Marketplace providers, because of their size and position represent an easy target for tax collection and remittance requirements. States are taking notice and introducing legislation in order to close their tax gap.
It has been a busy season so for among state legislatures, and at the forefront of all of their agendas is drafting a comprehensive budget with sufficient revenue. The common refrain ringing out from these congresses and assemblies is that they’re missing out on one of the biggest potential sources of tax revenue: online sales.
One of the main reasons (at least one of the main logistical reason) preventing states from collecting sales tax from online sellers is that most online sellers are small and far away. Even when a state could theoretically claim jurisdiction over an online seller, it may not be worth it for the state to pursue that revenue.
Instead, governments are increasingly looking to a different online platform for sales tax obligations–Online Marketplace. Marketplaces provide a platform for numerous smaller sellers to engage with customers, make sales, and ensure fulfillment of those orders (on the far end of the scale there’s the Amazon Marketplace, which provides a behemoth-sized umbrella for thousands of smaller sellers).
Because of their size and their status overarching individual sellers, Marketplaces seem like a perfect party for states to go after. Marketplaces are in a position to know who is selling what to whom at what price. As such, they are ready to provide all the data a state would need in order to effectuate sales tax collection. However, this leads to the billion-dollar question: are states able to legally compel Marketplaces to collect tax for their clients?
Current Marketplace Liability
As yet, no Department of Revenue in the United States has mandated that Online Marketplaces collect and remit tax for their business customers. That doesn’t mean, though, that they haven’t issued guidelines and rulings dictating when a Marketplace could have this burden, creating a patchwork of requirements depending on the services a Marketplace provides.
Last November, Indiana released Revenue Ruling #2016-07ST, in which a particular Marketplace was determined to have sales tax responsibility for its clients. This was a singular ruling, based on specific contractual arrangement that the Marketplace established with its clients. That arrangement caused the Marketplace to become a “Retail Merchant” under Indiana law, meaning that standard sales tax liability would apply to it. Therefore, this is not a ruling that has widespread application. But it does signal that tax regulators are on the lookout for new businesses they can get tax revenue from.
In Wisconsin, there is a rule imposing tax collection on Marketplaces, but this is limited to only when customers take possession of taxable goods at a physical location in Wisconsin operated by the Marketplace or its affiliates — which is pretty rare.
Arizona issued Transaction Privilege Tax Ruling TPR-16, in which it stipulated a number of activities a Marketplace could engage in, resulting in it being deemed a retailer. These activities include providing primary customer support for purchases made on the platform, providing payment processing services, and marketing the Marketplace as a single brand instead of a bazaar-like collection of individual stores. Overarching these activities is the determination of whether the Marketplace conducts or directs order fulfillment–that is, does it make deliveries directly, or otherwise control the delivery process?
New York has recently been very active in attempting to establish sales tax liability on Marketplaces. Governor Andrew Cuomo has introduced budget measures that would impose sales tax liability on Marketplace providers with more than $100 million in sales to New York customers. However, this effort does not appear to have much traction, as it was excluded from the final budget passed in May of this year.
The U.S. Is Not Alone
While the U.S. may be unique in basing sales tax liability on states’ borders and the requirement of physical presence, many other countries are moving to expand remote commerce taxation–and even moving quicker than the U.S. as they are not limited by physical presence requirements. A common area has been for countries to require remote sellers making retail sales of digital supplies (e.g. video games, movies, digital music, etc.) to register for and collect Valued-Added Tax (VAT). Looking to Marketplaces as sources of VAT is the next step.
Australia has been a leader in this initiative, proposing a rule that would require remote sellers–including “Electronic Distribution Platforms,” i.e. Online Marketplaces–to collect and remit VAT on “low value goods” sold to Australian customers. “Low value goods” are defined as those priced less than $1,000 AUD, and the rule would not apply to sellers that facilitate less than $75,000 AUD of sales in a year. Nevertheless, this signals a clear attempt to greatly expand the obligation of importers selling directly to Australian customers. However, its implementation has been attenuated by vigorous debate, and is unlikely to come into effect until at least 2018.
What Does This Mean For Marketplaces Going Forward?
Final answers are still far away. There will still be years of legislation and litigation over that legislation before the tax liability of Online Sellers is finalized. It is possible that some major change could occur abruptly–the Supreme Court overturning Quill, or Congress acting to empower states to tax remote sellers–but even those events will take time to develop. As such, it is more likely that the structure of sales tax for remote sellers will develop slowly, with fits and starts, as states pick around the edges.
But there is clearly a great deal of attention being paid to the billions of dollars running through Online Marketplaces. Governments see this as an enormous amount of lost tax revenue, and argue that it’s hurting their ability to provide services for their citizens. The attempts in New York and Arizona represent attempts to claw back some of this lost money.
As these efforts bear fruit, more states are making their own attempts to expand tax liability on Online Marketplaces. Here at Sovos, our regulatory analysis team is currently tracking bills working their way through Minnesota, Rhode Island, Texas, and Washington. These states all seek to reap tax revenue from remote sales by requiring Marketplaces to carry the burden of their clients.
Marketplace providers, because of their size and position represent an easy target for tax collection and remittance requirements. As they expand the services they provide to Marketplace sellers, they may end up engaging in activities that make them a “retailer” under current interpretations of the law–as in Indiana.
Changes will continue apace, as both Marketplaces evolve their structures and governments adapt their policies to match these evolutions. What this ultimately means is that the future is uncertain. However, knowledge is power, and here at Sovos we will continue to provide you with the knowledge and ready solutions needed to navigate the fluctuating tax landscape.