E-commerce has changed today’s market. Sales tax is one area
in particular that is feeling significant impact. In the past, sales tax
obligations have always been determined by a “physical presence”, known as
nexus. A traditional brick-and-mortar business would collect and remit sales
tax in the states they had a physical presence; whether that be an office
building, a warehouse, a manufacturing facility, employees, etc. Sales tax
compliance was fairly straight forward in that many sellers only had to worry
about the rules for one state. Likewise, each state’s primary concern was to monitor
sellers located in their state.

Today, however, e-commerce has inadvertently created a loop
hole allowing sellers to conduct business in a number of states, many of which
they have no physical presence. This has caused a domino effect to begin, as
previously, no physical presence in a state meant sellers had no obligation to
charge sales tax on sales made to consumers.  E-commerce sellers had the advantage of lower
prices, drawing consumers away from buying local, which ultimately decreased
sales volume for local businesses, and led to a substantial drop in revenue for
most states.

This change has caused states to get creative, in an attempt
to cultivate their loss in revenue. Over the past few years, as e-commerce has
become more prevalent, states are frequently working to change existing rules
and create new rules in an attempt to reach out-of-state sellers; making sales
tax compliance more challenging than ever. Many businesses, both small and
large, are not compliant with sales tax merely due to the new complexities and
a lack of awareness for the rules in the 45 states that have a state sales tax
rate – Delaware, Montana, New Hampshire, Alaska, & Oregon do not have a
state level sales tax. Enforcing sales tax compliance on these businesses is very
timely and costly for the states. Therefore, in an effort to fill the gap, some
states have shifted their sights to focus on the bigger players.

As a result, Marketplace Facilitator Legislation was born. A
Marketplace Facilitator is defined as a marketplace that allows third party
merchants to transact sales through their marketplace platform. This new
legislation obligates the marketplace facilitator to calculate, collect, and
remit sales tax on the third-party seller’s behalf. The most popular
marketplace facilitator today is Amazon.com, controlling around 50% of the
e-commerce market according to recent reports from CNBC. As states have begun
to enforce this new legislation, Amazon.com has communicated to their
third-party sellers that they will begin taking over the sales tax obligations.
Washington was the first to bring this legislation making it enforceable
January 1, 2018. In a matter of eleven months, Pennsylvania, Oklahoma,
Minnesota, and New Jersey have followed Washington’s lead. It is expected that
more states will follow this trend.

What do these new rules mean for third party sellers? Many
e-commerce sellers assume if the marketplace is calculating, collecting, and
remitting the sales tax under the Marketplace Facilitator rules, they have no
obligation to do anything further. This understanding is a common misconception.
If nexus is triggered in any particular state, even with Marketplace
Facilitator rules, registration, collection, filing, and remittance is still
required to be completely compliant. The components changed by these new rules
are the collection, and remittance. The third party seller is still responsible
for registering and filing. The Marketplace Facilitator is responsible for the
collection and remittance.

It’s especially important to file in these states if already
registered. Many sellers assumed filings were no longer required of them and
shortly thereafter received notices for missing filings from the states. Filing
is still required; and most states adopting this change have updated their
forms for gross sales to be reported and then any sales that the Marketplace
Facilitator collected sales tax on are included with the deductions, to be
subtracted out. Any remaining tax due would be due from the seller. The
Marketplace Facilitator is only required to pay the retail sales tax due, some
states have additional taxes the facilitator does not pay. For example,
Washington has an additional Business & Opportunity tax rate of 0.00471 for
retail sales. The seller would also be responsible to collect and remit sales
tax on any retail sales that were not made through a marketplace, such as a
personal webstore.

If a third party seller has nexus in a Marketplace
Facilitator state and has not registered, it’s important to understand there is
still a compliance requirement. The potential liability in the event of a state
audit, however, will be less substantial.

The Multi-state Tax Commission continues to encourage sales
tax reform that will streamline sales tax across the states. In the meantime, it
is vital for every e-commerce seller to know their liability risks and have a
strategy in place for sales tax registration, collection, filing, and

By Kayla Kormylo & Kassity Polensky theamazonaccountants.com