Turning marketplace facilitators into tax collectors
While most states have been busy retooling their sales tax on remote sellers to conform to the standards set forth by the Supreme Court in its Wayfair decision, the current activity is centered in the marketplace facilitator arena, with more than 20 states currently looking at ways to hold marketplace facilitators responsible for collecting and remitting sales tax on behalf of marketplace sellers. And 10 states have already adopted legislation requiring sales tax collection by marketplace facilitators.
“Marketplace legislation is gaining steam quickly and becoming a major trend among the states,” said Scott Peterson, vice president of U.S. tax policy and government relations with Avalara and former executive director of the Streamlined Sales Tax Governing Board. “It’s one of the four major sales tax issues being discussed in state legislatures, the others being Wayfair, feminine hygiene, and lodging.”
Putting the burden on marketplace facilitators eliminates the burden on smaller sellers, and ensures that the state can look to one party for compliance with their sales tax.
“It eliminates the burden on small retailers and on the states themselves,” Peterson explained. “They would much rather get one return that includes information from 5,000 or 10,000 retailers than a separate return from each one. Moreover, it gives states the ability to get tax from the small retailers when they can’t do it under Wayfair.”
The lowest threshold for states to require remote sellers to collect and remit sales tax, at $100,000, leaves many retailers exempt from the requirement. But the marketplace facilitator collects from every seller on the marketplace, no matter how small the amount of sales or number of transactions, Peterson explained.
“If a seller makes $25,000 in sales over a marketplace, the state can make the marketplace collect sales tax and get tax paid on every sale on the marketplace, regardless of how small the seller,” he said.
All of the marketplace bills are virtually identical regarding seller responsibility, according to Peterson. “They all say that to the extent the marketplace collects, sellers are relieved of any liability.”
However, the exact requirements for marketplace facilitators and their third-party sellers differ from state to state, according to Avalara author Gail Cole.
“For example, some states require marketplace sellers to report their marketplace sales and take a deduction for them if the facilitator is responsible for collecting sales tax; others don’t,” she said. “However, all states require sellers to register with the tax department and collect and remit tax on sales made through other channels, such as their own e-commerce store or a non-collecting marketplace.”
The number of states looking to hold marketplace facilitators responsible for collecting and remitting sales tax on behalf of all marketplace sellers is steadily increasing, according to Cole. “More than 20 states currently have marketplace facilitator measures under consideration, including the four most populous states in the country — California, Florida, New York and Texas,” she said. And by the end of 2019, it is projected that 35 states will have such legislation on the books.
Help is available
The Streamlined Sales and Use Tax Agreement, or simply Streamlined Sales Tax, is an effort by state and local governments to simplify sales tax compliance for SST-registered businesses, Peterson noted.
The agreement, which was cited by the Supreme Court in its Wayfair decision, provides liability relief and accuracy relief. SST aims to make multi-state compliance easier and more affordable by covering the cost of automated sales tax solutions for qualified businesses, including sales tax calculations, return preparation, and filing, in part through Certified Service Providers.
CSPs are agents certified to perform all of a seller’s sales and use tax functions, other than the seller’s obligation to remit tax on its own purchases. A CSP is designed to allow a business to outsource most of its sales tax obligations, according to the SST. There are six providers certified by the SST Governing Board: Accurate Tax, Avalara, Exactor, Sovos, TaxCloud and Taxify.
Some states are considering not joining the SST, but simply using the CSP model to help them collect sales tax more efficiently. Pennsylvania, Utah, Missouri and Connecticut are among those.
“We expect other states to look closely at this solution as well, as they grapple with how best to align with the Wayfair decision,” said David Campbell, chief executive of TaxCloud.
“Since the Wayfair decision last year, we have been talking to many of the states that haven’t signed on to the Streamlined agreement about using the CSP model,” he said. “As legislation is pending in statehouses across the country, CSPs are being looked into as an efficient way to collect online sales tax. Not only is it cheaper and easier for online retailers, but states gain by having the handful of CSPs as points of contact for audit, remittance, calculation, etc. By using a CSP, states don’t have to chase the tens of thousands of online retailers around the country, and also won’t have thousands of inbound queries from retailers with compliance or remittance issues.”
The impact of Wayfair has led to issues in acquisitions, where a common warranty is, “We are current and materially accurate in our taxes,” said Ryan Gamble, managing director at consulting firm Riveron. “Conversations we are having regard the implications in the income tax area. Economic nexus has been part of income tax for years, with similar standards to sales tax nexus. Does Wayfair signal that, given that it has overturned a law from 1992 when there was no real e-commerce, can the same reasons be given for P.L. 86-272 [a 1959 law that provides protection from state income tax on the sale of tangible personal property when a company has only one salesperson in a state]? It’s not a stretch to say that the same rationale would apply based on the change in the economy. From a planning standpoint, companies could try to avail themselves of that protection more aggressively now that they’re losing on Wayfair. And how aggressively will the states push back?”
Then there are companies that don’t deal in personal property, Gamble observed: “Will they be working to have Congress have a similar approach by eliminating the protection afforded by P.L. 86-272 and make a level playing field for everyone? That’s what we’re seeing in the marketplace currently.”
“Both state income tax and sales tax have economic nexus. They used to be very separate but today they’re tied together,” agreed Michael Nunez, tax director for state and local services at CPA firm Hall & Co. “For most small internet sellers, we recommend they first track their sales by state, and then layer over that and see in which states they cross the threshold. Not all states use the same threshold as South Dakota, that the Supreme Court approved. The practitioner should sit down with the client and discuss their options. If they are substantially over a particular threshold, the decision would be to become compliant — register and collect on a prospective basis. Or they may be below the threshold, so they should start tracking their sales in that state on a year-to-date basis and be on the alert for when they approach the state’s threshold.”