If you’re a remote seller with a store on Amazon or a similar marketplace, you may be excited to learn that marketplace facilitator laws can potentially ease the burden of sales tax for you. And in some cases, this is true, as this legislation means that sellers no longer have to collect and remit sales tax from their sales on popular marketplaces if they have nexus and only sell through one channel.
Before you cancel your seller’s permit or your sales tax software, it’s worth noting that very few sellers fall into this category, and therefore, most will need to keep their permits active in the states where they do business. We explain why, below.
Understanding economic nexus
To back up a minute, let’s explore why remote sellers even collect sales tax in states where they don’t live or have an office. Prior to June 2018, remote sellers only reported sales tax where they were physically located or had a presence, i.e., home office, employees, or inventory, which includes products in a warehouse if you’re using Amazon FBA. This activity is known as physical nexus and is the state’s way of saying you have enough of a presence to necessitate collecting and remitting sales tax to them.
In June 2018, a landmark Supreme Court case known as South Dakota vs. Wayfair changed the landscape of nexus significantly. This decision birthed the concept of economic nexus, which gives the states the ability to set their own thresholds to trigger a sales tax responsibility, regardless if you have a physical presence in the state or not. Once a seller crosses this limit, they must begin collecting sales tax in that state.
Because most remote sellers don’t conduct their business in just one state alone, many sellers now have a sales tax liability where they previously had none. What complicates matters even more is that every state’s threshold is unique and up to them to set.
For example, remote sellers in California don’t have to begin collecting sales tax until they exceed $500,000 in sales during a 12-month period. But in New York, an out-of-state seller must have more than $500,000 in sales and more than 100 separate transactions of tangible personal property in the previous calendar year to establish economic nexus. And in some states like Arizona, the threshold changes each year in a tiered approach, meaning a seller could not be liable one year, but once the threshold lowers, they will be responsible the next.
As a result of this legislation, remote sellers are now subject to economic nexus laws in more than 44 states (and counting) as well as ongoing marketplace facilitator legislation.
What are marketplace facilitator laws?
Marketplace facilitator laws are an extension of economic nexus laws and say that a marketplace, such as Amazon or Walmart, must collect and remit sales tax from all sales made on that marketplace by a third-party, remote seller. Similar to economic nexus, the states have their own revenue threshold as to when the marketplace will begin collecting.
So, what should you do if Amazon or Walmart are collecting for you?
This is a common question, as marketplace facilitator legislation puts the onus on the marketplaces to collect sales tax, while many remote sellers think they’re off the hook. The knee-jerk reaction might be to immediately cancel your sales tax permit, or a sales tax management solution like TaxJar. But, before you wipe your hands clean of sales tax reporting, you might want to consider a few things.
Take a look at your sales
You’ll want to take a deep dive into your past and projected sales; think about your intended growth; and understand where you currently have or may have nexus. Ask yourself, what are your plans for selling across multiple platforms, into new markets, and understand where your inventory is stored. If you’re using Amazon FBA, your products are in a warehouse that can move from state to state, granting physical nexus where you previously didn’t qualify. From there, you’ll also want to further dive into where you generate the bulk of your sales. Is it from one marketplace or collectively across multiple channels?
If your sales only come from a single marketplace facilitator that collects on your behalf, you may not have to report. It’s still wise, however, to keep your seller’s permit or certificate because each state has different rules that can impact you.
For example, some states like Connecticut will require marketplace sellers to file a yearly sales tax return with the Department of Revenue Service if they exceed the state’s economic nexus threshold. Instead of canceling your permit, you can request to change your filing status to annually by sending a secure email to the DRS through the online Taxpayer Service Center (TSC). You’ll still need to report all sales made in Connecticut, but you can deduct the sales made from a marketplace if the marketplace facilitator collects sales tax on your behalf. Should this leave you with no sales to report, you will need to file a $0 return, which lets the state know you’re still in business.
If you sell on Amazon for example, as well as your own website or on a marketplace that doesn’t collect for you, you’ll most likely still be liable for collecting sales tax on those platforms outside of what the marketplace facilitators collect (if you have nexus). Just because Amazon collects on your behalf in Alabama, they don’t in Florida. So, if you have nexus in both states and sell on Amazon in one, you’ll still be liable to report and collect sales taxes in the latter state.
To further illustrate, sellers in Iowa don’t have to register for a sales tax permit or file sales tax returns if they only make sales through a marketplace that collects for them. But, as mentioned above, sellers who make sales on both marketplaces and non-marketplaces must still report their sales and deduct any sales taxed by a marketplace facilitator.
Consult with a sales tax professional
While it may seem like a victory to have the marketplace collect on your behalf, most eCommerce is inherently multi-channel and the majority of sellers don’t fall into the category that benefits. If you do only sell on one marketplace, and that platform collects for you, then you’re most likely off the hook. However, it’s still wise to consult with a tax professional before you cancel any permits or sales tax solutions to understand where you have nexus, know when and where you’re close to approaching nexus, and know the current marketplaces that collect in each state for remote sellers.
Further, like economic nexus, each state has different thresholds the remote seller must cross before the facilitator will collect on their behalf. Certified tax advisors will be able to advise you on when you should file for a permit or cancel your current permit. We have a list of vetted sales and local tax professionals who can help you.
If you’re just getting started with sales tax and trying to understand economic nexus and marketplace facilitator legislation, then a sales tax management solution like TaxJar can take the guesswork out of sales tax and automate your returns as well as tell you where and when you have nexus. Subscribe to our blog to stay up-to-date on the most current legislation changes.