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Marketplace collection laws have shifted our common understanding of those persons that are responsible for collecting sales and use taxes. Historically, sellers have been responsible for collecting sales or use tax on sales they make to purchasers. Marketplace collection laws shift the tax collection responsibility on sales made through a marketplace from the seller to “marketplace providers” and “marketplace facilitators” (referred to throughout as “marketplace facilitators”).
In general, state tax laws have defined marketplace facilitators either narrowly (e.g., Oklahoma and Pennsylvania) or broadly (e.g., California, New Jersey, and Washington). State laws applying a narrow definition generally contain two requirements to qualify as a marketplace facilitator: (1) a person must facilitate a sale by listing or advertising the sale in a forum, and (2) the person must collect payment from the purchaser and transmit the payment to the seller.
In those states applying a broad definition, a person can qualify as a marketplace facilitator by conducting any one of a series of activities in two broad categories. For example, a broad definition will generally provide that a person qualifies as a marketplace facilitator if it contracts with a seller to facilitate the sale of the seller’s products through the marketplace and engages in one or more specified activities. Such activities typically include:
(i) transmitting or otherwise communicating the offer or acceptance between buyer and seller;
(ii) owning or operating the marketplace infrastructure that brings buyer and seller together;
(iii) providing a virtual currency that buyers may or are required to use to purchase items from a seller; or
(iv) research and development activities related to one of the preceding activities.
In addition, a person qualifying as a marketplace facilitator also engages in one of the following activities with respect to the seller’s products:
(i) payment processing services;
(ii) fulfillment or storage services;
(iii) listing products for sale;
(iv) setting prices;
(v) branding sales as those of the person (as opposed to the seller’s);
(vi) order taking;
(vii) advertising or promotion; or
(viii) performing customer service or accepting/assisting with returns or exchanges.
The two definitions can have varying consequences. For example, under the narrow definition, a person must, at minimum, conduct activities that facilitate the sale of the seller’s property and collect the payment from the purchaser. However, a person that does not collect payment from the purchaser could still be a marketplace facilitator in a state with a broad definition if the person merely lists products for sales and transmits the offer and acceptance between the buyer and the seller.
In addition to the two general definitions of marketplace facilitator, there are other differences in the state marketplace facilitator provisions that can lead to inconsistencies in who qualifies as a marketplace facilitator. These nuances include exclusions from the definition of marketplace facilitator for certain types of sales (e.g., services) or exclusions for marketplace facilitators in certain industries. For example, New York’s definition of “marketplace provider” does not capture a person that facilitates sales of services. N.Y. Tax Law § 1101(e)(1). For example, California law provides an exclusion for a “delivery network company” from its definition of “marketplace facilitator.” Cal. Rev. & Tax. Cd. § 6041.5(a). A “delivery network company,” for purposes of the marketplace exclusion, is defined as a business that maintains an Internet website or mobile application used to facilitate the pickup of local products from a local merchant and delivery of the local products to a customer. Cal. Rev. & Tax. Cd. § 6041.5(b).
Why this is important: The lack of uniformity in the definitions of marketplace facilitator will result in inconsistent tax collection obligations for similar transactions. Persons that qualify as a marketplace facilitator in one state may not necessarily have a tax collection obligation in other states. If a marketplace is not required to collect in a particular state, the seller will remain responsible for collecting and remitting sales tax.
What to prepare for: It is expected that the remaining states without marketplace collection laws will eventually enact such laws resulting in additional differences and nuances in the state laws. Furthermore, modifications and refinements to marketplace laws are expected in those states that already have such laws. As state’s issue guidance on existing laws, it is possible there will be further variations.
Next Monday: Economic Nexus Thresholds for Marketplaces