Last updated: Marketplace facilitator tax collection: Are you ready?

Marketplace facilitator tax collection: Are you ready?

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As of January 1, 2020, marketplace facilitator tax collection laws are in effect in a majority of states. Following the U.S. Supreme Court’s South Dakota v. Wayfair decision in June 2018, states rushed to enact laws requiring remote sellers to collect sales or use tax on in-state sales.

Many of these Wayfair laws also included a completely new sales tax collection framework for “marketplace facilitators.”

These policies require a company meeting certain criteria to collect sales tax not only on its own sales, but also on third-party sales facilitated through the company’s platform.

Marketplace facilitator tax collection: Uncertainties abound for platforms and sellers

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 of returns.

Companies like 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 they fall within a jurisdiction’s definition of “marketplace” and multichannel sellers need to consider which of their sales channels will be collecting tax on their behalf.

Some states have adopted a broad definition, and a company may find it’s responsible for sales tax collection even if it never directly or indirectly handles the customer’s payment. As these practical limitations to compliance arise, we can expect states to continue amending their criteria, meaning “marketplace” – and every seller’s tax collection obligation – is a moving target.

Most states have also 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. A company’s tax exposure may not, then, be fully within its ability to control. This can be particularly challenging for industries with complex tax rules, like oil and gas or telecommunications.

Companies in these industries may have set up robust systems for ensuring accurate collection and remitting of these highly technical taxes, while newly deemed marketplaces may not have the technology or know-how in place yet to similarly comply.

Further, the laws passed thus far apply only to sales and use taxes, not additional transaction taxes – which means 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.

Marketplace collection goes global

Marketplace tax collection is also gaining steam outside the United States. Australia first adopted marketplace VAT collection rules in 2017 and New Zealand followed suit with marketplace GST rules in 2019. In Germany, marketplace facilitators can now be held liable for unpaid VAT on third-party sales through their platforms.

As of January 1, 2020, France requires marketplaces to collect and report on certain taxable transactions by third-party sellers. These policies will expand throughout the European Union next year – qualifying online platforms will be deemed the supplier for VAT purposes for certain low-value goods and facilitated transactions.

Marketplaces will also need to keep “sufficiently detailed” information to ensure that VAT is collected on sales of goods by non-EU companies to EU consumers through the marketplace’s platform. Countries throughout Central and South America are also starting to look to marketplaces for indirect tax collection and reporting.

Weather the storm with flexibility, scalability, and reliability

Despite the many questions that remain around how these new collection regimes will operate, jurisdictions are rapidly moving forward with implementation. It’s still unclear where the burden of audits, due diligence, and documentation requirements will ultimately land.

Most states have provided that the marketplace 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 may still need to comply with record-keeping requirements, and 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 additional transactions around the world. Meanwhile, third-party sellers need to verify that marketplaces are handling tax calculation correctly and that no transactions are slipping through the cracks.

Since sellers can ultimately be held liable for tax collection in some cases, it’s important to retain a reliable audit trail of data for all transactions, regardless of the sales channel.

The rules for marketplaces are not yet fixed or fully defined, and being able to show a consistent tax policy with comprehensive, reliable data can go a long way in demonstrating a good faith effort to comply in this environment of uncertainty.

Whether you’re a potential marketplace facilitator or a multichannel seller, the right tax technology can ensure you’re able to comply with these new rules while also providing flexibility to adapt as tax authorities further expand and refine their laws.

Learn what effects the current health crisis might have on business strategy, digital transformation, and the future of e-commerce HERE.

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