Are You A Marketplace Facilitator? Important Things You Need To Know

As the preference for online shopping continues to expand, almost all states have passed marketplace facilitation legislation. Since legislation does vary state to state, it is important to be prepared and understand your tax obligations as a marketplace facilitator.

In this article we will break down areas that our marketplace facilitator clients have difficulties with and how we are able to help them.

And as with many tax requirements we discuss in our blogs, the matter of economic nexus and how it fits in is a driving factor to understanding your filing obligations  as a marketplace facilitator.  The crux of the matter here is whether the marketplace seller’s sales on a marketplace through a marketplace facilitator (i.e., you as the facilitator) count toward their economic nexus threshold (i.e., $100,000 or 200 transactions). And as you can imagine this will vary by state, so the concept can get somewhat complex. We’ll address these matters here too and define the requirements for both facilitator and seller.

Before we go on, remember, at Miles Consulting we’re here to guide you through all of your unique tax challenges, whether you are a seller, a marketplace facilitator, or aren’t sure!  Let’s talk. Reach out to us at info@milesconsultinggroup.com.

What Is A Marketplace Facilitator?

Let’s start with the basics. How do you know if your organization is a marketplace facilitator (or “MPF”)? The first step is to have a clear understanding of what a marketplace facilitator is.

As explained by TaxJar, a marketplace facilitator is a business that contracts with a third party (a “marketplace seller” or “MPS”) to sell goods or services on its platform. Amazon and Etsy are two examples of well-known marketplace facilitators.  Marketplace facilitation tax compliance can get tricky because sales tax obligations for MPFs vary by state. Avalara shares a helpful guide to marketplace facilitator legislation to help you get to know the basics. In its easiest definition, an MPF brings together buyers and sellers on its own platform, but does not generally take title to the inventory being sold.

We include here some definitions from California’s marketplace facilitator statutes, to show the technical aspects of the law. Many states have similar criteria to California’s. (But it’s still important to review each state individually when you find yourself in the position of a MPF.)

• Effective Oct. 1, 2019, marketplace facilitators are considered the seller and retailer for each sale they facilitate through their marketplace and must register and collect sales tax.
• Marketplace facilitators are required to register and collect tax if they actively sell tangible personal property in the state, are a retailer engaged in business in the state, or have an economic nexus with California. In determining whether the marketplace facilitator has sufficient nexus with California, the facilitator must include both sales it facilitates and sales made on its own behalf. (Note that nexus creation is important – it can be created by physical presence or economic nexus.  For economic nexus purposes, CA requires a marketplace facilitator to make sales of $500,000 or more in a calendar year before triggering the filing requirement. But that includes all sales made to CA through the marketplace.)
• A marketplace is a physical or electronic place (such as a store, booth, website, catalog, television or radio broadcast, or dedicated sales software application) where marketplace sellers offer for sale tangible personal property, regardless of whether the property, seller, or marketplace has a physical presence in California.
• A marketplace facilitator is a person who contracts with marketplace sellers to facilitate, for consideration, the sale of the seller’s products through a marketplace operated by the person or related persons, and:

• •  directly or through one or more related persons: transmits the offer from the buyer to the seller; owns the infrastructure that brings buyers and sellers together; provides a virtual currency that buyers can or must use to purchase items from sellers; or certain software development or research and development activities related to its marketplace; and
  •  with respect to the seller’s products: engages in payment processing, fulfillment or storage services; lists products for sale; sets prices; brands sales as those of the facilitator; takes orders; or provides customer service or accepts or assists with returns or exchanges. 

The above definitions are important because they show how easily a company can fall into the marketplace facilitator role, simply by meeting just a few simple rules including providing the platform, facilitating the exchange of payment and providing customer service – which most such platforms do!

Requirements: Facilitator and Seller

Once physical presence or economic nexus has been created, the marketplace facilitator will need to register for a sales tax permit and collect and remit taxes on marketplace sales, but the issue is whether the marketplace seller is also required to also get registered in a state and collect taxes on non-marketplace sales.

Using California’s Marketplace Facilitator Act, let’s unpack the requirement of each as a comparison:

Facilitator

Starting from October 1, 2019, a marketplace facilitator, such as an online shopping platform (like Amazon, for example), is considered both the seller and retailer for each transaction that occurs on its platform. This determination is crucial for the marketplace facilitator to ascertain whether it needs to register with the California Department of Tax and Fee Administration (CDTFA) for a seller's permit or Certificate of Registration – Use Tax.

Moreover, if a marketplace facilitator is registered with or required to register with CDTFA as a retailer and facilitates the sale of tangible personal property by a marketplace seller, it is regarded as the retailer responsible for selling or conducting the sale of the tangible personal property through its platform. Consequently, the marketplace facilitator typically must remit sales tax or collect and remit use tax on all retail sales of tangible goods delivered to California customers facilitated through its platform for marketplace sellers.

These requirements for marketplace facilitators are separate from any other sales or use tax obligations they may have. For instance, a marketplace facilitator is accountable for reporting and remitting tax on the retail sales of its own tangible goods made through its platform. If you're a marketplace facilitator, it's advisable to furnish documentation to all your marketplace sellers stating that you are registered with CDTFA and will handle sales tax and use tax collection for their sales of tangible goods facilitated through your platform.

Under the Marketplace Facilitator Act, marketplace facilitators might be exempt from tax on retail sales conducted through their platform if certain conditions outlined in either Revenue and Taxation Code section 6046 or Revenue and Taxation Code section 6047 are met. (Note that the burden of proof to rely on these sections is very high.  We’ve recently been working with a client that relied on these sections as part of its planning in this area, and has been in conflict with the CDTFA’s interpretation.  As with so many areas of sales tax law, the devil is in the details.  We recommend to contact a specialist before taking these positions.)

Seller

As a marketplace seller, starting from October 1, 2019, a significant change occurred where you are no longer regarded as the retailer for your sales of tangible goods facilitated through a marketplace, as outlined by the law, if the marketplace facilitator is registered or obligated to register for a seller's permit or Certificate of Registration – Use Tax.  By way of example, this situation occurs where a company may contract exclusively with an online marketplace, like Amazon, to sell its products.

Furthermore, commencing October 1, 2019, if all your retail merchandise sales are facilitated by a marketplace facilitator registered as a retailer with CDTFA, you, as a marketplace seller, are exempt from the requirement to register with CDTFA for a seller's permit or Certificate of Registration – Use Tax. Where companies get into compliance issues is where not ALL of their sales run through the marketplace facilitator – some still run through their own website, for instance (see more discussion below)

From October 1, 2019, the responsibility of the retailer for collecting and remitting tax to CDTFA on these facilitated sales for delivery in California lies with the marketplace facilitator. Nonetheless, if you, as a marketplace seller, conduct any sales of tangible goods in California or for delivery in California that are not facilitated by a registered marketplace facilitator, you may need to register with CDTFA. Essentially, a marketplace seller is typically obliged to register with CDTFA if they conduct direct sales of tangible merchandise to California customers without utilizing a marketplace or if they are a retailer conducting business in this state due to either having a substantial physical presence or an economic nexus with California.

To ascertain whether you, as the marketplace seller, have  economic nexus in California, you must consider all sales of tangible merchandise for delivery within this state, encompassing both your direct sales and those enabled through a marketplace facilitator's platform as described above.

And that’s just California! Complicated, right? Don’t stress, though. Miles Consulting can help you with your marketplace facilitation needs (determining if you’re a marketplace facilitator or a marketplace seller, where you need to register, collect sales tax and file returns, and how to become compliant), in every state in which you have presence. Click here to find out more.

To have a clearer view of each state’s economic nexus threshold requirement, in a table format for easy comparison, read this article: Explaining Nexus Threshold By State.

Real Client Examples

To bring some color to the marketplace facilitator story, here are some of the situations in which we’ve recently helped our clients regarding marketplace facilitation:

• A company provides a platform to match people requiring specific services with those who can provide the service, and needs assistance because some of the services provided through their platform are subject to sales tax, varying state by state.
• A platform that finds purchasers for gently used clothing needs assistance  because clothing is generally taxable, but there are some exemptions.
• A company that matches sellers and buyers of specific manufacturing materials  needs help because many of the sales on their website are not only through marketplace facilitators, but are also for resale.
• A company that provides a platform for people who have specialty equipment to lease needs assistance in determining the taxability of lease transactions across the states.

The challenge in all of these situations, is not just the structure of the sale or the nature of the product or service sold – it’s that online marketplaces are by their nature multi-state and require even relatively small companies to be familiar with the laws of all the states.  This is where we can help!

What Are Your Next Steps?

Once you determine whether or not your company is an MPF, what are your recommended next steps?

1. Review state economic nexus rules to determine whether the threshold has been met (and when). Many states have a sales threshold of just $100,000.
2. If nexus has been created, consider any prior exposure and quantify it.
3. Determine a path for remediation of prior liabilities.
4. Determine a plan forward for accurately collecting and remitting sales tax on sales made through the marketplace.

Do You Need Help With Your Marketplace Facilitation Tax Compliance?

Are you wondering how to tackle the “next steps” above? Do you have other marketplace facilitator questions? We recommend that people new to marketplace facilitation legislation never go at it alone, and with Miles Consulting Group in your corner, you’ll never have to. We’re standing by to help make the process clearer, and ensure you are compliant with the MPF legislation in your state. Contact us today.

by Monika Miles

Navigating Sales Tax Penalties and Assessments

Are you currently involved in an audit? A little worried about the assessments that follow, and the penalties that could come up? That’s understandable – audits are a scary thing. Or have you received an unexpected bill or notice of a lien on your property? Let us help you analyze the reasons and resolve these matters.

So, what are sales tax penalties and assessments? We’ll unpack these matters here:

1. Sales Tax Penalties
   • Fines and charges imposed for sales tax non-compliance, crucial for compliance and risk management.
2. Common Types of Sales Tax Penalties
   • Late filing and underpayment penalties incurred for various non-compliance scenarios.
3. Understanding Tax Assessments
   • Official determination of tax owed by a taxpayer, distinct from punitive charges. The difference between penalties and assessments.
4. Strategies for Disputing Tax Penalties
   • Dispute resolution involves reviewing notices, gathering documentation, and exploring negotiation or appeals.

Can’t find what you’re looking for? Let’s talk. Reach out to us at info@milesconsultinggroup.com.

1. What Are Sales Tax Penalties?

Sales tax penalties are fines and charges imposed by state tax authorities due to non-compliance, by businesses, with sales tax regulations. It is crucial for organizations to comprehend and effectively manage these penalties to ensure future compliance and minimize potential risks to their operations.

2. Common Types of Sales Tax Penalties

Late Filing Penalties

1. When They Apply: As the name suggests, late filing penalties are incurred when businesses fail to submit their sales tax returns by the specified deadline. This deadline is  set by the tax authority and varies depending on the jurisdiction. Failure to meet this deadline constitutes non-compliance with sales tax regulations and may trigger penalties. Note that most states require monthly or quarterly filings for sales tax returns. Typically, a return is due between the 15^th and 31^st day of the next month. If not filed timely, or for the correct amount, penalties can apply.
2. Calculation and Rates: The calculation of late filing penalties often involves a percentage-based approach applied to the unpaid tax amount. The specific rate varies across jurisdictions and may also depend on factors such as the duration of the delay. Typically, late filing penalties are in the range of 10-15%. But some states have a flat late fee, like Texas which charges $50 for a late return, even if no tax is due.  Washington can charge penalties of 39% on some delinquent filings.

Underpayment Penalties

1. Causes of Underpayment Penalties: Underpayment penalties occur when businesses do not remit the full amount of sales tax owed to the tax authority. Several factors can contribute to underpayment, including calculation errors, failure to accurately track taxable sales, or misunderstanding of tax regulations. In some cases, businesses may unintentionally underpay due to changes in tax rates or exemptions. Sometimes we also see intentional underpayments when a company doesn’t have the funds available to pay on time. (The most “dangerous” scenario is where sales taxes have been collected, but not remitted.  Sales taxes are, like payroll taxes, fiduciary in nature, and states take huge exception to taxpayers collecting and not remitting them!)
2. How They Are Determined: Underpayment penalties are typically determined based on the shortfall between the actual amount of sales tax owed and the amount paid by the business. The penalty calculation generally involves applying a predetermined rate to the underpaid amount for each period of non-compliance. Additionally, some jurisdictions may consider factors such as the taxpayer's compliance history or the presence of mitigating circumstances when determining the severity of underpayment penalties.

3. Understanding Tax Assessments

A tax assessment refers to the formal determination of the amount of tax owed by a taxpayer, conducted by tax authorities based on available information. It is essentially the calculation and establishment of the taxpayer's liability to the government for taxes owed. Tax assessments are crucial steps in the tax compliance process, providing a clear picture of the taxpayer's financial obligation to the authorities. Assessments are often generated as a result of an audit or other examination. However, we also see states levy what is called a jeopardy assessment. This happens when a state has sent several notices ignored by taxpayers and finally sends a bill – based on the state’s estimate of liability. In dealing with clients who have indeed been ignoring previous notices, we find that the jeopardy assessment does seem to get their attention! As an aside, we always recommend answering the notice before getting the jeopardy assessment. The next step is often a lien against a personal bank account.

Penalties and Assessments

Penalties and assessments are two different parts of an audit. Here's a breakdown:

1. Penalties: Penalties are punitive charges imposed by tax authorities as consequences for non-compliance with tax regulations. They are separate from the actual tax liability and serve as deterrents against behaviors such as late filing, underpayment, or failure to report taxes. Penalties are applied in addition to any taxes owed and are meant to encourage adherence to tax laws.
2. Assessments: Assessments, on the other hand, represent the state’s  determination of the taxpayer's tax liability. They are based on various factors such as income, sales records, deductions, and credits. Assessments provide a quantified amount of taxes owed by the taxpayer and serve as the basis for tax collection efforts by the authorities. Unlike penalties, assessments directly reflect the taxpayer's financial obligation to the government and are integral to the tax compliance process.  Note that assessments can be appealed at various levels of the audit process. See our recent article on Preparing for a Sales Tax Audit: Tips and Best Practices for Middle-Market Business Owner, for a little more on this.

4. Strategies for Disputing Tax Penalties

When a state taxing authority demands you pay up, there is hope to be found in this systematic response to penalties. We’ll help you complete these steps:

Reviewing the penalty notice:

1. Thoroughly examine the penalty notice provided by the tax authorities to understand the basis of the penalty and the specific regulations allegedly violated.
2. Identify any discrepancies or errors in the penalty assessment, such as incorrect calculation or misinterpretation of tax laws. Yes, states make mistakes too!

Gathering supporting documentation:

1. Collect relevant documents and records to substantiate your position, including sales records, financial statements, invoices, and correspondence with tax authorities.
2. Ensure that the documentation clearly demonstrates compliance with tax regulations or provides explanations for any discrepancies.

Effective communication with tax authorities:

1. Maintain open and constructive communication with tax authorities to address any misunderstandings or discrepancies regarding the penalty assessment. It’s key to respond as soon as possible.
2. Provide clear and concise explanations backed by evidence to support your case and facilitate resolution.

Exploring dispute resolution options:

1. Negotiation: Attempt to negotiate with tax authorities to reach a mutually acceptable resolution, such as reducing the penalty amount or agreeing on a payment plan.
2. Formal Appeals: If negotiation proves unsuccessful, consider filing a formal appeal with the appropriate tax appeals board or administrative tribunal. Miles can help.
3. Litigation as a Last Resort: As a last resort, pursue litigation through the judicial system to challenge the penalty assessment in court. This option should be considered only after exhausting all other dispute resolution avenues.  Also, litigation is very expensive and doesn’t guarantee victory either. Try to resolve issues before contemplating litigation.

The best strategy is to not go it alone. Come to Miles – we assist clients with state sales tax audits, notices, assessments, jeopardy assessments, and penalties that may result.  If you have assessments and penalties tied to your business’s tax affairs, we can help you understand them, and if need be, dispute them.

Did you get that audit notice this month? Not quite sure how to handle it? Book a consultation with Miles Consulting, drop us a line, or send us an email at info@milesconsultinggroup.com.

by Monika Miles