Taxation of Amazon-Like Marketplaces Tricky for States

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By Tripp Baltz

A Multistate Tax Commission work group examining state marketplace facilitator laws in the wake of the groundbreaking Wayfair decision homed in on a difficult conflict in such laws.

The question facing the work group, which met via teleconference Sept. 26, is whether some requirements in those laws are in conflict or duplicative. In other words, the work group said: If an online marketplace facilitator such as Amazon.com Inc., eBay Inc. or Etsy Inc. is required by a state to register, collect, and remit the sales/use tax on facilitated remote transactions, then is there a need for the marketplace seller to register or report those same sales?

Several other issues relate to this question, and one of the chief concerns is avoiding duplicative taxation, said those who participated the discussion, which included more than 50 representatives of states, online marketplaces, sellers, tax practitioners, and software providers.

The June 21 Wayfair ruling—which tossed out Quill Corp. v. North Dakota, the Supreme Court’s 1992 physical presence threshold for when states could tax remote sales—has many states looking to expand their authority over online sales taxation. The majority in the 5-4 ruling suggested strongly that South Dakota’s law would pass constitutional muster; the law established annual economic nexus triggering thresholds of $100,000 in sales or 200 transactions—remote vendors above those thresholds must collect and remit South Dakota taxes.

The court didn’t rule on the validity of South Dakota’s law in the absence of Quill, but in the aftermath of the decision, dozens of states are passing versions of South Dakota’s law or enforcing existing nexus laws and rules.

State Laws

They are also weighing marketplace facilitator laws that place the sales tax collection and remittance obligations on marketplaces that contract with third-party sellers to promote and facilitate the sale of the third parties’ products. Such laws are currently in effect in Oklahoma, Pennsylvania, and Washington; laws or rules will take effect in Minnesota and New Jersey Oct. 1, in Connecticut on Dec. 1, Alabama on Jan. 1, 2019; South Dakota on March 1, 2019; and Iowa on July 1, 2019, according to the MTC.

Comments submitted to the work group by TaxCloud and Intuit said it was “critical” to coordinate who’s responsible for reporting and remitting taxes on all categories of sales, recognizing that sellers may—and often do—sell on multiple marketplace platforms.

Richard Cram, director of the MTC’s national nexus program, told Bloomberg Tax state marketplace facilitator laws have generally fallen into one of two categories: (1) a requirement the facilitator register and collect on behalf of sellers “without exception,” while giving facilitators the discretion to enter into agreements with sellers for the sellers to register; or, (2) a requirement that facilitators collect and remit, while giving sellers the option to collect and provide proof of registration and remittance to the facilitator.

‘Who Has Control?’

The core of the conflict is “who has control,” Cram said. In the first situation, the facilitator has control over the “collect-and-remit” obligation unless they allow the seller to do it. In the second, the seller can say “no, I want to collect,” Cram said.

Some certified software providers (CSP)—an agent authorized under the Streamlined Sales and Use Tax Agreement to perform all of a sellers’ sales and use tax functions, including collecting and remitting taxes on remote sales—"fear that if it is just left up to the facilitator, and the CSP represents a seller who sells on multiple channels, the CSPs will get locked out,” Cram said. “They’ll lose those sales if the facilitator collects and the seller doesn’t have the option to opt out.”

In comments to the commission, Craig Johnson, executive director of the Streamlined Sales Tax Governing Board Inc., said CSPs are indeed “having some issues” when their clients sell both on marketplaces and on their own website or online store, and “being able to differentiate between those sales.”

Not Just Marketplaces

Marketplaces and states “seems to presume that third-party sellers only sell on marketplaces,” said Scott Peterson, vice president of U.S. tax policy and government relations for Avalara Inc., a tax compliance software provider, in comments submitted to the MTC work group. “Both think all they have done is shift 100% of the tax responsibility from the seller to the marketplace. The opposite is often true. For many sellers the marketplace is just one of many places the third-party seller is making sales.”

In other business, Cram shared with the work group a proposal from the Retail Industry Leaders Association for a draft bill for economic nexus and marketplace tax collection. The work group is scheduled to meet again Oct. 10.

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