In 2020, consumers worldwide spent $2.67 trillion on the top 100 online marketplaces, accounting for 62% of global web sales during the year. With the growing trend of sales happening online and within marketplaces, it’s important to understand how sales tax laws and compliance obligations affect marketplaces and marketplace sellers.
As a result of the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc., most states with a general sales tax now require certain out-of-state retailers and marketplace facilitators to collect and remit sales tax. The particulars of each state’s requirements can be especially challenging for small businesses with few resources to devote to sales and use tax compliance.
For small businesses selling on online marketplaces like Amazon or eBay, understanding a new breed of sales tax regulations that focus on marketplace sales — marketplace facilitator laws — is critical. Marketplace facilitator laws impose an obligation on marketplaces to collect and remit sales tax on behalf of marketplace sellers.
Because marketplace facilitators are required to collect and remit tax on all sales made through the platform, these laws enable states to capture tax revenue from remote marketplace vendors selling beneath the economic nexus threshold. Here are a few things small businesses need to know about marketplace facilitator laws.
Where Marketplace Facilitator Laws Apply
Knowing whether or not you sell on an ecommerce platform or through a marketplace facilitator can be a crucial distinction for small businesses. This is especially true when it comes to sales tax, and the obligations that follow suit.
There are four key conditions a marketplace must meet to qualify as marketplace facilitator:
- The platform lists or advertises goods for sale by marketplace sellers.
- It enables payments between sellers and customers.
- Customers pay the marketplace directly, who then pays the marketplace seller.
- The marketplace is compensated for providing this service.
Most marketplace transactions are subject to sales tax in most states, and marketplace facilitators are generally liable for collecting and remitting the tax due. Increasingly, marketplaces are also being held responsible for other taxes and fees like occupancy fees.
Understanding Economic Nexus Requirements
While marketplace facilitator laws create obligations for marketplaces, they also create sales tax complexity for marketplace sellers as their marketplace sales can contribute to their economic nexus requirements in certain states.
Economic nexus laws require businesses to register to collect sales tax in jurisdictions when an annual sales revenue and/or transaction quantity reaches a certain threshold set by the state. These laws currently exist in 45 states, the District of Columbia, and parts of Alaska.
The onus to register after establishing nexus always falls on businesses so compliance should be top of mind for small businesses. In most cases, businesses must charge sales tax for all goods they sell, even on an online marketplace. The good news is that, in cases where your marketplace is counted as a marketplace facilitator, the marketplace collects and remits sales tax for you.
But remember that while marketplace facilitator laws only require the marketplace to collect and remit sales tax for you, it’s still your businesses’ responsibility to file sales tax returns on time based on your filing schedule. There may also be additional obligations for your business, so be sure to check with your specific marketplace.
Using Technology to Improve Compliance
While marketplace sales continue to grow, that means rules and regulations for small businesses will also grow in tandem. Staying on top of compliance obligations with manual processes is constraining for an emerging company — especially when marketplace facilitator laws differ within each jurisdiction you sell to and also are subject to change at any time. Emerging small businesses spend hundreds of hours and thousands of dollars each month on sales and use tax compliance.
Because each marketplace and jurisdiction is unique, using automated compliance solutions can help businesses avoid fines and penalties associated with noncompliance. These solutions will monitor for tax changes across marketplaces, make real-time updates, and ensure you’re getting the calculation right on every transaction — leading to a better experience for your customers and removing the compliance headache from your business.
As you increase your sales through a marketplace, collecting and remitting sales tax, and handling other compliance obligations should not limit your company’s growth potential. By leveraging technology to automate the compliance process related to marketplace facilitator laws, small businesses can continue to expand selling potential, save money and time, and empower better customer experiences.
George Trantas is the Senior Director of Global Marketplaces, Avalara.