Marketplace Facilitators: Insights from 2023

Evolving Sales Tax Regulations

Ever wonder how the rapid evolution of e-commerce is reshaping your duties as a seller? If you've been relying on platforms like Amazon and other marketplace facilitators, you might be in for some surprises this year.

In today’s fast-paced e-commerce environment, staying on top of regulatory adjustments—particularly those related to e-commerce and sales taxes—isn't just good business practice; it’s crucial for survival. Sellers using marketplace facilitators like Amazon, eBay, or Walmart must now navigate significant retail sales tax compliance changes.

If you're selling in Missouri, brace yourself: the state rolled out marketplace nexus policies starting in January 2023.

A 2023 whitepaper from the Multistate Tax Commission (MTC) offers crucial insights into these changes, guiding state legislators and tax agencies on adopting similar laws. Understanding these updates is essential for sellers to avoid compliance pitfalls and potential audits.

What Sellers Need to Know About Marketplace Facilitator Laws?

The Reasoning Behind Marketplace Facilitator Sales Tax Laws

Marketplace facilitator laws were introduced to streamline the collection and remittance of sales tax. These laws make sure that large online platforms like Amazon and eBay handle sales tax collection on behalf of sellers using their platforms.

This move simplifies the tax process for states, reduces the risk of tax evasion, and eases the burden on individual sellers.

Texas began enforcing marketplace facilitator laws in 2019, and Florida followed suit in July 2021. These laws ensure sales tax is collected on internet-based transactions, responding to the booming growth of e-commerce.

When Does a Marketplace Seller Face Audits for Marketplace Sales?

Selling through online marketplaces is a double-edged sword: on the one hand, it opens vast markets and opportunities; on the other, it exposes sellers to compliance risks, including potential audits. So, when might a marketplace seller face an audit for their sales?

• Sales Volume Thresholds: Many states have specific sales volume thresholds. For example, in California, sellers must collect sales tax if they make $500,000 or more in sales to residents. If your sales exceed these thresholds, tax authorities may audit your records to ensure compliance.
• Inconsistent Reporting: Discrepancies between reported and actual sales, errors in tax collection and remittance, or incorrect taxable vs. non-taxable sales classification can raise red flags. States like New York and Texas are known for aggressive sales tax enforcement and audits.
• Failure to Register: If you fail to register for tax collection when required, you risk an audit. The South Dakota v. Wayfair, Inc. decision now mandates that sellers with no physical presence in a state still have to collect and remit sales tax if they meet economic nexus thresholds.

Understanding Marketplace Seller Economic Nexus Thresholds

Selling on online platforms like Amazon or eBay may seem to simplify tax compliance, but the reality is far more complex. Understanding economic nexus thresholds is critical to avoiding costly mistakes.

What Are Economic Nexus Thresholds?

Economic nexus thresholds determine when a seller must collect and remit sales tax in a specific state. These thresholds are typically based on the number of sales or transactions within that state. For example:

• Colorado requires sellers to collect sales tax if they have $100,000 or more in sales in the state.
• North Dakota has a $100,000 sales threshold or 200 transactions, whichever comes first.

Complying with nexus thresholds can result in substantial fines or penalties, so it's crucial to understand how these rules apply to your business.

Insights from the MTC Whitepaper on Marketplace Facilitators

The MTC whitepaper offers valuable insights into how states define and regulate marketplace facilitators. Here are some key takeaways:

Defining a Marketplace Facilitator

Platforms like Amazon, eBay, and Walmart are considered marketplace facilitators, but the definition is expanding. For example, in Massachusetts, companies involved in activities like payment processing or digital advertising might be defined as marketplace facilitators, and they may need to collect sales tax on behalf of their customers.

Who Is the Retailer?

Traditionally, the seller was considered the retailer, but marketplace facilitators are increasingly stepping into that role. This shift has significant implications for tax liability, especially for sellers who may no longer meet nexus thresholds on their own.

According to the Tax Policy Center, states collected over $3 billion in additional sales tax revenue in 2022, primarily due to marketplace facilitator laws.

Certification Requirements

Marketplace facilitators are often required to provide documentation during audits. California requires facilitators to retain records of all sales made through their platform for at least three years, which can assist sellers in case of an audit.

Information Sharing

States are increasingly sharing information. For example, Florida and Georgia have agreements to exchange information regarding online sales to ensure compliance, raising concerns about how sellers may be affected by shared data. Staying informed about these processes is critical to protecting your business.

Marketplace Facilitator Laws by State

Every state has its version of marketplace facilitator laws, making it crucial for sellers to understand the regulations where they operate. As of 2023:

• 47 states and the District of Columbia have marketplace facilitator laws in place.
• Missouri is introducing marketplace nexus laws starting January 2023.
• Alaska has local marketplace facilitator laws, with municipalities enacting their own sales tax regulations.

For sellers operating in multiple states, this patchwork of laws requires careful navigation to ensure compliance.

The Role of Competition in Setting Sales Tax Rates

Sales tax avoidance tends to occur in areas with significant differences between tax jurisdictions. Research shows that consumers often leave high-tax areas to make major purchases in nearby regions with lower tax rates.

For example, evidence suggests that consumers in the Chicago area make large purchases in surrounding suburbs or online to avoid Chicago’s 10.25% sales tax rate.

At the statewide level, businesses sometimes choose to locate just outside the borders of high-tax areas to avoid being subject to their rates. One stark example occurs in New England, where despite the I-91 highway running up the Vermont side of the Connecticut River, many retail establishments choose to locate on the New Hampshire side, where there is no sales tax.

A study shows that per capita sales in tax-free New Hampshire border counties have tripled since the 1950s, while per capita sales in border counties in Vermont have remained stagnant.

Marketplace Sellers

The trend in sales tax regulations increasingly favors marketplace sellers, particularly regarding tax collection and remittance responsibilities. However, this doesn’t mean you can neglect your compliance duties.

If your business has established a physical or economic nexus in multiple states through sales on online marketplaces, you may still be liable for sales tax. A thorough sales tax nexus analysis is essential to identify where and when your obligations begin, making compliance easier.

As taxable sales and retail sales volumes grow, the compliance burden increases for those selling via independent platforms like personal websites or Shopify. Maintaining accurate sales tracking and records is crucial for avoiding penalties.

By staying informed and leveraging tools like Kintsugi’s automated sales tax compliance platform, you can streamline your processes, ensure compliance, and keep your focus where it belongs—on growing your business.