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The shift in tax collection responsibility to marketplace facilitators raises questions on how to address exempt sales and related documentation requirements. States generally require sellers responsible for collecting sales and use tax to maintain that (i) sales or use tax was charged on all taxable sales, and (ii) the tax collected was subsequently reported and remitted to the state. When a seller does not charge sales or use tax on transactions, a valid exemption or resale certificate or other record must be maintained to demonstrate that the transaction was not subject to tax. However, when it comes to marketplace sales, the application of these general principles becomes less clear.
The major issues with exempt marketplace sales is determining who is responsible for collecting the exemption or resale certificates and who the certificate should be issued to – the marketplace seller, the marketplace facilitator, or both. For example, New York grants marketplace facilitators “the right to accept a certificate or other documentation from a customer substantiating an exemption or exclusion from tax.” N.Y. Tax Law § 1132(l)(1). Marketplace facilitators are then required to “keep such records and information and cooperate with the commissioner to ensure the property collection and remittance of tax imposed, collected or required to be collected [under New York law].” Id.
Similarly, Connecticut considers a marketplace facilitator the retailer of each sale facilitated on its marketplace. Conn. Gen. Stat. § 12-408e(b). As such, the marketplace facilitator is required to comply with all obligations that a retailer otherwise would. Id. Although not explicit, the retailer’s obligation to accept exemption certificates and retain those certificates for a period of six (6) years would thereby be imposed upon marketplace facilitators. Conn. Info. Pub. No. 2018(5) (Dec. 19, 2018). The Connecticut Department of Revenue Services has indicated it is developing additional guidance specific to the record-keeping requirements for marketplace facilitators. Conn. Dep’t of Revenue Services, Office of the Comm’r Guidance – OCG-8 Regarding Marketplace Facilitators and Marketplace Sellers (Nov. 16, 2018).
Other state marketplace laws indicate that the marketplace facilitator is generally the entity subject to audit. See, e.g., N.J.S.A. § 54:32B-3.6(f). Where this is the case, a best practice would be for a marketplace facilitator to obtain such certificates to ensure the marketplace facilitator can demonstrate that the transaction was not subject to tax.
With the collection and record retention burden falling upon the marketplace facilitator in numerous states, some states provide protections for the marketplace facilitators. For example, Virginia’s marketplace law provides protection to marketplace facilitators who reasonably rely on exemption certificates. Va. Code § 58.1-612.1(E). Specifically, a marketplace facilitator is relieved of liability for incorrect collection or remittance of tax on transactions for which it acted as a facilitator if the error is due to reasonable reliance on an invalid exemption certificate provided by the marketplace seller or purchaser. Id. In Indiana, if the purchaser was entitled to an exemption, but the marketplace facilitator collected the sales tax in error, the purchaser does not have a cause of action to bring a sales tax claim against the marketplace facilitator. Instead, the purchaser must file a claim for refund with the Department of Revenue for the recovery of the overpayment of sales tax. Ind. Dep’t of Revenue, Information Bulletin No. 89 (July 1, 2019).
Why this is important: If proper documentation is not maintained, marketplace facilitators run the risk of being liable for tax on transactions that would otherwise be exempt. In the absence of clear guidance, marketplace facilitators should consider retaining copies of exemption certificates and otherwise document any exempt sales. Marketplace facilitators should also consider ensuring procedures are in place for obtaining any exemption certificates from marketplace sellers if the exemption certificate is not obtained directly from the consumer.
What to prepare for: Marketplace facilitators should review marketplace collection state tax laws to confirm who is responsible for collecting exemption certificates or otherwise documenting exempt sales. Marketplace facilitators should also consider procedures to accept and verify exemption certificates. The exact information needed to verify an exemption certificate will vary by jurisdiction and type of transaction.
Next Monday: Marketplace Audits