mulled marketplace provider bills during the 2017 legislative session in a handful of states, including:

  •  Minnesota,
  •  New York,
  •  Rhode Island,
  •  Texas, and
  •  Washington.

The New York measure recently died, as did a prior effort. After consideration by both chambers—and receiving support from the Assembly, but not the Senate—Gov. Andrew M. Cuomo’s (D) proposal didn’t make it into the state’s 343-page omnibus budget bill ( A. 3009-C).

During an April event co-hosted by Bloomberg BNA and Reed Smith LLP, NetChoice Executive Director Steve DelBianco characterized the New York effort as “Batman Returns,” with Cuomo attempting to jam through the bill.

“But the Justice League prevailed,” he said.

“I think it’s very difficult to draw conclusions on what specifically killed the New York marketplace provision this time around,” Yesnowitz said. “What gets in and out of a New York budget bill historically is the function of a very private negotiation between the Senate majority leader, House majority leader and the Governor.”

He added that dynamics underlying this year’s negotiation was particularly challenging, and there is nothing preventing future consideration of a marketplace sales tax bill.

Another Swipe

Other bills are still in the hopper, but their chances of success vary.

Minnesota has introduced legislation after a similar proposal collapsed last year. Bills compelling collection from marketplace providers, with select exemptions, are contained in Senate and House versions of omnibus tax legislation. The House version, House File 4, passed the chamber March 30. The Senate version, Senate File 2255, passed April 3.

House and Senate leaders met April 19 during a tax conference committee session aimed at hashing out differences between the two bills. No final resolution was achieved, but additional conference committee meetings are expected before the legislative session adjourns in late May.

The bills expand a “retailer maintaining a place of business in the state” to include, among many business functions, retailers with a marketplace provider or other third party operating in the state under the retailer’s authority to facilitate or process sales. For those retailers with in-state taxable retail sales less than $10,000 annually, the bill creates an exemption if they maintain a place of business solely though sales on marketplace platforms.

“Marketplace providers” are defined as persons who facilitate a retail sale by a retailer—listing or advertising for sale any tangible personal property, services or digital goods in any forum, and collecting payment from the customer and transmitting it to the retailer directly or indirectly. Marketplace providers are required to collect and remit taxes to the commissioner for all facilitated sales unless they fall under an exemption.

Mark Haveman, executive director of the Minnesota Center for Fiscal Excellence, said similar language was folded into an omnibus tax bill that passed the legislature last year. Gov. Mark Dayton (DFL), however, vetoed the omnibus package.

Haveman gave the remote seller language a good chance of surviving the conference committee process and noted the measure would collect approximately $10 million annually for the state. But he said tax policy disagreements between the Republican-controlled Legislature and the governor raise questions about the viability of the broader tax legislation.

“We have a lot of work to do on the omnibus tax bill,” Haveman told Bloomberg BNA. “The governor and the legislative bodies are very far apart on a whole lot of things. I suspect the governor is supportive, but it’s also packaged in an omnibus bill that has about four or five times more tax relief than he wants to give. Plus he wants to give relief in completely different directions.”

Mixing Marketplaces, Reporting

Texas has also jumped on the bandwagon, with S.B. 1713 and H.B. 3875 filed in early March. H.B. 3875 sits in the House Ways and Means Committee, while S.B. 1713 is undergoing some changes.

Both bills provide that a “marketplace provider” includes a person who facilitates an in-state sale, lease or rental of tangible personal property for a third-party retailer; collects and transmits receipts to the retailer; and is engaged in business in Texas under state law. Absent an exemption, marketplace providers are responsible for sales tax collection on the transactions.

A marketplace provider “is not required to collect a use tax imposed under this subchapter that is due from a purchaser if the retailer for whom the marketplace provider facilitates the sale, lease, or rental collects the tax from the purchaser.” The bills further build in a presumption that a retailer registered with the Texas Comptroller collects the use tax.

As originally introduced, S.B. 1713 also established an “economic nexus” standard, under which remote retailers are responsible for tax collection if they have annual total receipts exceeding $1 million from taxable items delivered in-state or at least 2,000 sales of taxable items delivered in-state. However, after an April 10 hearing before the Senate Finance Committee, lawmakers are tweaking the bill to include a Colorado-style reporting regime.

“We are currently making tweaks to the bill based on feedback we received from other committee members,” Michael Ruggieri, legislative director for S.B. 1713 author Sen. Carlos Uresti (D), told Bloomberg BNA by e-mail. “The second committee substitute for S.B. 1713 will include a marketplace nexus standard and replace the economic nexus with the constitutionally-tested Colorado model, in which large out-of-state retailers must notify purchasers and the Comptroller of due use tax.”

Ruggieri said the modified S.B. 1713 “will be ready” for the next committee hearing, which could occur in the next week. And he expressed optimism the Senate will pass the bill.

Reign of Reporting?

In the immediate wake of the U.S. Supreme Court turning down an appeal challenging Colorado’s 2010 notice and reporting regime, some expect that states will trend toward notice and reporting regimes more than marketplace provider bills Direct Mktg. Ass’n v. Brohl , 2016 BL 411370, 137 S. Ct. 591, 196 L. Ed. 2d 473, U.S., No. 16-267., petition for review denied 12/12/16 .

At least 10 state legislatures have proposed notice and reporting regimes in 2017—some only require consumer notification, while others incorporate state reports. Former Alabama Gov. Robert Bentley (R) on March 22 signed into law S.B. 86, enacted as Act No. 2017-82, which authorizes the state’s Department of Revenue to require out-of-state sellers to report their sales to the department and notify Alabama customers of their tax obligations.

DelBianco said reporting regimes are the bigger threat, rather than marketplace sales legislation, in part because the concerns over consumer privacy and administrative burdens ultimately compel retailers to collect.

Opponents of the Colorado law have introduced S.B. 238, attempting to repeal what they term the “tattle-tale” reporting provisions of the law. The bill, which passed the Senate April 17, leaves in place the requirement that affected retailers provide notice to consumers about their obligation to pay taxes on products purchased via electronic commerce.

‘Multi-Prong Approach’

Still, states will push bills to capture tax from sales on marketplace platforms.

During the Bloomberg BNA/Reed Smith event, Julie P. Magee, Alabama commissioner of revenue, said that “from a state point of view, that reporting aspect, as well as any other aspect to reach the affiliates or the marketplace environment is definitely a priority. And we are definitely moving forward to explore any opportunity we can to reach them.”

Craig Johnson, executive director of the Streamlined Sales Tax Governing Board Inc., said during the same event that he expects states will start adopting more “multi-prong” measures that combine several approaches, such as marketplace provider, notice and reporting, and streamlined provisions. Business communities could then offer their preference for which approach lawmakers adopt.

For example, Rhode Island’s H.B. 5175 combines several sales tax collection approaches.

And Washington is attempting again to require sales tax collection from marketplace providers through various bills ( H.B. 2186, S.B. 5855, S.B. 5856) that also include other various collection and reporting requirements. With the Senate in Republican hands and the House and governor’s mansion held by the Democrats, the final budget and revenue package will be the product of negotiations between the parties, probably achieved in a special session.

Moving Forward

Many foresee a future where states increasingly consider, and adopt, marketplace sales tax legislation. And it may be driven by forces outside states’ immediate control.

“Click-through nexus laws got a boost throughout the United States not only through the New York Court of Appeals’ decision in Amazon, but through Amazon’s decision to enter into deals with many states under which they would agree to comply with the sales tax collection and remittance requirements in exchange for negotiated incentives,” Yesnowitz said. History might repeat itself “in some form or fashion if online marketplace sales tax legislation does get traction (which might occur through a state supreme court supporting the notion that such a law is constitutional).” Inc. now collects sales and use taxes in every state that imposes them at the state level, reaching a series of agreements this year.

Yesnowitz added that state tax authorities may “consider whether they could develop regulations or other guidance that apply existing sales and use tax laws to require businesses that run online marketplaces to be responsible for collection and remittance of sales tax.”

Fred Nicely, senior tax counsel for the Council On State Taxation, said during the Bloomberg BNA/Reed Smith event that states should target marketplace platforms through prospective legislative measures, not administrative rulemaking, because regulations often present issues with retroactive application.

With assistance from Michael J. Bologna in Chicago and Paul Stinson in Austin, Texas

To contact the reporter on this story: Jennifer McLoughlin in Washington at

To contact the editor responsible for this story: Ryan C. Tuck at

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