State & Local Tax and Third-Party Marketplace Facilitators
With so many complicated state sales tax laws across the country, it’s tough to keep track of your tax responsibilities. Combine that with trying to run your business, and you’ve got a real challenge. As a result, companies selling across state lines often use a third-party marketplace facilitator.
If you work with a marketplace facilitator, it’s important to understand how the arrangement works, from tax liabilities to collecting and remitting sales tax.
What is a third-party marketplace facilitator?
A third-party marketplace facilitator is “a business or organization that contracts with third parties to sell goods and services on its platform and facilitates retail sales.” The facilitator essentially handles the sales process: listing products, handling payments and receipts, sometimes even helping with shipping. And of course, they remit state taxes as required when economic nexus is met.
When your company works with a third-party marketplace facilitator, you’ll still likely have sales tax responsibilities. However, the facilitator would handle them on your behalf. There are many reasons why sellers and states appreciate these third parties, but the common thread is this convenience.
What do marketplace facilitator laws do?
Over the years, large online retailers like Amazon, Etsy, eBay and more have became a platform for third-party sellers. Through this arrangement, these smaller businesses get national exposure for their goods and services. This turned these e-commerce giants into marketplace facilitators.
However, states began noticing something amiss. While these companies collected sales tax on behalf of their own sales, in some cases the sales of third-party sellers were going untaxed.
As a result, states started passing marketplace facilitator laws in regard to tax liability around 2017. These laws shift the onus onto the facilitator to collect and remit sales tax, rather than the individual sellers themselves. Instead of thousands of small companies collecting and paying their sales tax obligations, the marketplace facilitator does it on their behalf.
Marketplace facilitators collect sales tax if any one of the three following points is true:
- The marketplace facilitator has a physical presence in the state
- Their marketplace sellers (vendors) have physical presence in the state
- Their collective, annual sales in the state surpass the sales tax registration threshold and they qualify for economic nexus
Economic and physical nexus laws are important here. For small companies, especially individual sellers on sites like eBay and Etsy, most sellers don’t do enough business to have a sales tax liability in all 50 states. This means any given state potentially loses out on a lot of sales tax revenue. However, third-party marketplace facilitators do have an economic and often a physical nexus to the states. So they are obligated to pay sales tax.
States and sellers alike love this setup. States collect sales tax revenue they may have missed out on because the sellers didn’t have a nexus (or it would be too expensive to pursue them for nonpayment). Sellers shift the responsibility to the marketplace facilitator, which has far better resources to comply with laws from multiple states.
However, it’s not always that simple. The third-party marketplace facilitator collects and remits sales tax on your behalf. But if you live, work and sell in a state, you are still obligated to pay your own sales tax on those sales.
In many cases, this means that you’ll need to keep your state sellers permit up to date. If you do a significant volume of business in another state through your own website, that may be enough to create an economic nexus in which you will pay sales tax there, as well. To make it even more confusing, some states require you to have sellers permits there, depending on how significant your economic nexus is.
Generally, if you work with a third-party marketplace facilitator, there is a presumption at tax time that the platform has appropriately collected and remitted sales tax on your behalf.
How many states have passed marketplace facilitator laws?
According to Thomson Reuters/Tax & Accounting, all but seven states (plus Washington, D.C.) have marketplace facilitator laws as of October 2020. However, that doesn’t mean that one size fits all. Once you figure out how the laws in one state work, doesn’t mean they’ll be the same across the board.
Each state handles its laws differently, so a third-party marketplace facilitator may have different policies and procedures for them. For example, Etsy calculates the sales tax rate for the state to which you’re shipping. They then either collect and pay the tax themselves, or collect it, send it to you as part of your payment and then add the sales tax amount to your monthly Etsy bill.
Understanding how sales taxes are collected and what third-party marketplace facilitators do on your behalf is only part of the puzzle. You must also know your own state’s tax and sales requirements so you don’t under or overpay your taxes. As always, a savvy seller should work with a skilled accountant at James Moore to clear up these confusing rules.
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