Remote sellers and marketplace facilitators now have firm tax collection obligations in all but two of the 45 sales tax states, but that doesn’t mean there won’t be disputes and litigation.
There are at least four areas “ripe for future disputes” involving marketplace facilitators and sellers transacting business over e-commerce platforms in the post-Wayfair world, said Charles Kearns, a tax partner at Eversheds Sutherland LLP in Washington.
Contractual provisions in the agreements linking sellers to marketplaces will no doubt create controversies landing the parties in court, Kearns said during a presentation Wednesday on marketplace litigation.
Marketplace sellers may object in cases where a marketplace improperly collects and remits tax on their behalf. So-called “hold harmless” provisions in most state laws immunize sellers from liability for the collection of tax when a marketplace facilitator fails to correctly comply with its tax duties.
Conversely, marketplaces may object to the conduct of sellers. Most states grant some level of immunity to marketplaces able to link their compliance failures to incorrect or insufficient information provided by the seller.
Kearns also pointed to the potential for class action lawsuits in cases where consumers believe they have been improperly assessed taxes for their purchases. He noted sales tax rules can be complex and inconsistent across states, opening the door for “over-collection” and consumer class actions aimed at recouping undue tax assessments.
Sellers and marketplaces could find themselves in front of a judge through traditional forms of commercial litigation unrelated to tax matters, Kearns said. He predicted waves of lawsuits alleging violations of consumer protection and product liability standards for products sold over e-commerce platforms.
The Supreme Court’s seminal South Dakota v. Wayfair ruling tossed out the court’s 1992 physical presence standard affirmed in Quill Corp. v. North Dakota, which limited the ability of states to tax remote sales. The majority in the 5-4 ruling suggested strongly that South Dakota’s law, which requires remote sellers to collect sales tax if they have more than $100,000 in sales or 200 transactions to buyers in the state, would pass constitutional muster.
Since the June 2018 decision, states have begun imposing remote sales tax based on a measure of economic activity, as opposed to physical presence. In addition, more than 30 states have passed marketplace facilitator laws, which place a duty to collect and remit sales tax on large online web sites such as Amazon Marketplace, eBay Inc., and Etsy Inc. that broker transactions for other, typically smaller, vendors.
Striving for Uniformity
Hoping to get a full picture of the way the 24 “streamlined states” tax all manner of goods and services in their jurisdictions, the Streamlined Sales Tax Governing Board on April 14 published a Taxability Matrix form for 2019.
The board is asking member states to describe the tax treatment of items identified in the matrix and provide links to all applicable laws, regulations, and written policies. The states are also encouraged to add comments aimed at compliance assistance. The matrix includes a library of definition and an explanation of tax administration practices.
The taxability matrix is an essential uniformity tool embedded into the Streamlines Sales and Use Tax Agreement. The agreement operates as a binding pact among the signatories aimed at harmonizing and standardizing tax practices for remote sellers across the 24 member states.
Increase in De-licensing
Right after Wayfair, many remote vendors who didn’t have licenses to collect sales taxes in certain states rushed to get registered.
Now, in ever-growing numbers, many are jumping back out, getting de-registered in states where they no longer meet the economic criteria triggering an obligation to collect and remit sales taxes, Diane Yetter, president of Yetter Tax, said.
The proliferation of marketplace facilitator laws in the states is one aspect driving the trend, Yetter said. For remote vendors that do nearly 100% of their business on online platforms like Amazon Marketplace, it could make sense to de-register in certain states.
It depends on the state’s treatment of sales post-Wayfair, she said. If a state’s law includes marketplace sales along with the vendor’s direct sales for the purpose of determining whether an economic presence threshold has been met, the vendor might need to stay registered. States that treat the different sales pathways as separate “buckets” might inspire a vendor to de-register, she said.
“Vendors should consider how they manage their nexus monitoring overall,” Yetter said. “If you do not have a physical presence and you no longer have economic nexus, what do you do? There can be a big difference between having 100% marketplace sales, and almost 100%.”
The Sales Tax Institute will be presenting virtual workshops April 27 to May 1 covering registration, marketplace facilitator rules, and other topics, Yetter said.