Marketplaces have grown significantly in recent years amid the pandemic-driven acceleration of e-commerce and the growth of omnichannel commerce. In reality, eMarketer predicts that US market sales will total more than $357 billion in 2022, or nearly 35% of all online sales. As more and more customers flock to marketplaces, the opportunity to scale a business is obvious, but thanks to marketplace tax laws, significant complexity makes it difficult to increase sales easily.
Market enabler laws, which impose on marketplaces the obligation to collect and remit sales tax on behalf of sellers, began to appear in 2017. They have increased significantly since the Supreme Court’s 2018 ruling in South Dakota vs. Wayfair, Inc. As a result of this ruling, most states with general sales tax now require certain out-of-state retailers and market facilitators to collect and remit sales tax. Almost four years after the case was judged, 58% of respondents to our May 2022 survey business survey noted that market enabler laws have impacted the way their company does business, the highest percentage to date.
Beyond the complexity of sales tax market enabler laws, states have used the Wayfair decision to introduce new rules for marketplaces. From monitoring stolen goods to expanded income tax obligations for distance sellers, market tax laws have far reaching implications.
Below are a few ways market tax laws have evolved since the ruling and how they may impact sellers using multiple channels.
New Reporting Requirements for High Volume Sellers
States are beginning to establish rules that curb a wide range of dishonest business practices, fraud, theft, and other crimes. In order to ensure that high-volume third-party sellers are valid entities and to reduce retail crime, several states, including Arkansas and Californiahave tasked Market Facilitators with validating and providing additional details on third-party sellers.
While this type of oversight will help reduce various practices that undermine market integrity, these new requirements introduce another compliance challenge. Marketplaces need to be both prompt and accurate with their reporting requirements, as some states like Arkansas only allow marketplaces three days to verify third-party seller information is correct, and three days to verify any updates to this information, before being found to be non-compliant. .
Tax obligations for distance sellers
As the Wayfair The decision opened the floodgates to more aggressive nexus laws, some state tax authorities interpret Public law 86-272 in their own way to impose income taxes on those who sell out of state, including market vendors. Both New York and California propose and implement legislation that would remove existing tax protections for distance sellers.
This type of legislation can go so far as to retroactively apply corporate income tax obligations to out-of-state e-commerce sellers. Therefore, many sellers who are not present in jurisdictions where these laws exist will be virtually unaware of their tax liability.
Although those affected by this legislation are poised to offer legal challenges as it limits protection for online sellers, it is evident that tens of thousands of sellers will still be affected in the short term. And we can expect other states to follow the example of California and New York if these laws are based on legal grounds.
Sales Taxes for Marketplace Sellers
States and sellers have been fighting for several years on the issue of retroactive taxes in the wake of Wayfair. In 2021, a California federal judge dismissed a lawsuit by the Online Merchants Guild against the California Department of Tax and Fee Administration (CDTFA), which held Amazon sellers liable for retroactive sales tax. It came after a similar complaint of an Illinois-based vendor against CDTFA was dismissed by a federal judge in Illinois.
Just this year PennsylvaniaThe Department of Revenue recently defended its decision to collect back taxes from third-party sellers who had inventory stored in Amazon’s warehouses in the state. Expect this power struggle to continue as more states try to claw back sales tax.
Staying on top of compliance obligations, for both marketplaces and marketplace sellers, can be a tedious, time-consuming, and burdensome process for growth, especially when marketplace enabler laws differ across jurisdictions. each jurisdiction and may change at any time. To make matters worse, the month of May 2022 Avalara Wayfair Decision Tracking Study shows that overall awareness of market enabler laws has dropped to levels almost never before seen. As sellers expand their operations using marketplaces, collecting and remitting sales tax and handling other compliance obligations shouldn’t limit their growth potential.
Technology solutions that move away from manual calculations will automate the entire compliance process to mitigate compliance risk while helping sellers deliver a simpler and more efficient customer experience. It can monitor tax changes in the markets, including those mentioned above, to ensure you get the right calculation for every trade. This reduces audit liability and leads to a quick and easy payment process for customers. For many, this can be a process as simple as implementing new software into the tech stack.
By leveraging technology to automate the compliance process related to Market Facilitation Acts, you can grow your business, save valuable time, money and other resources, and deliver better customer experiences.
George Trantas is Senior Director of Global Marketplaces at Avalara