How States Protect Marketplace Facilitators from Tax Overcollection Lawsuits

States have enacted new marketplace facilitator laws designed to impose sales tax obligations on marketplace facilitators related to sales made by third-party sellers. These new sales tax collection obligations on marketplace facilitators create the potential for class-action lawsuits arising out of unintended overcollection of tax.

Today’s Marketplace Monday explores two legislative solutions to overcoming this potentially expensive business risk.

Overview

• Most recently-enacted marketplace facilitator laws prohibit or mitigate the likelihood of class-action lawsuits related to the overcollection of sales taxes.
• These safeguards allow marketplace facilitators to comply with new tax collection obligations without fearing consumer litigation.
• States take different approaches to mitigating the risk of overcollection lawsuits, so marketplace facilitators must be aware of their state-specific obligations.

The Problem

Marketplace facilitator laws are a departure from the traditional imposition of sales tax collection obligations on a seller. Now, some states require marketplace facilitators – rather than the seller of goods – to collect tax on third-party sales facilitated through a marketplace platform if certain conditions are met.

Tax overcollection may occur if both a marketplace facilitator and a marketplace seller collect sales tax, or if a marketplace facilitator mistakenly collects sales tax on items that are not subject to a state’s tax.  These errors may occur due to a marketplace facilitator’s unfamiliarity with the item being sold.

Pennsylvania’s Approach: Ban Class-Actions Outright

To address the threat of litigation, many new marketplace laws ban class-action lawsuits related to the overcollection of sales tax by a marketplace facilitator. Class-action bans are common in states that place a tax collection obligation on both facilitators and sellers. Pennsylvania’s marketplace law provides an example of a common class-action ban:

A class action may not be brought against a marketplace facilitator or a referrer on behalf of purchasers arising from or in any way related to an overpayment of sales or use tax collected by the marketplace facilitator or the referrer, regardless of whether such action is characterized as a tax refund claim. Nothing in this subsection shall affect a purchaser’s right to seek a refund from the department under other provisions of this article. 72 Pa. Const. Stat. § 7213.5(e).

Therefore, consumers alleging tax overcollection cannot directly sue a marketplace facilitator, but must rather seek refund claims from the Pennsylvania Department of Revenue.

Maine’s Approach: Clearly Place the Tax Collection Obligation Solely on Facilitators

The failure of a state to provide a class-action ban does not necessarily mean that marketplace facilitators are at an increased risk of facing class actions. For example, on June 20, Maine Governor Janet Mills signed a marketplace facilitator law that does not contain a ban on class-action lawsuits relating to the overcollection of tax.

The introduced version of L.D. 1452, filed April 2, contained similar provisions to Pennsylvania’s marketplace law, including an identical class-action ban. However, the class-action ban was removed in the legislative process after the law was amended to place the tax collection burden on marketplace facilitators.

Maine’s newly-enacted law:

1. Places all tax collection responsibilities on marketplace facilitators that meet certain requirements,
2. Requires marketplace facilitators to provide a written statement to marketplace sellers informing them that the facilitator (not the seller) will collect the applicable tax, and
3. Bars marketplace sellers that receive required statement from marketplace facilitators from collecting tax on the same sales.

Therefore, a Maine class-action lawsuit is unlikely to arise out of the double-collection of tax by marketplace facilitators and sellers. However, a marketplace facilitator may be exposed to litigation associated with the overcollection of sales tax due to errors in determining the proper tax rates or the taxability of specific items.