Barkin Doganay · October 9, 2023 · 5 min read
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.
As of 2023, these platforms are responsible for collecting and remitting sales tax in over 47 states, including the District of Columbia and even at the local level in Alaska, where the remote seller sales tax code was introduced back in 2019.
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.
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.
Online sales in the U.S. reached $870 billion in 2021, representing 13% of total retail sales.
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.
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?
The penalty for underreporting or failing to file can be steep. In California, tax penalties can be as high as 25% of unpaid tax.
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.
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:
Complying with nexus thresholds can result in substantial fines or penalties, so it's crucial to understand how these rules apply to your business.
The MTC whitepaper offers valuable insights into how states define and regulate marketplace facilitators. Here are some key takeaways:
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.
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.
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.
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.
Every state has its version of marketplace facilitator laws, making it crucial for sellers to understand the regulations where they operate. As of 2023:
For sellers operating in multiple states, this patchwork of laws requires careful navigation to ensure compliance.
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.
Did You Know? In New England, retailers often locate just outside high-tax areas like Vermont to benefit from New Hampshire’s zero sales tax.
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.
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.
Barkin Doganay · September 1, 2023 · 5 minutes
Barkin Doganay · September 8, 2023 · 4 minutes
Pujun Bhatnagar · September 11, 2023 · 5 minutes