Avalara Tax Changes 2022: Marketplace facilitators

Marketplace facilitators: an interesting business model with unique tax compliance challenges. Many are run by tech entrepreneurs who have little to no experience with sales tax, yet getting sales tax right is critical to the marketplace business model. 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, such as occupancy taxes or 911 fees.

Getting tax wrong can be costly for any business, but particularly for marketplace facilitators with a high volume of sales. Unless a marketplace facilitator can demonstrate that a failure to collect and remit applicable taxes was due to receiving incorrect information from marketplace seller(s), facilitators will generally be held liable for uncollected or under-collected tax, plus penalty and interest charges. (Washington law offers an example.)

The following five tips can help marketplace facilitators get sales tax compliance right.

1. Keep marketplace facilitator regulations and economic nexus laws top of mind

Sales tax registration requirements for marketplace facilitators are governed primarily by marketplace facilitator and economic nexus laws. Though these vary by state, like other sales tax laws, they can be broadly defined as follows.

Marketplace facilitator laws make the marketplace facilitator the retailer responsible for tax on all transactions made through the platform - both direct sales and sales by third-party sellers. These rules apply to marketplace facilitators that have a physical presence in the state, such as a fulfillment center, and to marketplace facilitators that have economic nexus with the state.

Economic nexus laws base a sales tax collection obligation on economic activity in the state rather than physical presence. However, not every remote business is subject to every state's economic nexus law because all economic nexus laws provide an exception for businesses selling under the state's economic nexus threshold.

Thresholds vary by state. For example:

California: $500,000 in total combined sales of tangible personal property delivered into the state by the retailer and all persons related to the retailer in the current or previous year

Florida: $100,000 in taxable sales of tangible personal property delivered physically into the state in the current or previous calendar year

New York: $500,000 in cumulative total gross receipts from taxable and nontaxable sales of tangible personal property delivered into the state (including software as a service) in the immediately preceding four sales tax quarters

Washington, D.C.: 200 transactions or $100,000 in gross receipts from all retail sales delivered in the district, including exempt sales, in the current or previous year

See state-specific threshold information and find out where you may be required to collect sales tax.

It's important for marketplace facilitators and sellers to understand which sales count toward each state's economic nexus threshold; some states count specified digital products or exempt transactions, some do not. States generally require marketplace facilitators to count all sales made through their platform, but some allow marketplace sellers to exclude sales made through a registered marketplace.

Thresholds and other aspects of both economic nexus and marketplace facilitator laws are subject to change. Maine is one of several states that's eliminated its transaction threshold (while keeping the sales threshold). And the first iteration of Nevada's marketplace facilitator law didn't specify how it applies to delivery network companies; Nevada is now in the process ofrefining that and other aspects of the law.

2. Register for sales tax where required, when required

Marketplace facilitators that have physical presence or economic nexus with a state mustregister for a sales tax permit (also known as a seller's permit, etc.). Once registered, they may need to certify to marketplace sellers that they'll collect and remit sales tax on their behalf; this is required inTexas.

Some states, likeIdaho, require marketplace facilitators to obtain separate permits for third-party sales and direct sales. In other states, only one permit is needed.Connecticut allows marketplace facilitators to report their sales together with third-party sales, or to obtain a separate tax registration sub-number for marketplace sales. See our state-specific registration requirements for marketplace facilitators and marketplace sellers for more details.

Understanding how soon you need to register after establishing economic nexus with a state is critical. In some cases, the state mandatesregistration as soon as the economic nexus threshold has been crossed, as in, by the next transaction. Other states give businesses a bit more time to register, such as 30 or 60 days. Most want sales tax collection to begin as soon as possible.

3. Assign the right sales tax rate to each transaction

Once registered for sales tax, marketplace facilitators must ensure all products sold in that state are assigned the proper sales tax rate. This can be a time-consuming task because marketplace facilitators tend to sell a variety of products across numerous states. Furthermore:

• Different products can be subject to different tax rates
• 37 states have local sales taxes on top of state sales tax (and Alaska has local sales tax but not state sales tax)
• Rates are subject to change

Examples of product taxability complexity: Certainsweetened beverages are subject to a higher rate of tax than non-sweetened beverages in the city of Seattle - and throughout the entire state of Vermont - and what does and doesn't qualify as a sweetened beverage may surprise you. Clothing priced less than $110 isexempt from state sales tax in New York but may be subject to local sales tax. In Texas,taxable information services are taxed at 80% of the billing amount, rather than 100%. And so on.

Another complicating factor is that more than 15 states typically hold one or moresales tax holidays each year. Numerous normally taxable items are temporarily exempt during these tax-free periods, which usually last from one day to one week. During Florida's2021 Freedom Week, the temporary exemption applied only to a portion of the sales price of a variety of items, not the full cost. Getting tax compliance right during sales tax holidays can be extremely challenging without the use ofsales tax software.

Marketplace facilitators need to track and comply with all such sales tax regulations and requirements. In addition, they must validate any exempt sales made through the platform by collecting and maintaining a valid exemption certificate from the purchaser, then keep all documents straight.

4. Remit sales tax to the proper tax authority

Once sales tax has been collected as required, it must be remitted on time with a sales tax return to the proper tax authority. Filing requirements vary by state, and in some states, by locality.

Some states require marketplace facilitators toidentify their own sales separately from third-party sales on their sales tax returns. That's the case in Georgia and Tennessee. Wyoming allows it but doesn't require it. And Washington allows marketplace facilitators to file separate returns for direct and third-party sales but doesn't require it.

Sales tax is administered by the state tax authority (e.g., the New York State Department of Taxation and Finance) in most states, but in some home rule states, local governments may require remote businesses to register, remit, and file returns with the local tax administrator. Compliance in these states is extremely challenging for remote sellers or marketplace facilitators with a high volume of sales nationwide.

For example,marketplace facilitators are now responsible for collecting West Virginia's hotel occupancy tax, which must be remitted to the county or municipality because the state doesn't administer hotel occupancy tax. While in Louisiana, remote sellers and marketplace facilitators may need to register and remit tonumerous local tax authorities in addition to the Louisiana Department of Revenue.

Home rule states are working to streamline compliance for remote sellers. To that end, Alabama created aSimplified Sellers Use Tax (SSUT), Colorado developed a newSales and Use Tax System (SUTS) and local governments in Alaska built aremote sales tax information portal. But change takes time. For Louisiana to change its system, it will likely need to amend its state constitution.

5. Comply with a world of tax requirements

In addition to navigating tax requirements throughout the United States, global marketplace facilitators must understand and comply with growing tax requirements in other countries.

The United Kingdom mademarketplace facilitators the deemed supplier liable for collecting, remitting, and reporting VAT on certain sales effective January 1, 2021. The European Union followed suit starting July 1, 2021. In the EU,the deemed supplier rule affects two types of cross-border transactions:

• Goods valued below €150 imported by EU or non-EU sellers and sold to EU customers
• Goods of any value sold by a non-EU seller to an EU customer

Marketplace facilitators based outside of the EU can streamline VAT compliance for low-value goods by using the EU's new electronic portal, Import One-Stop Shop (IOSS). Using IOSS can expedite customs clearance and streamline logistics, among other benefits. Yet to take advantage of IOSS, non-EU businesses need to appoint an approved EU-established intermediary to represent them and fulfill their VAT obligations.

Any company that sells internationally also needs to assign the properHarmonized System (HS) code to every product sold. The more than 180 countries using the HS each add their own identifying numbers to the first six digits, which are the global standard. Assigning an incorrect HS code to a shipment can cause delays at the border.

The above just scratches the surface of what marketplaces are dealing with today. They're also facing ongoing supply chain issues, arise in railroad theft, and growing demands that they do more toprevent people from selling stolen goods through the marketplaces.

To learn more about these and other issues affecting sales tax compliance for marketplace facilitators, check out our annual report,Avalara Tax Changes 2022.