On the heels of the U.S. Supreme Court decision in South Dakota v. Wayfair (2018) many states enacted marketplace facilitator laws to tighten the sales and use tax collection net and reduce their tax collection costs. The marketplace facilitator laws give states one-stop collection of sales and use tax: one platform reports the tax of many sellers and the state only has to look to that one platform for uncollected tax. Why chase many debtors when one will pay for them all?
The marketplace facilitator laws are still relatively new, and anytime a law is new there will be those that are unaware of the change. So, the State of California graciously passed two laws to provide some tax relief for the unwary marketplace facilitators. Unfortunately, the tax relief laws are buried in the law books and are known to very few taxpayers. Fortunately, because of Miles Consulting Group’s careful study of California’s marketplace facilitator laws we discovered these hidden lifelines for California marketplace facilitators. We have also requested and received from the state an operations memo that was written for the California Department of Tax and Fee Administration’s tax auditors, which we will summarize in this blog.
The two tax relief laws are California Revenue and Taxation (“R&TC”) 6046 and 6047. The Operations Memo is 1209, “Tax Relief for Marketplace Facilitators.” Whether relief is warranted under these law sections is based on the applicable facts and circumstances and is determined on a case-by-cases basis.
We will dive into the details of these two laws in a moment, but first here is a quick overview. R&TC 6046 provides full tax relief to a marketplace facilitator that attempts to obtain information from a marketplace seller, but the marketplace seller does not provide the information needed for the marketplace facilitator to report the proper amount of tax. Whereas, R&TC 6047 provides only partial tax relief to a marketplace facilitator that is unaware of its obligation to report sales tax for sales made by a marketplace seller.
Now, let’s dig deeper into the two tax relief laws.
R&TC Section 6046 Relief
R&TC section 6046 provides that the CDTFA shall relieve a marketplace facilitator from their tax liability for a retail sale facilitated through their marketplace for an unrelated marketplace seller if:
- The marketplace facilitator demonstrates due diligence and a reasonable effort to obtain accurate and complete information from the unrelated marketplace seller regarding the retail sale; and
- The marketplace facilitator failed to remit the correct amount of tax imposed on the sales due to inaccurate or incomplete information provided by the unrelated marketplace seller.
Where a marketplace facilitator is relieved of liability for the tax on a retail sale under this section, then the tax obligation switches to the marketplace seller.
The CDTFA expects its auditors to scrutinize the circumstances that might justify tax relief for the marketplace facilitator. So, the facilitator should collect documentation to substantiate its failed efforts to collect the necessary records from the marketplace sellers. Proper documentation might include emails, letters, agreements, and contracts.
For example, if the marketplace facilitator has emails that support it requested relevant information from a marketplace seller to substantiate whether an item was taxable or nontaxable and the marketplace seller either did not provide the information or mischaracterized the item then the marketplace facilitator would not be responsible for the tax that should have been collected and reported. The liability for the tax would revert to the marketplace seller.
R&TC Section 6047 Relief
R&TC section 6047 provides that the CDTFA shall relieve a marketplace facilitator from the tax on retail sales facilitated through its marketplace if they can demonstrate to the satisfaction of the CDTFA that they:
- Facilitated the sales through their marketplace for unrelated marketplace sellers prior to January 1, 2023; and
- Failed to collect tax or tax reimbursement on the sales due to a good faith error, which is defined as making an error due to an honest belief, without any intent to defraud or take unfair advantage.
Limitations to Allowable Relief
According to the memo, the tax relief provided under Section 6047 shall not exceed the following percentages of the total sales and use tax due on sales facilitated by the marketplace facilitator for unrelated marketplace sellers:
- 7% for 4Q-2019, or the 2020 calendar year
- 5% for 2021 Calendar year
- 3% for 2022 Calendar year
For instance, if the tax due on retail sales facilitated through the marketplace on behalf of an unrelated marketplace seller in 2020 was $100,000 and the full $100,000 of the tax liability was reported and collected, then there is no tax relief for the marketplace facilitator as the total tax amount was already collected and remitted.
However, if in calendar year 2020, the marketplace facilitator collected $95,000 of the total $100,000 of tax that was due, then it would be entitled to relief for the full $5,000 of uncollected tax. This is because in calendar year 2020 the relief is no more than 7 percent of the total tax for the year, or $7,000 in this example: 7% of $100,000.
But if in calendar year 2020, the marketplace facilitator collected $90,000 of the total $100,000 of tax that was due, then it would be entitled to relief of $7,000, which is the maximum allowable relief in 2020. The $3,000 of uncollected tax ($10,000 less the $7,000 of relief) would not be waived under R&TC 6047.
So, California marketplace facilitators should bear in mind that documentary support from its marketplace seller is needed to sustain the relief provided by R&TC 6046. And, for those marketplace facilitators that did not report tax for the sales of some marketplace sellers there is some relief from October 1, 2019 to December 31, 2022.
Additional questions?
This is obviously a fairly technical area specific to marketplace facilitators. But one additional thing to bear in mind is that many companies ARE marketplace facilitators and that these rules can apply to more companies than were originally anticipated. We have several clients who deal with marketplace facilitator rules – not only in CA, but also across the country. Please contact us for additional questions about California’s tax relief rules or multi-state questions you might have!
