For decades, companies needed to establish physical presence in a state to establish a taxable presence, or nexus. This meant they needed “boots on the ground” in the form of people or property for a state to require them to collect and remit the state’s taxes (sales tax, income tax, corporate tax, etc.).

However, when the U.S. Supreme Court ruled that states could establish economic nexus in Wayfair v. South Dakota, it meant that legislatures could also require companies with a minimum number of transactions or sales to collect and remit state taxes as well.

A marketplace facilitator (or “MPF”) is a business or organization that contracts with third parties (“sellers”) to sell goods or services on its platform, facilitating the sales that arise (such as Amazon or Etsy).  As the name seems to indicate, these companies facilitate sales of goods or services between a seller and a buyer – but generally the MPF does not take title to or even carry the inventory.  Following the 2018 South Dakota vs. Wayfair U.S. Supreme Court decision eliminating the physical presence standard for sales tax nexus, most states have in the last 4 years started requiring the marketplace facilitators to collect and remit the sales tax on behalf of the third party sellers. This places a burden on MPFs to be the company which collects and remits and reports the sales tax to the various states in which they’ve established nexus.

However, not all marketplace facilitators are as large as Amazon or Etsy, and in their haste to pass laws to incorporate filing requirements on marketplace facilitators, many states didn’t give much consideration to businesses that might be outside the “norm” of simply facilitating the sale of tangible property on the marketplace.

Because of the complexity that arises for such marketplace facilitators, we often share articles detailing the most up-to-date issues. You can read some of our past articles here and here. Today, we focus on some unique circumstances that we’ve had with clients in their roles as marketplace facilitators.

Client Example 1: Marketplace Facilitators & Services

The taxation of services already varies state to state, making it complex for multi-state providers to keep up. As you can imagine, adding marketplace facilitation to the mix just further complicates the process. One client we’ve worked with is a company which matches providers of a service with the consumer who need that  specific service performed (like home repair, yard work, etc). The marketplace facilitator provides a platform (and payment system) that helps match the need with the service. While this can be a useful system for consumers, it does come with sales tax consequences for the marketplace facilitator. First, if the marketplace facilitator charges any kind of separately stated platform fee, that can be subject to sales tax in many states. Also, many services are subject to sales tax and may require the marketplace facilitator to both understand which services are subject to tax in each of the states in which they create nexus and be able to collect it. Since taxability of services varies from state to state, this can get complicated quickly. A few  common services subject to sales tax are: fabrication and installation, catering, and specific types of construction and landscaping.

Client Example 2: Sales Tax Complications For Marketplace Facilitators & Rentals

Another specific situation we’ve seen is a client who is a marketplace facilitator that  connects people who own specialty equipment that they make available for rent to people looking to rent such equipment for a short time period. In a state like California where sales tax isn’t required to be collected on the rental stream as long as tax was paid up front on the purchase of the property, it may seem relatively straightforward. But what if the person putting equipment out on the marketplace platform for rent  can’t readily prove that they paid sales tax on the original purchase? This is often the reality, especially if the item was originally purchased years ago. In this case, the marketplace facilitator may be required to collect tax on the rental stream. It then becomes more of a question of how to properly document the original payment of tax. Based on our detailed conversations with representatives at the California Department of Tax and Fee Administration (“CDTFA”), they certainly hadn’t considered all of the ramifications of such a fact pattern and the necessary documentation required when the state legislature  passed the marketplace facilitation legislation. We’ve been working with our client and the state agencies to get to a good resolution. Also, that’s just California! Other states may treat the rental stream (and documentation thereof) differently.

Client Example 3:  Liquor Sales As A Marketplace Facilitator

What happens if a regular online seller of unique gift items becomes, in effect, a marketplace facilitator because it begins to sell the occasional bottle of specialty liquor or wine, which, by their nature are subject to special rules?  States generally require a seller of alcoholic beverages to be specially registered with the state’s alcoholic beverage commission. Thus, does the flow of goods through the website constitute a reseller relationship or make the company a marketplace facilitator because it can’t directly sell liquor to an end consumer without a liquor license?  We recently had a client with this issue and found that the answer took us in a few different directions.

As you can see, marketplace facilitation and sales tax issues are not always as straightforward as you might think. Sometimes you may not even realize that you are a marketplace facilitator and need to be aware of this legislation.

Do You Need Help With Your Marketplace Facilitation Tax Compliance?

If you find yourself with questions regarding marketplace facilitation or sales tax, please give us a call! We recommend that people new to marketplace facilitation legislation connect with professionals like Miles Consulting Group to make sure they are compliant with the marketplace facilitation legislation in their state from the beginning. We would be happy to help you and clarify any tax issues you are trying to navigate. Contact us today.