In addition to the start of the crucial fourth quarter, Tuesday, Oct. 1 is also the day that marketplace facilitator laws take effect in 11 states that represent 33.1% of the U.S. population. Those states are: Arizona, California, Colorado, Maine, Maryland, Massachusetts, Nevada, North Dakota, Texas, Utah and Wisconsin.
That will mean 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, will be in effect in 36 states. Two other states, Hawaii and Illinois, will have their marketplace facilitator laws take effect on Jan. 1.
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.
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 roughly four 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 will likely come next 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, 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. New Mexico, for example, expects its law to generate about $43 million this fiscal year.
Remote sales tax laws
That means, as of Tuesday, 44 states will 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. However, there are some key differences between the various states’ laws. For example, Colorado requires out-of-state sellers to collect and remit sales tax on orders placed within the state if the merchant has generated $100,000 in revenue (including services and exempt sales) within the state over the previous 12 months or past calendar year. That’s a different approach from Arizona, which this year has a $200,000 threshold for gross sales from Arizona customers exclusive of marketplace sales over the previous 12 months or past calendar year (Arizona’s threshold dips to $150,000 next year and $100,000 in 2021).
Read about how retailers are navigating the hodgepodge of state laws and regulations in Internet Retailer’s June 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.