On Wednesday, Nov. 6, 2019, the Multistate Tax Commission (MTC) Uniformity Committee will consider an updated white paper on the state of marketplace facilitator sales tax collection laws. This new white paper follows up on, and supersedes, the MTC’s 2018 white paper on the same topic.
The 2019 white paper is the result of several months of public meetings held by a working group of the MTC’s Uniformity Committee called the “Wayfair Implementation and Marketplace Facilitator Work Group.” Tommy Hoyt of the Office of Texas Comptroller of Public Accounts chaired the Work Group, which included representatives from the MTC, state tax agencies, the business community, and tax advisors such as Eversheds Sutherland. The white paper was presented as part of the MTC’s fall committee meetings in San Antonio, Texas. Although MTC members are not obligated to follow the recommendations in the white paper, it will help inform policy makers as they enact new marketplace collection laws, revise existing marketplace collection laws, and issue administrative guidance.
In August, the Work Group developed a “prioritized issues list” to structure the Work Group’s discussions regarding state approaches to marketplace collection issues. The Work Group then spent the following months reviewing the issues in order and considering feedback from states, the business community, and tax advisors. Below is an overview of the 13 prioritized issues covered by the MTC’s 2019 marketplace facilitator white paper, and their possible impact on taxpayers.
1. Definition of marketplace facilitator/provider
One essential aspect of any marketplace collection law is defining what exactly a “marketplace facilitator” is. The Work Group noted that state laws are split between narrow and broad definitions of “marketplace facilitator,” with 15 states using broad definitions and 18 states plus the District of Columbia with narrow definitions. Business participants in the Work Group strongly prefer marketplace collection laws with narrow definitions that would exclude certain activities like advertising or owning infrastructure. A broad definition of “marketplace facilitator” may apply to businesses that do not directly or indirectly process payment and therefore cannot practically comply with tax collection requirements. The draft working model currently being considered by the National Conference of State Legislatures (NCSL) State and Local Tax (SALT) Task Force suggests a narrow definition and includes certain exclusions. The exclusions typically address situations where the type of business falling within the definition lacks access to the sales transaction information and the payment and so cannot practically comply, or the industry already has an established tax compliance model in place that would otherwise be disrupted.
2. Who is the retailer?
A related gating question is “who is the retailer in a marketplace facilitator transaction?” Most state marketplace laws treat the marketplace facilitator as the “retailer” for the purpose of its facilitated sales, which is an approach favored by the Work Group’s business participants. Because the marketplace facilitators “step into the shoes” of the retailer, the marketplaces also assume the retailer’s rights and obligations regarding its sales, such as claiming bad debts and issuing refunds.
3. Recordkeeping and audit liability matters
Most states with marketplace collection laws place sales tax audit risk on marketplace facilitators. However, it is common for states to audit marketplace sellers if a marketplace facilitator demonstrates that its failure to collect sales tax was due to erroneous information from the marketplace seller. Some Work Group participants suggested that states should look solely to the marketplace facilitator for recordkeeping, audit and liability for non-collection of tax to avoid the possibility of multiple audits.
4. Marketplace seller-marketplace facilitator information requirements
There is a need for clear guidance regarding what information a marketplace seller needs to provide to a marketplace facilitator so that it can make taxability determinations. Additionally, if a marketplace seller retains collection requirements, the marketplace facilitator should be obligated to provide the seller with sufficient information needed to complete a sales tax return.
5. Collection responsibility
Most states do not allow a marketplace facilitator and seller to negotiate which party has the collection responsibility. Additionally, the Work Group noted the need for clarity regarding which party needs to collect other types of taxes and fees that may apply to a transaction. Some Work Group participants wanted the marketplace facilitator to be responsible for all applicable taxes and fees, whereas others prefer marketplace collection laws to be limited to sales and use tax. The NCSL working draft model suggests waiver language. Several business participants urge the states to provide more flexibility in their laws, through either allowing the parties to negotiate collection responsibility or waiver provisions.
6. Marketplace seller economic nexus threshold calculation
Most marketplace collection laws include economic nexus thresholds that encompass both a marketplace facilitator’s direct sales and facilitated sales. However, at least eight states consider a marketplace facilitator’s direct sales only when applying an economic nexus threshold. Some Work Group participants supported excluding a marketplace facilitator’s facilitated sales to reduce the number of “zero” or minimal dollar returns that have to be filed.
7. Remote seller sales/use tax economic nexus threshold issues
Economic nexus thresholds may pose unexpected issues for certain remote sellers. For example, if a marketplace collection law’s sales volume threshold includes sales for resale, then wholesalers may be required to file “zero” returns in multiple jurisdictions. Several Work Group members supported eliminating transaction thresholds from marketplace collection laws, but one business participant recommended keeping the transactions threshold.
8. Certification requirements
At least 11 states have enacted marketplace collection laws that include a provision requiring the marketplace facilitator to certify to the seller that it has begun collecting sales tax. This provides a document that the marketplace seller can rely on in case of an audit. Two Work Group states expressed opposition to the certification requirement and several business participants objected to the certification requirement as burdensome.
9. Information-sharing
The Federation of Tax Administrators administers the Uniform Exchange of Information Agreement; however, the MTC noted that information-sharing may have a chilling effect on sales tax registration if it is used to target remote sellers or marketplace facilitators. The MTC recommends avoiding the use of information-sharing specifically to identify remote sellers who are registered in one state but not in others.
10. Taxability determination
Business participants in the Work Group strongly encouraged states to publish specific guidance to assist remote sellers in quickly determining the taxability of items. Streamlined Sales Tax Governing Board Executive Director Craig Johnson advised that any state could access the Streamlined Sales and Use Tax Agreement (SSUTA) taxability matrix form template required to be used by member states and would be welcome to use that in developing its own taxability matrix. Johnson also shared during the Work Group meetings that SSUTA states are working on developing an expanded, more comprehensive taxability matrix.
11. Return simplification
There is no uniformity regarding whether marketplace facilitator must file separate returns for direct and facilitated sales. Business participants in the Work Group also varied in their preference for combined returns or separate reporting. For sellers, the compliance burdens would be eased if states eliminated the need for sellers to report facilitated sales if a marketplace facilitator is registered and collecting tax on those sales.
12. Foreign sellers
Some of the business participants in the Work Group encountered significant hurdles in attempting to register with states when they lack a permanent establishment in the United States and do not have a Federal Employer Identification Number or a corporate officer with a Social Security Number. Additionally, business participants noted that state registration systems that require an email address with a US domain can also present unexpected challenges for foreign companies. The white paper recommends that states publish clear guidance for foreign sellers with economic nexus that need to register and collect tax.
13. Local sales/use taxes
The collection of local sales and use taxes can present challenges for remote sellers. The MTC notes that states could adopt measures such as uniform local tax bases and centralized filing systems to ease the compliance burden for remote sellers. Colorado and Louisiana are developing centralized filing systems for their local “home rule” jurisdictions, but lack the authority to require these jurisdictions to adopt the systems.
What’s Next
Although the white paper does not offer solutions to every issue created by marketplace collection laws, it will serve as a valuable tool for state tax policymakers. By capturing feedback from state administrators and the business community, the paper provides a detailed overview of the state of marketplace collection laws and emerging workability issues arising in various jurisdictions. The information contained in the MTC’s white paper will help guide states as they continue to modify their approaches to the taxation of marketplace sales.
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