Sales Tax Fundamentals
Get up to speed on the basics of sales tax
When the South Dakota v. Wayfair Supreme Court decision allowed states to require that more e-commerce businesses collect sales tax, individual sellers received a lot of the attention. How would they handle exponential sales tax compliance requirements? Would this be the end of mom and pop businesses?
One of the sparks of light for smaller businesses was that most states quickly fell into line and passed laws that required online marketplaces like Amazon or eBay to collect sales tax on behalf of the sellers who use their platform.
But what happens if you run an online marketplace? Even a small one? How do marketplace facilitator laws apply to you?
Let’s dig into what makes a “marketplace facilitator” and if state marketplace facilitator laws apply to your business.
What is a marketplace facilitator?
In the US, each state makes their own sales tax rules and laws. After the South Dakota v. Wayfair ruling, states were given the go-ahead to pass laws requiring that certain “marketplace facilitators” collect sales tax on behalf of the third-party sellers who use their marketplace.
A marketplace is an online platform that enables multiple different sellers to sell via the marketplace. Think of Amazon, eBay, Etsy or Walmart’s third-party marketplace. There are countless smaller marketplaces, too.
In general, online marketplaces “facilitate” a sale by allowing a third-party to list items on the marketplace. The marketplace also accepts payment on behalf of the seller. This is different from an e-commerce business who sells on their own website.
In the US, all 46 states (plus DC) that have sales tax also have some form of marketplace facilitator law. Each state’s marketplace facilitator law is slightly different, and there is generally (but not always) a “small seller exemption.” For example, many states’ laws say that a marketplace that generates more than $100,000 in sales in a year is subject to collecting sales tax on behalf of the 3rd party sellers who sell via their marketplace.
Each state’s definition of what constitutes a “marketplace” is a little different, but Alabama’s definition provides a general overview. In Alabama’s definition, a marketplace provides:
- Payment processing services
- Fulfillment or storage services
- Listing products for sale
- Setting prices
- Branding sales as those of a marketplace facilitator
- Order taking
- Advertising or promotion
- Customer service
So, while the traditional marketplaces like Amazon and Etsy definitely meet this criteria, some other online marketplaces may meet a state’s criteria, too.
Examples of Marketplace Sales Tax Pre- and Post-Wayfair
Before Wayfair and marketplace facilitator laws:
Company A, who sold on the Amazon marketplace, was required to collect sales tax from their Amazon buyers in states where Company A had nexus. Though Amazon was required to collect sales tax on it’s own sales through Amazon.com, they were not required to collect sales tax on behalf of a 3rd party like Company A. If Company A failed to comply with relevant sales tax laws, the burden of fines and penalties fell on Company A.
Before marketplace facilitator laws, marketplace sellers were required to collect sales tax from buyers they sold to via online marketplace.
After Wayfair and marketplace facilitator laws:
Company A still sells their products via Amazon’s online marketplace. But now, Amazon is required to collect sales tax on behalf of Company A whenever Company A makes a sale through their marketplace. (In applicable states. But more on that in a minute!) Company A is no longer required, in states with a marketplace facilitator law, to collect sales tax when making a sale through Amazon’s marketplace.
Today, marketplace facilitator laws have taken the burden of sales tax collection on marketplace sales away from marketplace sellers.
Is my online business a marketplace facilitator?
If you run an online marketplace, you need to be very aware of each US state’s marketplace facilitator laws.
Most state marketplace facilitator laws say that a marketplace that makes over $100,000 in the state in a year are considered marketplace facilitators and are required to collect sales tax on behalf of their third-party marketplace sellers.
However, it can’t be stated enough that each state is different. Some states don’t have a threshold at all and consider all marketplaces responsible for sales tax. Others also have a transaction threshold, such as that the marketplace must also make over 200 transactions in the state in a year to be considered a marketplace facilitator.
As always, if you are concerned that you should be collecting sales tax and don’t know where to turn, we recommend speaking with a vetted sales tax expert.
What do I do if my business is a marketplace facilitator?
If you find that your marketplace is considered a marketplace facilitator in a state, then your next step is to get compliant with the state and start collecting on behalf of third-party sellers who use your marketplace.
- First, you’ll need to register for a sales tax permit with the state as a marketplace facilitator. If you are already registered with that state, most states require that you contact the state’s taxing authority in order to update or convert your registration.
- From there, you’ll be required to begin collecting sales tax from buyers on behalf of the sellers on your online marketplace. This means you’ll need to be able to collect the right amount of sales tax on all of your sellers’ products in every state. The TaxJar API does this for you, and more about that below!
- You’ll then be required to periodically remit the sales tax collected on behalf of third-party sellers to the state. You will generally be required to file and remit sales tax collected once per month, but some state filing frequencies may vary depending on individual state law. Further, you may be allowed ro required to file a separate sales tax return for your own sales vs. the sales tax you collected on behalf of 3rd party sellers.
- Depending on the state, you may be required to report to 3rd party sellers on your marketplace how much sales tax you collected on their behalf.
I can’t stress this enough. Every state’s marketplace facilitator rules and laws are slightly different. If you have questions about registering, collecting or remitting sales tax, contact the state’s taxing authority or a vetted sales tax expert.