Marketplace Facilitator Act Sales Tax 101

What does Patreon collecting sales tax mean for creators?

by Jennifer Dunn

Patreon will begin collecting sales tax from some patrons starting July 1, 2020

Patreon, the platform that allows content creators to earn income by providing perks and rewards to subscribers (or “patrons”) recently announced that they would be required to collect sales tax from some patrons effective July 1, 2020.

This post will address why Patreon is collecting sales tax and some common questions that affected creators and patrons might be wondering about.

Patreon itself did a wonderful job of explaining this new development, and you can read Patreon’s article on sales tax collection here.

Or read on to find the answers to:

Why is Patreon collecting sales tax?

Long story short, a number of US states (and some countries) have laws that require a service like Patreon to collect sales tax. 

In the US, these are “marketplace facilitator laws” and they require that online marketplaces like Patreon collect and remit sales tax on behalf of any 3rd parties who use their platform. 

Marketplace facilitator laws were created with online platforms like Amazon and Walmart in mind, but according to a very helpful article on the Patreon website, the way the laws are written affects Patreon, too.

Click here for a list of states and countries where Patreon will collect sales tax (or other forms of consumption tax) on behalf of creators who use the platform.

You can read the lowdown on marketplace facilitator laws here.

What basics do Patreon creators need to know about sales tax?

In the US, sales tax is governed at the state level. That means there is no “federal” sales tax.

Forty-five US states (and Washington DC) all have a sales tax. From there, each state gets to decide what is and what isn’t taxable.

“Tangible personal property”(I.e. things you can touch like toothbrushes, books and fancy soaps) are generally taxable in all states. Though there are some notable exceptions, like the handful of states that do not tax clothing or tax clothing at a reduced rate.

Sales tax rates also vary. States set a statewide rate (usually 4-8%) but then local areas like cities, counties and special taxing districts can also add their own rates. That’s why you might buy a toothbrush in a city and pay 9.45% sales tax but then buy the same toothbrush just outside the city limits and only pay 8% sales tax. 

As technology has advanced, some states have also begun taxing things like digital goods – books, movies – or streaming content like the services provided by Netflix or Spotify.

As a creator who uses Patreon, if you provide a taxable product or service in a state where Patreon is now required to collect sales tax, you may find that Patreon begins collecting sales tax on your behalf. 

How does Patreon collecting sales tax affect creators who use the platform? 

Good news! Creators do not have a new obligation to collect and remit sales tax on the rewards they offer through Patreon. As the marketplace, Patreon is the “seller of record” so the obligation to figure out how much sales tax to collect from which patron, and to collect and remit that sales tax, falls on them. 

However, depending on the rewards that you offer to your patrons, some patrons may see an extra charge for sales tax in the coming months. 

How does Patreon collecting sales tax affect patrons who use the platform? 

Some patrons may notice that their monthly pledge now includes a sales tax (in the US) or another form of consumption tax (in other countries.)

This sales tax will depend on where the patron is located. 

For example, say your reward is a video. Digital products are not taxable in Florida, so Patreon would not collect sales tax from a patron in Florida for that reward. But digital products are taxable in Arizona. So Patreon would collect sales tax from a patron in Arizona on that same reward.

Another example is physical products. If you provide physical products like stickers or t-shirts, then in most cases Patreon will be required to collect sales tax from patrons for that reward. 

Is there a way to help patrons pay less in sales tax?

Yes! In their announcement, Patreon also said that they will be releasing some advanced sales tax tools in late May 2020.

Right now, Patreon will apply tax based on keywords. As a creator, it seems likely that you will be able to delve into your account with the new advanced tools to be sure that all of your rewards are categorized correctly. For example, you could dive in and make sure that a t-shirt reward is categorized as “clothing” so that it isn’t taxed in a state like Pennsylvania where clothing is sales tax exempt.

Further, Patreon provided a sample email that creators can send to patrons as a more personalized notification of the upcoming sales tax. In the same support article, Patreon wrote that they will also notify affected patrons before they begin collecting sales tax from them.

I’m a creator who already collects sales tax. Does this affect my current sales tax liability?

This is a great question! The short answer is “no, not right now” but it’s worth it to delve into the longer answer.

In this example, a creator uses Patreon, but also sells their customized phone cases through their own online store that they built with WooCommerce. Maybe they also sell their phone cases at craft shows or even in a brick and mortar store. 

In this case, the creator is likely already required to collect sales tax on those sales. And that means they’re already registered to collect sales tax, and already file periodic sales tax returns.

The good news is that Patreon collecting sales tax on their behalf does not change their sales tax liability. This does not give them an obligation to collect sales tax from their patrons, or collect sales tax in more states. 

However, it’s always a good idea to keep track of your sales tax liability. Read on for more.

What else do creators need to know about sales tax?

Businesses (and even individual creators are considered “businesses” when it comes to sales tax) are required to collect sales tax when two conditions are met:

  • They have sales tax nexus in a state
  • The products they sell are taxable in that state

Businesses always have nexus in their home state, but things like an employee or contractor, a location, using a 3rd party fulfillment service, or even an affiliate can also give a business “nexus” and mean that that business is on the hook to collect sales tax in a state.

Sales volume can also create sales tax nexus. Many states have “economic nexus laws” meaning that if your business makes over a certain number of sales in that state (usually 200), or if your sales exceed a certain amount in that state (usually $100,000, but this amount varies greatly) then you are required to collect sales tax from buyers in that state. Every state gets to make its own rules and laws regarding nexus. You can read about each state’s economic nexus law here.

To add insult to injury, sometimes marketplace sales (such as Patreon rewards) count toward your economic nexus threshold, even if the marketplace is required to collect sales tax on your behalf!

That’s a little confusing, but TaxJar is here to help.  Just connect your online shopping carts and marketplaces and TaxJar will determine if you have economic nexus in a new state. TaxJar also notifies customers when your sales are approaching economic nexus in a new state so you can be ready to get sales tax compliant!

Check where your business has economic nexus!

To Sum it Up

Patreon will begin collecting sales tax on behalf of creators on July 1, 2020. While this doesn’t necessarily affect creators, some of your patrons may now notice that sales tax is collected on their pledges.

Patreon is being extremely proactive about this, providing creators with tools to make sure patrons are charged the right amount of sales tax, and notifying patrons of the change.

Creators who provide taxable products through Patreon should keep an eye on sales tax rules and laws to determine if they are liable to collect sales tax.

More Sales Tax Resources

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