Wednesday, Jan. 1 was not only the first day of a new decade, it also was the first day that marketplace facilitator laws are in effect in Hawaii and Illinois.
That means marketplace facilitator laws, which require online marketplaces such as those operated by Amazon.com Inc. and eBay Inc. to collect and remit sales tax on behalf of sellers, are now in effect in 38 states.
Marketplace facilitator laws are one way that states have responded to the U.S. Supreme Court’s June 2018 ruling in the South Dakota v. Wayfair Inc. case. That decision enabled 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.
Hawaii‘s law considers a business to be a marketplace facilitator if it sells or assists in the sale of tangible personal property, intangible property, or services on behalf of another seller. Illinois‘ law considers a business a marketplace facilitator if it assists in a sale on behalf of another retailer either by listing or advertising tangible personal property for sale by the marketplace seller in a marketplace, as well as if it collects payment from the customer and transmits that payment to the marketplace seller. It doesn’t matter if the marketplace facilitator receives compensation or other consideration in exchange for its services. Both Hawaii and Illinois require marketplace facilitators to comply with their laws once they have hit the thresholds of at least $100,000 in gross income generated in the state and at least 200 transactions with customers in the state.
Variations in state laws add complexity for online retailers
In passing marketplace facilitator laws, numerous state legislators have suggested that they are further simplifying the sales tax and remittance process. In fact, that isn’t the case, 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. For example, there are several different structures of the laws that complicate matters for retailers and marketplaces.
Pennsylvania’s law, for instance, requires marketplaces to collect and remit online sales tax if they generate more than $10,000 in revenue in the state, and it defines marketplace facilitators as businesses that list or advertise a seller’s goods and services for sale through a marketplace (the law states that the marketplace may directly or indirectly collect the payment). That stands in contrast with Colorado’s law that doesn’t consider a company a marketplace facilitator if it only provides online advertising services or lists products for sale—instead, it has to facilitate the sale. The lack of consensus creates complexities, he says, especially for merchants that, in addition to online marketplaces, sell on their own websites and apps.
The laws require multichannel retailers 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. “That’s making sales tax collection more complicated,” 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. “Compliance isn’t easy.”
But changes may come this year as states reevaluate their laws and come to an agreement as to what types of businesses should be considered marketplace facilitators. Even if states reach that type of consensus, there will still be a number of complicating factors that make compliance difficult. For example, the Illinois law requires a retailer to collect and remit sales tax on all apparel items while Pennsylvania law only requires sales tax on apparel that is formal attire, an item made with real, imitation or synthetic fur, or sporting goods and clothing that’s “normally worn or used when engaged in sports.”
There’s good reason that states are rapidly implementing marketplace facilitator laws: They’re generating significant revenue. California, for example, expects its law to generate about $616 million in sales tax revenue thanks to its online sales tax laws this year.
Read about how retailers are navigating the hodgepodge of state laws and regulations in Internet Retailer’s June 2019 article, “How the Supreme Court’s Wayfair decision is changing retail” and the October 2018 cover story, “The Supreme Court overturned Quill. Now what?” or listen to an Internet Retailer webinar on the topic here. You can find additional resources and research available here.