The ability to sell products online has drastically changed since the birth of online marketplaces that allow third parties to sell their goods and services. Offering the ability to sell through an established platform instead of building one’s own website, marketplaces facilitate faster product launches and significantly larger customer reach.
How Online Marketplaces Affect Sales Tax for Remote Sellers
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Multichannel sellers face sales tax changes
The ability to sell products online has drastically changed since the birth of online marketplaces that allow third parties to sell their goods and services. Offering the ability to sell through an established platform instead of building one’s own website, marketplaces facilitate faster product launches and significantly larger customer reach. Selling goods and services across multiple websites is now easier than ever.
But with this ability to reach the masses, and the financial reward from successful online sales, come the burden of collecting and remitting sales taxes. Although marketplace facilitator laws allow some marketplaces to collect on your behalf, recent changes have caused more confusion for many sellers about when and where they owe sales tax, and to whom.
What are marketplace facilitators?
Marketplace facilitators are businesses or organizations, such as Walmart, that contract with third parties, allowing them to sell goods and services on their platform and hence facilitating retail sales. While the ability to sell on a platform with major brand equity can do wonders for remote sellers, it also causes complexity for those who sell on multiple platforms in a variety of states.
Prior to 2018, remote sellers only reported sales tax where they had a physical presence, such as a home office, employees, or inventory, even if they sold online to other states. This activity creates physical nexus, which is the state’s way of saying you have enough presence in their state to necessitate collecting and remitting sales tax to them.
Economic nexus is born
In June 2018, the landmark Supreme Court case known as Wayfair vs South Dakota changed the nexus landscape and the way sellers report sales tax. The case granted power to the states to set their own sales tax responsibility thresholds for out-of-state sellers. Known as economic nexus, these thresholds vary from state to state, causing confusion and difficulty for retailers.
For example, economic nexus minimums can be as low as $100,000 in annual sales or as few as 200 transactions, causing many sellers to owe sales tax in one state but not in the other.
Currently, 44 states have economic nexus legislation, and there are almost as many states with related marketplace facilitator laws. These laws require marketplace facilitators to collect and remit sales tax on their third-party sellers’ transactions when economic nexus is triggered.
Economic nexus minimums can be as low as $100,000 in annual sales or as few as 200 transactions, causing many sellers to owe sales tax in one state but not in the other.
So, when should you collect?
If you’re a remote seller with listings on Walmart’s online platform, then you’re probably excited to learn that marketplace facilitator laws can potentially ease the burden of sales tax for you. How? This legislation means that in some cases sellers no longer have to collect and remit sales tax from their sales on popular marketplaces—but this is if they have nexus and only sell through that one channel.
In response to these laws, some retailers are canceling their sales tax permits and calling the state Department of Revenue to unregister. But, before you cancel your seller’s permit or your sales tax automation software, it’s worth noting that very few sellers will benefit to the point that cancelation is recommended. Most will need to keep their permits active in the states where they do business for a number of reasons. Read on to learn why.
You may still need to file, even with no sales
Marketplace facilitator legislation places the burden of sales tax collection on the marketplaces, much to the delight of sellers. And, while the impulse might be to immediately cancel your sales tax permit, it’s wise to wait. In fact, some states require a permit to show you’re still in business and require you to file a zero-dollar return.
Today, most eCommerce business are multichannel and sellers use multiple platforms and marketplaces; there are very few sellers who only sell on one marketplace. So, unless you are one of the few in that category, you still need to keep your registration active.
Some states require a permit to show you’re still in business and require you to file a zero-dollar return.
Take a look at your sales
Look closely and thoroughly at your past and/or projected sales. While you may have not met the thresholds for nexus in 2019, the holiday season can have a large impact and cause many to have nexus in new states. With that in mind, you’ll want to review your past sales closely to see if you’ve triggered a new threshold and need to register for a sales tax permit in a new state.
Further, think about where and how you want to sell in the future. Are there new platforms or markets you’re looking to expand to? Inventory can cause nexus as well, so even if your marketplace fulfills orders for you via inventory warehouses, you may also have a responsibility to remit taxes yourself. Not all marketplaces collect in the same states, so once again, you’ll need to closely examine where you generate the bulk of your sales. Is it from one marketplace or collectively across multiple channels?
When do marketplaces collect for you?
If you’re only selling products or services via one marketplace facilitator that collects on your behalf, you may not have to report your sales tax and may let the marketplace report for you. But as with economic nexus, marketplace legislation varies from state to state, so you’ll want to make sure you understand the laws before canceling any permits.
For example, Connecticut requires marketplace sellers to file yearly sales tax returns with the DOR if they exceed the state’s economic nexus threshold. Instead of canceling your permit, you can request to change your filing status to annually by sending a secure email to the DRS through the online Taxpayer Service Center (TSC). You’ll still need to report all sales made in Connecticut, but you can deduct the sales made from a marketplace if the marketplace facilitator collects sales tax on your behalf. Should this leave you with no sales to report, you will need to file a zero-dollar return to let the state know you’re still in business.
In Iowa, on the other hand, sellers don’t have to register for a sales tax permit or file sales tax returns if they only make sales through a marketplace that collects for them. But, sellers who make sales outside of Walmart and other marketplaces must still report their sales and deduct any sales taxed by a marketplace facilitator.
Likewise, if you operate your own website through an eCommerce shopping platform, (in addition to selling on a marketplace), and have economic nexus, you’re still on the hook for collecting the sales tax on your own website. So, it’s important to keep your sales tax permit valid in each state where you have economic or physical activity.
Ask your tax professional
If you’re still unsure as to when or where to remit your sales tax, it’s worth consulting a CPA or tax advisor. They can help you do a deep-dive into your sales, discuss projected growth plans, and direct you toward the right solutions to help you automate sales tax. Certified tax advisors will be able to advise you on when you should file for a permit or cancel a current permit as well as look at your nexus obligations.
In the meantime, if you are already collecting and filing sales tax, you will most likely have to remit sales tax in January, as almost everyone has a responsibility to file. Here is a complete listing of January sales tax due dates to help you stay on track and file a timely return.
Get professional help from TaxJar
If you’re just getting started with sales tax and trying to understand economic nexus and marketplace facilitator legislation, then a sales tax management solution like TaxJar can take the guesswork out of sales tax, automate your returns, and tell you where and when you have nexus. Sign up for a free trial today, and automatically import your sales tax data. Saving you as many as five hours per state return, TaxJar’s sales tax solution simplifies your sales tax burden and lets you focus on growing your business.