On October 21, 2019, the Multistate Tax Commission (“MTC”) Marketplace Work Group released its draft marketplace facilitator white paper addressing issues arising from marketplace facilitator laws that have been enacted in nearly all states. The draft white paper is the result of several months of public meetings held by the Work Group. The meetings consisted of input by representatives from the MTC, state revenue departments, taxpayers and outside consultants.
In August, the Work Group developed a prioritized issues list of the top 13 issues of greatest importance to the states. The Work Group then spent the following months reviewing the issues and considering feedback from taxpayers and tax advisers.
The 13 priority issues include:
- Definition of marketplace facilitator/provider.
- Who is the retailer?
- Remote seller and marketplace seller vs. marketplace facilitator/provider recordkeeping, audit exposure and liability protection.
- Marketplace seller-marketplace facilitator/provider information requirements.
- Collection responsibility/determination.
- Marketplace seller economic nexus threshold calculation.
- Remote seller sales/use tax economic nexus threshold issues.
- Certification requirements.
- Information sharing.
- Taxability determination.
- Return simplification.
- Foreign sellers.
- Local sales/use taxes.
While the MTC’s draft white paper does not take positions or provide recommendations on most of the issues, there are a few important points made in the white paper:
- Businesses desire a narrow definition of “marketplace facilitator.”
Taxpayer participants in the Work Group expressed a strong preference for the narrow definition of marketplace facilitator because the broad definition leads to more uncertainty and compliance issues. Specifically, a business that does not directly or indirectly process or collect payment cannot practically comply with a tax collection requirement.
- Businesses strongly prefer the marketplace to be the “retailer” for facilitated sales.
The prevailing trend among states enacting marketplace collection laws is to treat the marketplace facilitator as the “retailer” under the sales/use tax laws. Taxpayer participants in the Work Group expressed a strong preference for marketplaces being the sole retailer in marketplace transactions.
- Audit liability protections are still needed for marketplace facilitators.
Marketplace collection laws generally provide that the marketplace facilitator is the party to be audited on facilitated sales transactions. However, some marketplace collection laws also impose recordkeeping requirements on marketplace sellers for facilitated sales and subject the marketplace seller to audit when the marketplace facilitator can establish that its failure to collect was due to erroneous information provided by the marketplace seller. Taxpayer participants in the Work Group believe that at least for a transition period, audit liability protection needs to remain in place for marketplace facilitators for non-collection caused by erroneous information from marketplace sellers.
- Collection obligations regarding other types of fees and taxes remain unresolved.
Generally, state laws requiring marketplace facilitators to collect tax, limit the collection requirement only to sales and use taxes. It is often unclear what should happen when other types of fees or taxes apply to the transaction. Certain participants in the Work Group urged that one party or the other should collect all applicable taxes to avoid a customer receiving multiple invoices for the same transaction. However, other participants wanted the marketplace collection requirement limited to sales/use tax.
- State information sharing can create a chilling effect for registrants.
A mechanism currently exists for state tax agencies to share or exchange taxpayer information. However, the MTC acknowledged that remote sellers may be hesitant to register if information sharing among the states is targeted specifically to identify those remote sellers who have registered in one state but not others.
- Foreign sellers need better guidance.
States need to provide clearer guidance to foreign sellers and marketplace facilitators regarding registration procedures. States should also develop work-around processes for foreign sellers needing to register for sales/use tax when those foreign sellers have no permanent establishment, lack an FEIN number, and their officers are not US citizens.
- Local tax collection solutions are in the works.
The collection of local sales/use taxes adds a layer of complexity to tax compliance for remote sellers and marketplaces. Some states have local jurisdictions with “home rule” authority to impose and administer local sales/use taxes, and local sales tax administration may not be centralized at the state level. These states are working to create centralized filing systems in an effort to solve this problem.
What to prepare for: The MTC will be meeting this week in San Antonio, Texas, where the findings of the white paper will be presented. It is expected that the white paper will serve as guidance for states considering implementing or modifying their marketplace collection laws, in addition to providing taxpayers with important insight regarding how states view marketplace collection obligations.
Why this is important: States are expected to make revisions to existing marketplace collection laws in the 2020 legislative sessions. The MTCs recommendations will likely have some influence on these revisions.