Bloomberg Tax
March 8, 2023, 9:45 AM

The Trends Shaping Marketplace Tax Compliance and Controversy

Scott Peterson
Scott Peterson

If you’ve shopped online this week, there’s a good chance you visited an online marketplace. Their popularity has been fueled by the pandemic-driven shift to e-commerce, and experts predict that third-party marketplace sales will account for 59% of all global e-commerce by 2027.

While marketplaces have become a de facto channel for shopping, they also have become a focal point for tax legislation. Similarly, marketplaces and marketplace sellers have been at the center of sales tax controversy since the introduction of economic nexus and marketplace facilitator laws nearly five years ago.

Today, 45 states, parts of Alaska, and the District of Columbia have marketplace facilitator laws, which impose an obligation on the marketplace to collect and remit sales tax on behalf of sellers. Missouri was the final state to adopt this type of legislation beginning Jan. 1, 2023. And, like most facets of sales tax policy, marketplace facilitator laws vary by state in how they are applied defined, and enforced.

With the widespread adoption and variation of marketplace facilitator laws in mind, here are some of the ongoing trends that will be shaping compliance and controversy for marketplaces.

Lack of Uniformity Makes Laws Confusing

A 2022 survey of US businesses found that compliance with marketplace facilitator laws remains low—even five years after the first rules were introduced. Some key findings from the survey include:

  • 54% of businesses are aware of marketplace facilitator laws.
  • 84% of enterprise businesses said their business has been impacted by such laws.
  • 38% of businesses believe they’ve done all they need to comply with such laws.

These findings signal two realities—marketplace facilitator laws are confounding to businesses, and true compliance with these laws remains low.

If we look examples of how states have approached marketplace facilitator laws, we can see just how confusing it can be. North Carolina’s law states that marketplace facilitators that made $100,000 in gross sales or 200 transactions in the state have an obligation. Meanwhile, in Texas, marketplace facilitators must collect, report, and remit state and local sales and use tax on $500,000 or more in sales made through a marketplace in the state. The variation in thresholds can be confusing because marketplaces must be able to track the amount of transactions or sales in a state to know when an obligation is triggered.

Another layer of complexity is how states define the type of sales that count toward their economic nexus threshold. Some states count exempt transactions toward economic nexus thresholds, while others don’t. It’s this type of complexity that makes it difficult for businesses to know what the laws are and how they apply, causing widespread noncompliance.

Marketplace Inventory

One ongoing area of controversy is whether marketplace inventory establishes a physical nexus and an obligation to collect and remit for marketplace sellers. More than 20 states—from Pennsylvania to Washington—have held marketplace sellers liable for past sales tax because of inventory in the state. Last year, a Pennsylvania court determined that having inventory placed in the state by Fulfillment by Amazon warehouses doesn’t create a sales tax obligation.

However, California has made it clear that if you have inventory stored in a third-party’s fulfillment center in California, “you are engaged in business in California,” and are responsible for the tax due on sales not made through a registered marketplace facilitator. Washington state’s perspective is similar to its West Coast neighbor. According to the state’s department of revenue, “the fact that goods owned by the Taxpayer were physically stored in Washington until sale, even briefly via digital reassignment of ownership, is sufficient to establish substantial nexus.”

As states look to reevaluate their established policies and others explore adopting rules themselves, expect to see further controversy.

Tax Requirements Continue to Change

States are constantly changing their rules and regulations. Just this year, there have been several updates, including:

  • Colorado and Oklahoma requiring online marketplaces to collect and report information on high-volume sellers; other states are looking to do the same.
  • Tennessee deeming that certain marketplace facilitator fees aren’t subject to sales tax. This is another inflection point for complexity because if one state says fees charged by marketplace to marketplace sellers are exempt from sales tax that likely means there are states that say the opposite.
  • Oklahoma requiring marketplace facilitators to collect and remit applicable local taxes as of Jan. 1.

There also was a major change this year at the federal level. As part of the Integrity, Notification, and Fairness in Online Retail Marketplaces for Consumers Act—or INFORM Consumers Act—marketplace facilitators must collect and verify certain information from high-volume third-party sellers. The move comes after several states set similar requirements for businesses to increase transparency and cut down on the sales of counterfeit goods.

There also are changing tax requirements for specialized marketplaces, from food delivery to car-sharing platforms. Third-party delivery marketplaces have become extremely popular; as a result, states have taken steps to tax them. In Texas, food delivery marketplaces are charged myriad fees, including for setup, service, credit cards, and subscriptions.

When it comes to third-party delivery marketplaces, confusion around who owes the tax looms large. This is because systems aren’t always set up correctly to account for the marketplaces collecting and remitting the tax. In these cases, the restaurants may also collect the tax, leading to a host of issues, including overcharging the customer.

Additional Complexity Outside of the US

While not sales tax specific, marketplaces are facing similar requirements and complexity abroad. The UK and EU now require online marketplaces to collect, remit, and report value-added tax on certain transactions under deemed supplier laws. In the UK, marketplaces must identify the value of each transaction, where each seller’s goods were at the time of sale, and whether the seller is a UK or foreign business. In the EU, marketplaces also must record the value of goods because rules apply differently for imports over 150 euros.

Marketplaces and businesses selling through the platforms should be prepared for ongoing tax compliance challenges. Rules will continue to evolve, and we should expect to see more litigation around hot-topic items such as inventory nexus.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Scott Peterson is vice president of US tax policy for Avalara.

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