One of the most confusing and frustrating issues to deal with as an online seller is the question of sales tax. Understanding when you have an obligation to collect sales tax from your customers is a challenge, and in part, that’s because even tax and legal experts don’t always agree. One constant in the debate, however, is the fact that states are continuing to search for ways to collect sales tax from online sales. One new addition to this dynamic is the recently enacted Marketplace Facilitator Law in Washington state.
What Is the Marketplace Facilitator Law?
The Marketplace Facilitator Law was signed in July 2017, and it went into effect on January 1, 2018. It stipulates that the responsibility for collecting and remitting sales tax for online purchases by customers in Washington state falls on the company supporting the marketplace rather than on the individual sellers.
This has prompted Amazon and Etsy, among others, to begin collecting and remitting sales tax to Washington on any sales made through their platform by third party sellers to customers in the state. Of course, the marketplace facilitator still has to have a nexus established in the state in order for the law to apply to them, and the criteria for this are outlined in the legislation.
There are a number of benefits for both sides from this new approach, including the fact that, for sellers, everyone making a sale is operating on a level playing field. One reason many sellers resisted charging sales tax to customers other than those in their home state is that they were afraid they’d be operating at a disadvantage if their competitors did not add the tax. The increased purchase price for their customers might drive that business elsewhere.
This is on top of the fact that it’s immensely challenging for small online sellers to stay on top of the myriad regulations regarding sales tax rates, nexus and the taxability of goods from one state to the next. It’s also a huge hassle for states to try and track down non-compliant sellers and collect back taxes from them. It’s much more straightforward on all fronts if the selling platform handles all of this, and that’s what the new law in Washington is tapping into.
In other states, the emphasis of late has been to go after the individual sellers in an attempt to make it seem worthwhile for them to register with the state to collect and remit sales tax themselves. Along these lines, a judge in Massachusetts recently issued an order directing Amazon to disclose information about sellers who use its platform, but the resources required to track down and collect from these individuals are considerable.
Another approach was recently presented by a multistate tax commission, which offered an amnesty program to sellers that would forgive any back sales tax payments they owed in exchange for a commitment that they would collect sales tax going forward. However, only about 850 sellers have signed up so far, bringing the effectiveness of this approach into question.
The Question of Nexus
One thing that is certain is that these types of trends will continue moving forward. States have lost significant sales tax revenue thanks to the growth of online selling, and the share that represents of total retail sales will only continue to increase over time. There are a number of economic nexus laws now winding their way through the courts in the hopes of eventually overturning the Supreme Court decision in Quill Corp v North Dakota, which is what current interpretations of nexus as a physical presence are based on.
That ruling stipulated that an actual physical presence in a state was required for the establishment of nexus in that state. Nexus is what gives the state government the right to levy taxes on a business, and so without it, no taxes could be enforced. In some states, this included the use of specific print advertising materials or individuals acting as affiliates, but since the growth of the online marketplace has changed selling dynamics so dramatically, the laws as they are written are difficult to stretch to accommodate the current circumstances.
Amazon Fulfillment Centers
One point of contention among sellers, particularly those who use Fulfillment by Amazon, is whether or not having their products stored in an Amazon fulfillment center in a particular state creates a nexus for them in that state. Many feel, and have been advised by tax professionals, that because they have no control over where their products are stored, and because they do not own the facility, that there is no nexus. Many states disagree.
With the imposition of the Marketplace Facilitator Law, Washington has done away with this aspect of the debate for sales made within its borders. Since it’s Amazon who owns the warehouses, and because the company is based in the state anyway, it absolutely has a nexus, and so sales tax laws may be applied to it. Several other states including Arizona and Minnesota already consider the marketplace to be the seller for sales tax purposes when it comes to online sales, and so it seems likely that some other states may begin to move in that direction as well.