By: Jamie Baker, CPA
Key Takeaways:
- Marketplace facilitators like Amazon and Etsy are now legally required to collect and remit sales tax on behalf of sellers in most states, following the Supreme Court’s 2018 “Wayfair Ruling,” which expanded states’ ability to tax out-of-state sales.
- State-specific laws impose tax collection duties on these platforms once their sales or transactions surpass certain thresholds, with the option for sellers who are already tax-registered to manage their tax obligations independently.
- By the end of 2023, every state that has imposed a sales tax, has adopted such laws to align tax policies with the booming e-commerce sector, although concerns about uniformity and the broader implications on interstate commerce and income taxes remain unresolved.
Tax Obligations Shift from Sellers to Marketplace Facilitators Like Amazon
In the world of online selling, marketplace facilitators are shopping platforms where individuals and businesses can sell their products. Think of Amazon, Etsy and even Walmart. Increasingly, marketplace facilitators are being impacted by state laws governing the taxation of digital sales to purchasers within their borders.
Marketplace facilitator laws require the platform that facilitates a sale to collect and remit sales tax on behalf of the seller. These laws are significant because they shift the obligation to collect and remit sales tax from the seller to the marketplace platform.
Sellers are still responsible for collecting and remitting sales tax for digital sales made outside of a marketplace platform, including on their own ecommerce sites, as well as sales from physical stores.
Shifting the obligation to collect and remit sales tax from the seller to the marketplace platform blurs the relationship in a way that has raised legal questions about marketplace facilitator laws. The fact that many online sellers store their products in warehouses operated by the marketplace facilitators blurs the relationship even more. But as yet, no legal challenges have knocked down any of the laws currently enacted.
Recent History
In the wake of the 2018 “Wayfair Ruling” by the U.S. Supreme Court, state laws governing taxation of digital sales have been changing rapidly. The case, South Dakota v. Wayfair, Inc., ruled that states may charge tax on purchases made from out-of-state sellers even if the seller does not have a physical presence in the taxing state.
In the intervening years, states have weighed in with new laws governing the application of sales tax and income tax not only on companies that sell directly on the internet, but on marketplace facilitators.
The specifics of marketplace facilitator laws vary by state but generally require qualifying platforms to collect and remit sales tax on behalf of third-party sellers who meet certain criteria. These criteria often include a minimum threshold of sales within the state or a certain number of transactions.
Additionally, marketplace facilitator laws may include provisions for marketplace sellers to opt out of having sales tax collected on their behalf by the platform if they prefer to handle tax obligations independently. However, this option is typically only available to sellers who can demonstrate that they are already registered to collect and remit sales tax in the state.
The growth of online sales during the COVID-19 pandemic accelerated the implementation of marketplace facilitator laws as states sought to shore up their finances amid economic uncertainty. This trend has continued as ecommerce has reshaped the retail landscape, making it increasingly important for states to adapt their tax policies accordingly.
As marketplace facilitator laws have grown, so have the legal questions surrounding them. One critical question is whether treating the facilitator as a retailer (in applying sales tax to their transactions) may extend to income taxes. Some states have imposed income taxes on certain digital sales. Additionally, some states are aligning sales and use taxes remitted on facilitated sales with the marketplace facilitators’ sales factor numerator in the state, raising legal questions.
The burdens on interstate commerce imposed by lack of uniformity among states regarding taxation of online sales has begun raising legal concerns under the Commerce Clause.
Since all states that impose an sales tax have adopted marketplace facilitator laws (all except Oregon, Montana, New Hampshire and Delaware, all of which have no sales tax), it’s important to note that the laws vary from state to state. A few examples of these variations are below:
Illinois
Enforcement date: January 1, 2020
Summary: Marketplace facilitators are required to collect tax on sales made by or on behalf of their third-party sellers in Illinois if, in the preceding 12-month period, cumulative gross receipts from sales of tangible personal property to purchasers in Illinois by the marketplace facilitator and its marketplace sellers are $100,000 or more; or the marketplace facilitator and sellers cumulatively enter into 200 or more separate transactions for the sale of tangible personal property into Illinois.
Learn more about the Illinois economic nexus law and Illinois registration requirements for marketplace sellers.
Non-collecting seller use tax reporting: No
Indiana
Enforcement date: July 1, 2019
Summary: Marketplace facilitators that make or facilitate sales in Indiana and meet the economic nexus thresholds of $100,000 in Indiana must collect and remit sales tax on all taxable sales made through the marketplace. Indiana removed its 200 transactions threshold effective 1/1/24. This requirement also applies to lodging marketplaces.
Learn more about Indiana’s economic nexus law and Indiana registration requirements for marketplace sellers.
Non-collecting seller use tax reporting: No
Iowa
Enforcement date: January 1, 2019
Summary: A marketplace facilitator that meets the economic nexus threshold and makes or facilitates Iowa sales on behalf of itself or one or more marketplace sellers must collect and remit sales tax on each facilitated taxable Iowa sale.
Learn more about Iowa’s economic nexus law and Iowa registration requirements for marketplace sellers.
Non-collecting seller use tax reporting: No. The Iowa Department of Revenue is authorized to establish and impose notice and reporting requirements for remote retailers, including marketplace facilitators who don’t collect and remit sales and use tax. However, it hasn’t done so.
Missouri
Enforcement date: January 1, 2023
Summary: A marketplace provider that makes or facilitates $100,000 of gross sales in the state in the current or previous calendar year (determined quarterly) must collect and remit sales tax on behalf of its third-party sellers. This requirement does not apply to certain advertising services, travel agency services, or third-party payment processors. Although marketplace sellers are relieved of the duty to collect or remit sales tax on sales made through a collecting marketplace, they may still be required to register with the state and report all Missouri sales.
Learn more about Missouri’s economic nexus law and Missouri registration requirements for marketplace sellers.
Non-collecting seller use tax reporting: No
If you have questions about how state laws levying sales and income tax on digital sales may impact you or your business, contact your KRD advisor.
