On July 1, marketplace facilitator laws took effect in seven states: Arkansas, Indiana, Kentucky, New Mexico, Virginia, West Virginia and Wyoming. Marketplace facilitator laws requires online marketplaces such as those operated by Amazon.com Inc. and eBay Inc. to collect and remit sales tax on behalf of sellers.
That means that 23 states currently have marketplace facilitator laws in effect. The next significant date is Oct. 1 when marketplace facilitator laws take effect in six more states (Arizona, California, Colorado, Maine, North Dakota and Utah).
Marketplace facilitator laws are one part of a broader effort by states to respond to the U.S. Supreme Court’s June 2018 ruling in the South Dakota v. Wayfair Inc. case that allowed states and local governments to require online retailers to collect sales tax even if they don’t have a physical presence, or nexus, in the state or local tax jurisdiction. The court stated that it was overturning decades of precedent because the South Dakota law is straightforward: The law requires retailers to collect and remit sales tax if they sell more than $100,000 in the state or complete at least 200 transactions with South Dakota residents.
In passing marketplace marketplace facilitator laws, numerous state legislators have suggested that they are further simplifying the sales tax and remittance process. However, that’s far from accurate given the disparities between the states’ laws, says Scott Peterson, vice president of U.S. tax policy and government relations at Avalara, a software-as-a-service sales tax and compliance vendor.
“The states don’t get it, they think they’re making things easier,” says Peterson, who worked as a state tax director for South Dakota’s department of revenue and then as executive director of the Streamlined Sales Tax Governing Board before joining Avalara. When states pass marketplace facilitator laws, they think “they’re going from requiring 1 million companies to collect sales tax to one.” But they’re failing to understand how marketplace facilitator laws create new issues for merchants that sell on several online marketplaces, as well as their own ecommerce sites and apps. The laws require them to constantly monitor which marketplaces are handling and collecting in which states while they also handle their own collection and remittance processes for sales on their sites and apps. The situation gets even more complicated for merchants that also operate their own online marketplace.
“Compliance isn’t easy,” he says, given that marketplace facilitator laws vary from state to state. “Arizona’s version looks very different from Minnesota’s law.”
For example, Wyoming defines a marketplace facilitator as any person who facilitates the sale of tangible personal property, services or admissions for a marketplace seller and collects payment from a consumer and transmits that payment to the seller, regardless of whether that person receives a commission for doing so. And it requires all marketplace facilitators to collect and remit online sales tax on behalf of sellers. Arkansas, Indiana, Kentucky, Virginia and West Virginia, on the other hand, only require facilitators to collect and remit online sales tax on behalf of marketplace sellers once they generate $100,000 or 200 transactions in the state.
There’s good reason that states are rapidly implementing marketplace facilitator laws: They’re generating significant revenue. New Mexico, for example, expects its law to generate about $43 million this fiscal year.
Online sales tax laws
In addition to the new marketplace facilitator laws, six states (Arkansas, New Mexico, Pennsylvania, Rhode Island, Tennessee and Virginia) had their online sales tax laws take effect.
That means, as of July 1, 40 states have sales tax collection statutes and regulations that require online retailers to collect sales tax on online orders even if they do not have a physical presence in that state.
There are some key differences between the various states’ laws. For example, Tennessee requires out-of-state sellers to collect and remit sales tax on orders placed within the state if the merchant has generated $500,000 in revenue within the state over the previous 12 months. That’s a marked contrast from Arkansas, which requires merchants to collect and remit sales tax on orders placed within the state if the merchant has generated $100,000 in revenue within the state either within the current calendar year or over the previous 12 months.