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Editorial 11 MIN READ

Marketplace facilitators become the tax collector: a state-by-state snapshot

Four months after Wayfair, the statutes that shift collection onto Amazon, eBay, and Etsy are the ones actually moving revenue

The Editors
Staff, Incorporator.org
11 min read Updated
Contents 8 sections
  1. What a marketplace facilitator law actually does
  2. The states that already flipped the switch
  3. The two-layer compliance map
  4. Thresholds, at a glance
  5. What October 23 looks like for the states still drafting
  6. The operational answer for a seller this quarter
  7. What Congress is doing, and not doing
  8. Sources

marketplace facilitator law tells Amazon, eBay, and Etsy that they, not the third-party merchant on their platform, owe the sales tax to the state. By October 23, 2018, nine states have one of these statutes in force, with New Jersey switching on November 1. The revenue that economic nexus produced on paper after South Dakota v. Wayfair is, in practice, being collected through marketplace facilitator rules.

This is the second layer of the post-Wayfair compliance stack. The first layer, economic nexus, is catalogued in Economic nexus after Wayfair: the state-by-state scramble. This piece is about what sits on top of it.

What a marketplace facilitator law actually does

A marketplace facilitator, in the standard drafting, is any person that contracts with a third-party seller to facilitate the sale of the seller's tangible personal property (or services, or digital goods, depending on the state) and that either directly or indirectly processes payment, transmits the offer, or provides the fulfillment. The list of companies this reaches is short and familiar: Amazon, eBay, Etsy, Walmart Marketplace, Wayfair, Newegg, Reverb, StubHub, Poshmark, and a growing set of vertical marketplaces.

The operational shift is simple to state. Before a facilitator law, a third-party seller on Amazon was responsible for collecting and remitting sales tax on its own sales, using its own state registrations. Amazon collected only on items it sold directly (1P inventory). After a facilitator law takes effect, Amazon is the statutorily designated retailer for 3P sales into that state. The third-party seller either gets relieved of the collection duty on those sales or is credited against any duplicate remittance. The state collects from one large, solvent, auditable entity instead of from thousands of small sellers it cannot practically reach.

The second-order consequence is that the facilitator takes on nexus for every seller on its platform at once. A Colorado seller doing $50 of business in Connecticut has no personal nexus obligation in Connecticut under the dollar floor. Amazon, which crosses every threshold in every state in an afternoon, does. The revenue the state could not collect from ten thousand small sellers becomes collectible from one.

The states that already flipped the switch

Washington was first, and by several months. Chapter 28 of the Laws of 2017 (Engrossed House Bill 2163), signed July 7, 2017, required marketplace facilitators with more than $10,000 in Washington retail sales either to collect and remit on behalf of their third-party sellers or to comply with a notice-and-report regime. Collection became effective January 1, 2018. This was enacted eleven months before Wayfair, and it relied on the older "substantial nexus" theory that the facilitator itself had enough Washington contact to be made the taxpayer. The statute survived, and it is now the template that every drafting committee in the country has been reading.

Minnesota followed in its 2017 session with H.F. 1, the omnibus tax bill signed May 30, 2017, which added Minnesota Statutes § 297A.66, subd. 4a. The provision made marketplace providers the retailer for sales into Minnesota beginning July 1, 2019 in the statute as enacted, with an earlier option for providers that elected to collect sooner. Revenue Notice 18-04, issued in July 2018, confirmed that Wayfair did not accelerate the effective date but that providers registered under the Streamlined system may begin collecting in advance. The practical effect in 2018 is that Amazon started collecting on Minnesota 3P sales on October 1, 2018.

Rhode Island acted quickly. H 5175 Sub A as Amended, enacted as part of the FY 2018 budget on August 3, 2017, amended R.I. Gen. Laws § 44-18.2 to define "referrer" and "retail sale facilitator" and to require collection or a notice-and-report filing from any facilitator with more than $100,000 in Rhode Island sales or 200 separate transactions. Enforcement has been phased in through the Division of Taxation's administrative guidance.

Pennsylvania's Act 43 of 2017, which originated as the notice-and- report statute discussed in the economic-nexus piece, was amended by the Department of Revenue's Sales and Use Tax Bulletin 2018-01 on January 19, 2018, to clarify that marketplace facilitators with more than $10,000 in Pennsylvania sales must elect to collect or to notice and report. Pennsylvania was the first state to explicitly name marketplaces as a distinct class of taxpayer in post-Wayfair administrative guidance. Effective April 1, 2018, Amazon began collecting Pennsylvania sales tax on 3P sales.

Connecticut's Public Act 18-152, signed June 14, 2018, added a marketplace facilitator provision to the economic-nexus regime enacted earlier in the session under Public Act 18-49. The collection threshold for a facilitator is $250,000 and 200 transactions, conjunctive, and the effective date was December 1, 2018. Connecticut's statute is unusual in that it treats the facilitator and the underlying seller as jointly and severally liable for uncollected tax if the facilitator failed to register.

Iowa's Senate File 2417, the same omnibus bill that put Iowa's economic-nexus threshold on the books, included a marketplace facilitator provision at Iowa Code § 423.14A. Facilitators with more than $100,000 in Iowa sales or 200 transactions must collect beginning January 1, 2019. Iowa is the first state to pair the economic-nexus and facilitator thresholds at the same numbers, which simplifies the compliance question for smaller platforms that are close to the line.

Alabama's Simplified Sellers Use Tax regime, originally enacted in 2015, reaches marketplace facilitators through Act 2018-539, signed March 29, 2018. A facilitator with more than $250,000 in Alabama sales must either register under the SSUT at a flat 8% rate or collect under the ordinary state and local rates. The flat rate is administratively easier and produces a predictable remittance; most facilitators have elected it. Collection began January 1, 2019 in the statute but Amazon began voluntary collection October 1, 2018.

South Dakota, the state whose name is on the Supreme Court decision, added a marketplace facilitator provision through Senate Bill 1 of the 2018 Special Session, signed September 12, 2018. S.D. Codified Laws § 10-65 now defines a marketplace provider and imposes collection on any provider that itself meets the $100,000 or 200-transaction threshold. Effective date March 1, 2019. The legislature moved in a special session specifically to have the facilitator rule on the books before the 2018 holiday quarter.

New Jersey's A.4496, signed October 4, 2018, takes effect November 1 and imposes collection on marketplace facilitators with more than $100,000 in New Jersey sales or 200 transactions. N.J. Rev. Stat. § 54:32B-3.6 now reads that the facilitator is the seller of record for sales made through its platform. The statute contains a joint- and-several liability provision similar to Connecticut's and an express provision relieving the underlying third-party seller from collection duty on sales through a compliant facilitator.

Oklahoma, under House Bill 1019XX signed April 10, 2018, gives facilitators the same choice as ordinary remote sellers: collect, or file purchase notices. As with Oklahoma's seller rule, the choice architecture is expected to change in the 2019 session.

The two-layer compliance map

A seller on Amazon who ships into Connecticut now has to think about four questions, in this order. Does the seller itself cross Connecticut's economic-nexus threshold of $250,000 and 200 transactions, conjunctive, for direct sales and sales through non-compliant marketplaces? Does Amazon, as the facilitator, cross its own facilitator threshold and, because the answer is obviously yes, collect on the seller's behalf for Connecticut orders? Does the seller need to register in Connecticut anyway, to file information returns or to claim back any sales that Amazon collected but for which the seller had a resale exemption? And does the seller owe use tax in its home state on any inventory it holds in a Connecticut fulfillment center?

Only the first two are settled by the new statutes. The third is a registration question with forty-five different state answers, and most states have not yet issued the relieving guidance that would let a third-party seller deregister in a state where its only sales are through a compliant facilitator. The fourth is the Fulfilled-by-Amazon inventory-nexus question that predates Wayfair and has not been touched by any of the new laws.

Amazon's FBA network places third-party inventory in states the underlying seller has never visited. Before Wayfair, the seller in most states had physical-presence nexus the moment Amazon shipped a pallet into a fulfillment center in that state. After Wayfair, the question is partially moot for sellers who already crossed the economic-nexus threshold, but it remains live for smaller sellers and for purposes of income-tax and franchise-tax apportionment, which are not governed by Wayfair. California's South Carolina v. Amazon-style inventory litigation is one of several cases that will test how far the facilitator relief reaches.

Thresholds, at a glance

The facilitator thresholds clustering on the $100,000 or 200 transactions line are: Rhode Island, Iowa, South Dakota, and New Jersey. The raised- floor states are Connecticut and Alabama, both at $250,000, with Connecticut's conjunctive transaction requirement making it the narrowest of the group. The small-sales-with-notice states are Washington and Pennsylvania, both at $10,000 as the threshold for the collect-or-notify election. Minnesota uses no numerical threshold for the facilitator itself and instead relies on the underlying sales flow. Oklahoma parallels its seller rule.

Every state that has acted has included a provision addressing what happens when a facilitator and an underlying seller would otherwise both collect on the same transaction. The drafting varies. Washington and Pennsylvania treat the facilitator as the sole taxpayer. Connecticut and New Jersey make both jointly and severally liable until the facilitator has registered. Alabama lets the facilitator take the SSUT rate for the whole platform and lets the individual seller stand down. The result is a system in which the facilitator's election determines, effectively, whether the small sellers on its platform owe tax for that state.

What October 23 looks like for the states still drafting

California, Texas, Florida, Illinois, Massachusetts, New York, Ohio, and Virginia had no marketplace facilitator law on the books as of this morning. Several have draft bills or administrative proposals in circulation. The California Department of Tax and Fee Administration issued a Special Notice (L-565) on September 11, 2018 signaling forthcoming action and reiterating that Amazon and other facilitators remain liable for their own first-party sales in California regardless of the draft legislation. Texas Comptroller guidance is pending. Ohio House Bill 292, introduced in September, would cover facilitators beginning July 2019.

The Multistate Tax Commission's Uniformity Committee approved a model marketplace facilitator statute in August 2018. Its baseline is $100,000 or 200 transactions, with a six-month lead time before collection begins, an exclusive-liability rule for the facilitator, and language relieving underlying sellers from registration for facilitated sales. Several of the states drafting this fall have the MTC language open in one browser tab and their own existing economic-nexus statute in another.

The operational answer for a seller this quarter

A mid-size Amazon seller with national distribution should, by the end of the October 2018 holiday quarter, have (1) a state-by-state matrix of where the seller itself crosses the economic-nexus threshold, separate from any sales made through a facilitator; (2) a written record, state by state, of whether Amazon has begun collecting on 3P sales and on what effective date; (3) confirmation that the seller's Amazon tax-collection settings match that record, because Amazon's platform-level collection does not always propagate to every marketplace the seller uses; and (4) a list of states in which the seller holds FBA inventory today, which is the predicate for a separate inventory- nexus question that the facilitator laws do not resolve.

For an Etsy or eBay seller, the answer is simpler only because those platforms are later to the facilitator-collection infrastructure. Washington, Pennsylvania, and soon New Jersey are states in which Etsy and eBay are either collecting or about to begin. In the other forty- something states the underlying seller still owes collection on its own nexus, which for most craft-scale sellers means no states at all because they do not cross economic thresholds, but it is worth the check.

What Congress is doing, and not doing

The Online Sales Simplicity and Small Business Relief Act, introduced September 14, 2018 by Representative Jim Sensenbrenner (R-Wis.), would prohibit states from retroactively imposing economic-nexus collection, bar enforcement against remote sellers until January 1, 2019, and exempt sellers with less than $10 million in national gross receipts until Congress enacts a compact. It is unlikely to move. The Marketplace Fairness Act and the Remote Transactions Parity Act both continue to sit in committee. Federal preemption is the cleanest way to end the patchwork, and the political coalition that produces it has not yet formed.

The thing the facilitator laws actually accomplish, quietly, is to make the patchwork tolerable without federal action. A seller on a compliant platform can now file in its home state and trust that most of the destination states are being handled upstream. That is not the same as uniformity, but it is, for the first time since mail-order catalogs began shipping across state lines, a system in which most consumer sales actually have tax collected on them. The losers in the new architecture are the sellers just small enough to fall under economic- nexus thresholds but large enough to sell direct-to-consumer outside a marketplace; they are discovering that the easiest compliance path runs through a facilitator they had been resisting joining.

Sources

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