February 13, 2024

The Evolution of Marketplace Facilitator Legislation: Navigating the New Terrain of E-Commerce Taxation

By John Bonk, Partner, National Co-Leader - State & Local Tax

The Evolution of Marketplace Facilitator Legislation: Navigating the New Terrain of E-Commerce Taxation State & Local Tax

The evolution of marketplace facilitator laws marks a pivotal shift in the regulatory landscape of e-commerce taxation, which gained momentum after the transformative South Dakota v. Wayfair, Inc. Supreme Court decision in 2018. This landmark ruling empowered states to impose tax collection duties on out-of-state sellers, thereby altering the operational dynamics of online marketplaces. The roots of these laws, however, can be traced back to a confluence of factors, including the pursuit of a level playing field by businesses and the quest for augmented revenue by governments.

Post-Wayfair, states wasted no time enacting economic nexus statutes, compelling out-of-state retailers to remit sales taxes once they crossed certain sales or transaction thresholds. Concurrently, marketplace facilitator laws came into effect. These laws designate the marketplace facilitator—an entity that aids sellers in executing sales and processing payments—as the responsible party for tax collection, shifting this burden from individual sellers to the sales platforms.

While most states have aligned their economic thresholds with those set by South Dakota—$100,000 in sales or 200 transactions—several practical issues have emerged concerning:

  • The definition of the sales threshold;
  • The necessity and feasibility of the 200-transaction threshold;
  • The obligation for marketplace sellers to register and file returns in states where they have minimal or no tax liability; and
  • The timeline for sellers to register and commence tax collection upon meeting the threshold.

Despite the concerted efforts of the Multistate Tax Commission (MTC), the National Conference of State Legislatures (NCSL), and the Streamlined Sales Tax Governing Board (SSUTA) to harmonize marketplace facilitator statutes, variations persist. Each organization has contributed valuable insights, including the MTC’s white paper, the NCSL’s model act and legislative guide, and the SSUTA’s interpretive guidance for states.

The definition of a Marketplace Facilitator/Provider can vary by state, though it is generally an entity that lists merchandise for sale and manages payments. The breadth of the various definitions and presence of multi-tiered marketplace models add layers of complexity and potential unforeseen repercussions.

Retailers need to understand how they are utilizing the marketplace to account for potential tax impacts. Some marketplaces include the fulfillment of the seller’s goods, which can have significant nexus implications. Retailers also need to understand how to report sales on their own sales tax returns and how to back out their marketplace sales.

In conclusion, marketplace facilitator laws are a testament to the ongoing evolution of tax regulations in response to the burgeoning realm of e-commerce. While strides have been made toward a more unified regulatory framework, substantial discrepancies persist among state laws. It is important that taxpayers who utilize these marketplaces understand the impact to their tax responsibilities.