Marketplace Facilitator Tax And How Do I Account For It?

You may have heard of marketplace facilitator tax if you sell products or services online. But what does it mean, and how does it affect your online business?

A marketplace facilitator tax is a type of sales tax collected and remitted by a marketplace facilitator on behalf of the third-party sellers who use their platform. A marketplace facilitator is a person or business that provides a platform for online sales, such as an e-commerce website, an app, or a software service. Some examples of common marketplace facilitators are Amazon, eBay, Etsy, Shopify, and Uber.

The marketplace facilitator tax is vital for online sellers and platforms because it affects their sales, use tax obligations and compliance. Depending on the state laws, a marketplace facilitator may be required to collect and remit sales tax on all sales made through their platform, regardless of whether the seller has a physical or economic presence in the state. The seller may not have to register, collect, or remit sales tax in those states, as the marketplace facilitator will take care of it. However, this also means that the seller may lose some control and visibility over their sales tax transactions and reporting.

The marketplace facilitator tax is a relatively new and evolving concept in the United States, as more and more states have enacted laws to require marketplace facilitators to collect and remit sales tax on behalf of third-party sellers. These laws vary from state to state regarding the definition, criteria, and exemptions of a marketplace facilitator, as well as the effective dates and thresholds for collecting and remittance sales tax.

As of January 2024, 43 states and the District of Columbia have adopted marketplace facilitator laws, while the remaining seven states still need to implement them. This blog will answer some of the most common and essential questions online sellers and platforms may have about the marketplace facilitator tax. By the end of this blog, you will better understand the marketplace facilitator tax and how to account for it in your online business.

States with marketplace facilitator laws:

What is a Marketplace Facilitator, and How Does It Affect Sales Tax?

A marketplace facilitator is a virtual hub where third-party sellers can showcase and sell their products or services to consumers. These platforms create a digital marketplace and take care of essential tasks such as processing payments, ensuring secure transactions, and frequently providing extra services like order fulfillment and customer support. It's like having a one-stop shop that makes online selling and buying a seamless and convenient experience.

Some examples of well-known marketplace facilitators are Amazon, eBay, Etsy, Shopify, and Uber. They facilitate sales of various products or services, such as tangible personal property, digital goods, software, transportation, lodging, food delivery, and more.

Being a marketplace facilitator affects sales, use tax obligations, and compliance differently, depending on the state laws. Most states have enacted marketplace facilitator laws that require marketplaces to collect and remit sales tax on behalf of the third-party sellers who use their platform, regardless of whether the sellers have a physical or economic presence in the state. The marketplace facilitator is considered the seller and retailer for each sale. They are responsible for calculating and collecting the appropriate sales tax amount for transactions made through the platform.

The implications of being a marketplace facilitator for sales and using tax purposes are positive and negative. On the one hand, the marketplace facilitator laws simplify sales tax compliance for third-party sellers, as they do not have to register, collect, or remit sales tax in the states where the marketplace facilitator does it for them. On the other hand, the marketplace facilitator laws create new challenges and uncertainties for the marketplace facilitators, such as:

• Determining the sales tax nexus and liability in different states based on the marketplace facilitator laws' criteria, thresholds, and effective dates.

• Sourcing the sales to the correct state and local jurisdictions, based on the destination or origin principle, and applying the correct sales tax rates and exemptions.

• Tracking and reporting each state's sales tax transactions and remittances and filing the required returns and forms.

• Dealing with potential audits, disputes, and penalties from the state tax authorities or third-party sellers.

Therefore, being a marketplace facilitator for sales and using tax purposes requires a thorough understanding of the state laws and regulations and the use of software, such as Avalara, Vertex, TaxJar, and Taxify, or experts or resources to ensure compliance and avoid risks.

Amazon Marketplace Facilitator Tax: What Sellers Need to Know?

Understanding the implications of the marketplace facilitator tax for sellers operating on Amazon is crucial. As a prominent marketplace facilitator, Amazon plays a significant role in the sales tax landscape for its sellers.

Amazon as a Marketplace Facilitator

Amazon acts as a marketplace facilitator for many third-party sellers, meaning it takes on the responsibility of collecting and remitting sales tax on behalf of these sellers. It relieves individual sellers from the burden of handling sales tax compliance for transactions made through the platform.

Impact on Amazon Sellers

Amazon sellers should be aware that the marketplace facilitator tax affects their tax obligations in states where it applies. Sellers can skip individually registering, collecting, or remitting sales tax in those states, as Amazon handles these tasks on their behalf.

Tracking and Accounting for Marketplace Facilitator Tax on Amazon

Sellers can utilize the platform's reports and tools to navigate the complexities of the marketplace facilitator tax on Amazon. Amazon provides features like the Tax Calculation Service, Tax Document Library, and Transaction Detail Page, offering insights into the sales tax collected and remitted by the platform.

Automation Software for Amazon Sellers

Amazon sellers can leverage third-party software or services like PayTraQer for streamlined accounting and tax compliance. This software helps automate processes, ensuring accurate tracking and reporting of sales tax transactions.

Amazon Referral Fees vs. Marketplace Facilitator Tax

It's important to note that marketplace facilitator tax differs from Amazon referral fees. The former is a sales tax collected by Amazon, while the latter represents the commissions charged to sellers for each sale on the platform. Clearing up this distinction helps sellers understand the breakdown of fees and taxes associated with their Amazon transactions.

Upcoming Changes:

Additionally, sellers should stay informed about any upcoming changes related to Amazon's policies, as the e-commerce giant periodically updates its fee structures and services. For instance, starting February 1, 2024, changes to the referral fee calculation for cross-border sales will be introduced, impacting sellers involved in international transactions.

How do you determine your sales tax nexus and liability as a marketplace facilitator or seller?

Sales tax nexus is the connection between a seller and a state that requires the seller to register, collect, and remit sales tax in the state. The sales tax nexus requires various factors, such as:

• Physical presence.

• Economic activity.

• Marketplace facilitator laws.

Depending on the type and extent of nexus, a seller may have different sales tax obligations and liabilities in different states.

Physical Presence Nexus

Physical presence nexus is the most common and traditional type of sales tax nexus. A seller creates it by having a physical location or presence in a state, which can include an office, a warehouse, a store, an employee, a contractor, a representative, or a vehicle. Physical presence nexus generally applies to both marketplace facilitators and sellers, meaning that they have to collect and remit sales tax on their sales in the state where they have a physical presence.

Economic Nexus

Economic nexus is a newer and more complex type of sales tax nexus. The nexus forms when a seller has a certain amount of sales revenue or transactions in a state, regardless of whether they have a physical presence in the state or not. Economic nexus was established by the United States Supreme Court’s decision in South Dakota v. Wayfair, Inc. (2018), overturning the previous physical presence requirement for sales tax nexus4. Economic nexus generally applies to both marketplace facilitators and sellers, meaning they must collect and remit sales tax on their sales in the state where they exceed the economic nexus threshold.

Marketplace Facilitator Nexus

Marketplace facilitator nexus is a specific sales tax nexus that applies only to marketplace facilitators. A marketplace facilitator creates it by facilitating sales for third-party sellers in a state. It occurs regardless of whether the facilitator or the seller has a physical presence or economic nexus in the state.

Marketplace facilitator nexus depends on state laws that require marketplace facilitators to collect and remit sales tax on behalf of the third-party sellers who use their platform. Marketplace facilitator nexus generally relieves the sellers from their sales tax obligations in the state where the facilitator collects and remits sales tax for them.

To determine your sales tax nexus and liability as a marketplace facilitator or seller, you need to follow these steps:

• Identify the states where you have a physical presence, such as a location, an employee, a contractor, a representative, or a vehicle.

• Identify the states where you have an economic nexus, such as a certain amount of sales revenue or transactions. You can use applications like Avalara or TaxJar to check the economic nexus thresholds and effective dates for different states.

• Identify the states where you have a marketplace facilitator nexus, such as facilitating sales for third-party sellers. You can use software like Avalara or Taxify to check the marketplace facilitator laws and requirements for different states.

• Register for a sales tax permit in each state with a sales tax nexus.

• Collect and remit sales tax on your sales in each state where you have a sales tax nexus.

• Track and report your sales tax transactions and remittances for each state where you have a sales tax nexus.

Following these steps, you can determine your sales tax nexus and liability as a marketplace facilitator or seller and comply with the state sales tax rules and regulations.

Note: The sales tax nexus is a dynamic and evolving concept, and the state laws and requirements may change over time. Therefore, consulting with a tax professional or using a tax automation solution is advisable to stay updated and avoid errors or penalties.

How Do You Determine Revenue and Allocate Your Sales Factor as a Marketplace Facilitator?

Managing revenue and distributing your sales factor is crucial for income tax considerations, particularly in the context of a marketplace facilitator. Identifying where a deemed sale or service occurs is known as sourcing, while assigning a share of total income to each state or jurisdiction where the business operates is referred to as allocation. Both identification and allocation play a pivotal role in calculating the sales factor, a key component in the apportionment formula determining a business's taxable income in each state.

For marketplace facilitators, sourcing and allocation can be challenging and uncertain, as there are no uniform or clear rules on applying them to the fees and commissions earned by facilitating sales for third-party sellers.

Depending on the type and nature of the fee or commission, different state sourcing rules may apply, such as the destination principle, the origin principle, the market-based method, or the cost-of-performance method. Moreover, some states may have specific rules or guidance for marketplace facilitators, while others may not. It risks inconsistency, confusion, and double taxation for marketplace facilitators.

To source and allocate your revenue as a marketplace facilitator, you need to follow these tips and best practices:

Understanding Fee or Commission Nature and Characteristics

Analyze the nature and characteristics of your fee or commission. Different state sourcing rules may apply depending on whether your fee or commission is considered a sale of tangible personal property, a sale of service, or an intangible property.

Navigating Sourcing Methods: Destination, Origin, Market-Based, and Cost-of-Performance

Apply the appropriate state sourcing rule to your fee or commission. Depending on the state law or regulation, you may need to use the destination principle, the origin principle, the market-based method, or the cost-of-performance method to source your fee or commission. 

For example, the ‘destination principle’ sources the sale to the state where the customer receives the product or service, and the ‘origin principle’ sources the sale to the state of the seller. Meanwhile, the ‘market-based method’ sources the sale to the state of the customer or the market for the product or service exists, and the ‘cost-of-performance method’ sources the sale to the state where the seller incurs a more significant proportion of the service's costs.

Marketplace Facilitators: Adhering to State Guidance and Regulations

Follow the state guidance or instructions for marketplace facilitators. Some states may have specific rules or advice for marketplace facilitators on sourcing and allocating revenue, while others may not.

For example, Colorado requires marketplace facilitators to source their revenue to the exact location as the sale of the underlying product or service through the marketplace. In contrast, Ohio requires marketplace facilitators to source their revenue based on the location of the marketplace seller.

Leveraging Tools for Efficient Sourcing and Allocation

Sourcing and allocation can be complex and time-consuming, especially for marketplace facilitators who operate in multiple states or jurisdictions. You can use software like Avalara to automate and simplify the process of sourcing and allocating your revenue or consult with tax professionals or experts to help you with compliance and reporting requirements.

Wrap Up

In conclusion, navigating the realm of marketplace facilitator tax is crucial for online businesses, especially with the dynamic landscape of state laws. As a facilitator or seller, understanding your sales tax nexus and liability is the first step toward compliance. Whether it's physical presence, economic activity, or specific marketplace facilitator laws, the key lies in identifying and adhering to the rules of each state.

Moreover, sourcing and allocating revenue as a marketplace facilitator adds another layer of complexity. The process demands careful consideration, from analyzing the nature of fees to applying state-specific sourcing methods. Embracing applications like Avalara or seeking expert guidance can streamline these tasks, ensuring accurate reporting and compliance.

While the marketplace facilitator tax introduces challenges, it also offers a silver lining for sellers. Utilizing platforms like Amazon, eBay, Etsy, Shopify, or Uber lifts the burden of sales tax collection and remittance in various states, offering a simplified process.

In this ever-evolving landscape, staying informed about state laws and requirements changes is crucial. Consider consulting with tax professionals to avoid errors and penalties. As the marketplace facilitator tax continues to shape the e-commerce landscape, adaptability, and a proactive approach will be the keys to success in the online business realm.

FAQs

What is a Marketplace Facilitator Tax?

A Marketplace Facilitator Tax is a sales tax collected and remitted by online platforms on behalf of third-party sellers. It simplifies sales tax compliance for sellers using the platform.

Which states have Marketplace Facilitator laws?

As of January 2024, 43 states and the District of Columbia have adopted Marketplace Facilitator laws, including Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, the District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.

How does being a Marketplace Facilitator impact my business?

Being a Marketplace Facilitator shifts sales tax responsibilities to the platform, relieving sellers from individual state registrations. However, it brings challenges like determining nexus, sourcing sales, and tracking tax transactions.

What is the Sales Tax Nexus, and How Does it Apply to Marketplace Facilitators?

Sales Tax Nexus is the connection between a seller and a state that triggers tax obligations. For Marketplace Facilitators it includes physical presence, economic activity, and specific laws applying to facilitators.

How Can I Determine My Sales Tax Nexus and Liability?

• Identify physical presence states.

• Check economic nexus thresholds using software like Avalara or TaxJar.

• Be aware of Marketplace Facilitator nexus obligations.

• Register, collect, and remit sales tax accordingly.

How are Fees and Commissions Sourced for Marketplace Facilitators?

Sourcing depends on the nature of the fee. Tangible goods are usually sourced to the destination state and services from where the benefit is received. Different states may apply various sourcing methods.

What are the Challenges of Sourcing Revenue for Marketplace Facilitators?

Sourcing challenges include:

• Lack of uniform rules.

• Potential for inconsistency.

• Risk of double taxation.

• Marketplace Facilitators must navigate state-specific guidelines and methods.

How Can I Stay Updated on Changing Marketplace Facilitator Laws?

Marketplace Facilitator laws are dynamic. Stay informed by consulting tax professionals and using automated solutions. Regularly check state laws and guidelines to avoid errors and penalties.

How Does Marketplace Facilitator Tax Affect Amazon Sellers?

Marketplace facilitator tax affects Amazon sellers by shifting the responsibility of calculating, collecting, and remitting sales tax from the sellers to Amazon. It means that Amazon will automatically charge and collect sales tax from the buyers in the states where marketplace facilitator tax applies and remit it to the respective state authorities. Amazon sellers only need to register, file, or pay sales tax in those states if they have other sales tax obligations outside of Amazon.

How Can Amazon Sellers Track and Account for Marketplace Facilitator Tax?

Amazon sellers can track and account for marketplace facilitator tax by using Amazon’s reports and tools, such as the Tax Calculation Service, the Tax Document Library, and the Transaction Detail Page. These reports and tools provide information on the sales tax collected and remitted by Amazon on behalf of the sellers and the sales tax that the sellers are responsible for collecting and remitting themselves. Amazon sellers can also use software or services like PayTraQer to automate and simplify their accounting and tax compliance processes.

Is Marketplace Facilitator Tax Part of the Amazon Referral Fees?

No, the marketplace facilitator tax is not part of Amazon referral fees. Marketplace facilitator tax is a sales tax collected and remitted by Amazon on behalf of third-party sellers in states where it applies. Amazon referral fees are commissions charged to third-party sellers on each sale made on Amazon Marketplace, regardless of the sales tax status, and calculated as a percentage of the total sales price, excluding taxes and shipping costs.

Starting February 1, 2024, Amazon will introduce changes to the referral fee calculation for cross-border sales, where items purchased by a customer are shipped to a country different from the originating Amazon store. The referral fee amount will be consistent, regardless of the destination country or the VAT rate applied. For more information, click here.