Tax authorities are adopting policies to collect transactional taxes on purchases made through digital marketplace facilitators, like Amazon, eBay & Etsy
In 2018, the U.S. Supreme Court ruled in South Dakota v. Wayfair that states can require companies to collect sales and use tax even when the company making the sale does not have a physical presence in the state. This resulted in a flood of state legislation requiring remote sellers to collect and remit sales taxes in the states where they have more than a threshold amount of transactions or gross receipts. Today, attention has turned to sales facilitated by platforms such as Amazon and Etsy. Most states have passed or are pursuing policies requiring these platforms to collect taxes on the third-party sales they facilitate.
For states, this is a way to generate new tax revenue through changes in compliance and enforcement, rather than enacting a “new” tax or raising rates. Indeed, marketplace tax collection is gaining steam outside the United States, as well, including:
Asia Pacific — Australia first adopted value-added tax (VAT) collection rules for digital marketplaces in 2017, and New Zealand enacted marketplace goods & services tax rules in 2019.
Europe — In Germany, marketplace facilitators can now be held liable for unpaid VAT on third-party sales through their platforms. And as of January 1, France requires marketplaces to collect and report on certain taxable transactions by third-party sellers. These policies will expand throughout the European Union (EU) next year when qualifying online platforms will be deemed the supplier, for VAT collection purposes, for certain low-value goods and facilitated transactions.
Click here for more on indirect tax strategies and how new rules could impact your business.
Marketplaces also will need to keep “sufficiently detailed” information to ensure that VAT is collected when non-EU companies sell to EU consumers through the marketplace’s platform.
Latin America — Countries throughout Central and South America also are beginning to look to marketplaces for indirect tax collection and reporting.
Compliance challenges for platforms & sellers
In the U.S., each state has crafted its own criteria for what activities will cause a platform to be considered a marketplace facilitator — typically some combination of listing or advertising third-party products for sale and then facilitating those sales through fulfillment, payment processing, or handling returns.
Companies such as Amazon and eBay are marketplace facilitators in most, if not all states that have passed these laws. But the impact is not limited to these major players. Any company involved in third-party sales needs to evaluate whether it falls within a jurisdiction’s definition of “marketplace,” and multi-channel sellers need to consider which of their sales channels will be collecting taxes on their behalf.
Some states have adopted a broad definition, which leaves companies responsible for sales tax collection even if they never handle the customer’s payment. As these practical limitations to compliance arise, states will likely continue amending their criteria, which means that the precise definition of marketplace — and every seller’s tax collection obligation — is a moving target.
Most states have taken the position that marketplaces and sellers cannot opt-out of these new regimes by changing their respective tax collection and reporting obligations with private agreements. In light of this, a company’s tax exposure may not be fully within its ability to control. This can be particularly challenging for industries with complex tax rules, like oil & gas or telecommunications.
Companies in these industries often have robust systems for ensuring accurate collection and remittance of these highly technical taxes, while newly deemed marketplaces may not have the technology or know-how in place to similarly comply.
In addition, the laws passed thus far apply only to sales and use taxes, not additional transaction taxes, so there could be multiple collectors and remitters on the same transaction. Industry groups are urging states to carve out exceptions for certain industries, but it’s unlikely these eventual exceptions will be uniform across all jurisdictions.
Who’s responsible for regulatory requirements?
With an eye toward new tax revenue, jurisdictions are rapidly moving forward with implementation despite the questions that remain. For example, it’s unclear in some cases where the burden of audits, documentation, and other due diligence activities will ultimately land.
Most states have said the marketplace itself is the party subject to audit, rather than the third-party seller (except in cases where the seller provided incorrect taxability information to the marketplace). However, third-party sellers still may need to comply with record-keeping requirements because improper tax calculation can impact vendor and customer relationships even when the error is attributable to the marketplace.
Marketplaces need the ability to rapidly scale in order to handle tax calculation on potentially millions of transactions around the world. Third-party sellers, meanwhile, need to verify that marketplaces are handling their tax calculation correctly and that no transactions are slipping through the cracks. Given that sellers can ultimately be held liable for tax collection in some cases, it’s important for them to retain a reliable audit trail of data for all transactions, regardless of the sales channel.
With the rules for marketplaces not yet fixed or fully defined, sellers and marketplaces must be able to show a consistent tax policy with comprehensive, reliable data in order to demonstrate a good faith effort to comply in this uncertain environment.
For marketplace facilitators and multi-channel sellers, the right tax technology can ensure the ability to comply with these new rules while also providing flexibility to adapt as tax authorities further expand and refine their laws.
A version of this article appeared in The Future of Customer Engagement and Experience.