Marketplace Facilitator Sales Tax Collection, Reporting, and Liability Risks

Description

In recent years, virtually every state that imposes a sales tax has adopted legislation that requires marketplace facilitators to collect and remit sales tax on behalf of third-party sellers. With various conflicting state tax laws, maintaining compliance is difficult for marketplace facilitators. Third-party sellers are equally concerned with understanding the impact of shifting the collection and remittance duties to the marketplace facilitator.

In January 2024, the South Carolina Court of Appeals held that Amazon, a marketplace facilitator, was liable for sales tax prior to the Wayfair decision. This consequential ruling has led many companies and their advisers to reconsider their sales tax obligations.

Tax advisers and their client companies that operate marketplaces must grasp an understanding of recent state tax rules, nexus considerations, and reporting obligations for facilitators of sellers of third-party products and services.

Marketplace facilitators contract with third parties to sell goods and services often throughout the U.S. These facilitators enable the sales of third-party sellers by listing and offering the products or services of the seller, taking payments, collecting receipts, and managing the fulfillment of orders. This engagement with third parties may subject the marketplace facilitator to state sales tax laws requiring them to collect and report these transactions. Failure to do so can result in hefty penalties and tax liability.

An entity falling into the category of "marketplace facilitator" is not automatically subject to a state's tax collection requirements. In some states, there must be sufficient nexus with a state before it may be obligated to collect the state's sales and use tax on marketplace sales. Although there are adequate bases for economic nexus for retailers after the Wayfair decision, the same cannot be said for marketplaces due to variations of state tax rules on the economic nexus threshold.

Listen as our panel discusses key sales tax issues impacting marketplace facilitators, recent state tax legislation, nexus considerations, collection and reporting requirements, and methods to avoid penalties and ensure compliance.