As the preference for online shopping continues to expand, many states have passed marketplace facilitation legislation. Since legislation does vary state to state, it is important to be prepared and understand your tax obligations as a marketplace facilitator. In this article we will break down areas that our marketplace facilitator clients have difficulties with and how we are able to help them. But first, let’s start with the basics. How do you know if your organization is a marketplace facilitator (or “MPF”)?
What Is A Marketplace Facilitator?
The first step to determine if you are a marketplace facilitator is to have a clear understanding of what a marketplace facilitator is.
As explained by TaxJar, a marketplace facilitator is a business that contracts with a third party (a “marketplace seller” or “MPS”) to sell goods or services on its platform. Amazon and Etsy are two examples of well-known marketplace facilitators. Marketplace facilitation tax compliance can get tricky because sales tax obligations for MPFs vary by state. Avalara shares a helpful guide to marketplace facilitator legislation to help you get to know the basics. In its easiest definition, an MPF brings together buyers and sellers on its own platform, but does not generally take title to the inventory being sold.
We include here some definitions from California’s marketplace facilitator statutes, to show the technical aspects of the law. Many states have similar criteria to California’s.
- Effective Oct. 1, 2019, marketplace facilitators are considered the seller and retailer for each sale they facilitate through their marketplace and must register and collect sales tax.
- Marketplace facilitators are required to register and collect tax if they actively sell tangible personal property in the state, are a retailer engaged in business in the state, or have an economic nexus with California. In determining whether the marketplace facilitator has sufficient nexus with California, the facilitator must include both sales it facilitates and sales made on its own behalf. (Note that nexus creation is important – it can be created by physical presence or economic nexus. For economic nexus purposes, CA requires a marketplace facilitator to make sales of $500,000 or more in a calendar year before triggering the filing requirement. But that includes all sales made to CA through the marketplace.)
- A marketplace is a physical or electronic place (such as a store, booth, website, catalog, television or radio broadcast, or dedicated sales software application) where marketplace sellers offer for sale tangible personal property, regardless of whether the property, seller, or marketplace has a physical presence in California.
- A marketplace facilitator is a person who contracts with marketplace sellers to facilitate, for consideration, the sale of the seller’s products through a marketplace operated by the person or related persons, and:
- directly or through one or more related persons: transmits the offer from the buyer to the seller; owns the infrastructure that brings buyers and sellers together; provides a virtual currency that buyers can or must use to purchase items from sellers; or certain software development or research and development activities related to its marketplace; and
- with respect to the seller’s products: engages in payment processing, fulfillment or storage services; lists products for sale; sets prices; brands sales as those of the facilitator; takes orders; or provides customer service or accepts or assists with returns or exchanges.
The above definitions are important because they show how easily a company can fall into the marketplace facilitator role, simply by meeting just a few simple rules including providing the platform, facilitating the exchange of payment and providing customer service – which most such platforms do!
Real Client Examples
To bring some color to the marketplace facilitator story, here are some of the situations in which we’ve recently helped our clients regarding marketplace facilitation:
- A company provides a platform to match people requiring specific services with those who can provide the service, and needs assistance because some of the services provided through their platform are subject to sales tax, varying state by state.
- A platform that finds purchasers for gently used clothing needs assistance because clothing is generally taxable, but there are some exemptions.
- A company that matches sellers and buyers of specific manufacturing materials needs help because many of the sales on their website are not only through marketplace facilitators, but are also for resale.
- A company that provides a platform for people who have specialty equipment to lease needs assistance in determining the taxability of lease transactions across the states.
The challenge in all of these situations, is not just the structure of the sale or the nature of the product or service sold – it’s that online marketplaces are by their nature multi-state and require even relatively small companies to be familiar with the laws of all the states. This is where we can help!
What Are Your Next Steps?
Once you determine whether or not your company is an MPF, what are your recommended next steps?
- Review state economic nexus rules to determine whether the threshold has been met (and when). Many states have a sales threshold of just $100,000.
- If nexus has been created, consider any prior exposure and quantify it.
- Determine a path for remediation of prior liabilities.
- Determine a plan forward for accurately collecting and remitting sales tax on sales made through the marketplace.
Have a question? Contact Monika Miles.
Subscribe to TaxConnections Blog
Enter your email address to subscribe to this blog and receive notifications of new posts by email.