The shift in tax collection responsibility to marketplace facilitators raises questions on how to address exempt sales and related documentation requirements. States generally require sellers responsible for collecting sales and use tax to maintain that (i) sales or use tax was charged on all taxable sales, and (ii) the tax collected was subsequently reported and remitted to the state. When a seller does not charge sales or use tax on transactions, a valid exemption or resale certificate or other record must be maintained to demonstrate that the transaction was not subject to tax. However, when it comes to marketplace sales, the application of these general principles becomes less clear.

The major issues with exempt marketplace sales is determining who is responsible for collecting the exemption or resale certificates and who the certificate should be issued to – the marketplace seller, the marketplace facilitator, or both. For example, New York grants marketplace facilitators “the right to accept a certificate or other documentation from a customer substantiating an exemption or exclusion from tax.” N.Y. Tax Law § 1132(l)(1). Marketplace facilitators are then required to “keep such records and information and cooperate with the commissioner to ensure the property collection and remittance of tax imposed, collected or required to be collected [under New York law].” Id.

Similarly, Connecticut considers a marketplace facilitator the retailer of each sale facilitated on its marketplace. Conn. Gen. Stat. § 12-408e(b). As such, the marketplace facilitator is required to comply with all obligations that a retailer otherwise would. Id. Although not explicit, the retailer’s obligation to accept exemption certificates and retain those certificates for a period of six (6) years would thereby be imposed upon marketplace facilitators. Conn. Info. Pub. No. 2018(5) (Dec. 19, 2018). The Connecticut Department of Revenue Services has indicated it is developing additional guidance specific to the record-keeping requirements for marketplace facilitators. Conn. Dep’t of Revenue Services, Office of the Comm’r Guidance – OCG-8 Regarding Marketplace Facilitators and Marketplace Sellers (Nov. 16, 2018).

Other state marketplace laws indicate that the marketplace facilitator is generally the entity subject to audit. See, e.g., N.J.S.A. § 54:32B-3.6(f). Where this is the case, a best practice would be for a marketplace facilitator to obtain such certificates to ensure the marketplace facilitator can demonstrate that the transaction was not subject to tax.

With the collection and record retention burden falling upon the marketplace facilitator in numerous states, some states provide protections for the marketplace facilitators. For example, Virginia’s marketplace law provides protection to marketplace facilitators who reasonably rely on exemption certificates. Va. Code § 58.1-612.1(E). Specifically, a marketplace facilitator is relieved of liability for incorrect collection or remittance of tax on transactions for which it acted as a facilitator if the error is due to reasonable reliance on an invalid exemption certificate provided by the marketplace seller or purchaser. Id. In Indiana, if the purchaser was entitled to an exemption, but the marketplace facilitator collected the sales tax in error, the purchaser does not have a cause of action to bring a sales tax claim against the marketplace facilitator. Instead, the purchaser must file a claim for refund with the Department of Revenue for the recovery of the overpayment of sales tax. Ind. Dep’t of Revenue, Information Bulletin No. 89 (July 1, 2019).

Why this is important: If proper documentation is not maintained, marketplace facilitators run the risk of being liable for tax on transactions that would otherwise be exempt. In the absence of clear guidance, marketplace facilitators should consider retaining copies of exemption certificates and otherwise document any exempt sales. Marketplace facilitators should also consider ensuring procedures are in place for obtaining any exemption certificates from marketplace sellers if the exemption certificate is not obtained directly from the consumer.

What to prepare for: Marketplace facilitators should review marketplace collection state tax laws to confirm who is responsible for collecting exemption certificates or otherwise documenting exempt sales. Marketplace facilitators should also consider procedures to accept and verify exemption certificates. The exact information needed to verify an exemption certificate will vary by jurisdiction and type of transaction.

Next Monday: Marketplace Audits

The New York Appellate Division ruled that telecommunication companies’ fiber optic cables do not qualify for a property tax exemption for such property that transmits radio and television signals. (New York Real Property Tax Law, §102(12)(i)(D).) The New York Court of Appeals had previously ruled in T-Mobile Northeast LLC v. DeBellis (December 13, 2018) that telecommunications installations and fiber optic cables are taxable as real property under New York law but did not address this particular exemption.

Reversing the lower court, the Appellate Division rejected the telecommunications companies’ position that any exempt usage of the property, no matter how slight, would be sufficient to satisfy the exemption. Any other interpretation, the court stated, would allow all fiber optics cables that allow cell phones to “stream video, television, and other programming,” to be excluded from taxation even if the property is used to a minuscule degree in such manner. “That, however, conflicts with the Court of Appeals’ determination in T-Mobile Northeast, LLC that such property is taxable.” Rather, the court concluded that the only reasonable construction of the statute would be that fiber-optic installations are exempt only when primarily or exclusively used for an exempt purpose.

1) Level 3 Communications LLC v. Erie County, Case No. 18-01598.
2) Level 3 Communications LLC v. Chautauqua County, Case No. 18-01575.

Marketplace collection laws are a departure from traditional state sales tax rules that contemplate a single buyer and seller. The addition of the marketplace facilitator to a transaction, as the party responsible for collecting and remitting sales and use tax, raises the question of who is the “seller” or “retailer” (hereinafter “seller”) in a marketplace transaction. Not surprisingly, states do not provide a uniform answer to this question.

In California, for example, marketplace facilitators are deemed to be the “seller and retailer for each sale facilitated through its marketplace.” Cal. Rev. & Tax. Cd. § 6042. Indiana similarly deems a marketplace facilitator to be “the retail merchant of each retail transaction . . . that is facilitated for sellers on its marketplace when it . . . (1) Collects the sales price or purchase price of the seller’s products[;] (2) Provides access to payment processing services, either directly or indirectly[; or] (3) Charges, collects, or otherwise receives fees or other consideration for transactions made on its electronic marketplace.” Ind. Code § 6-2.5-4-18(a).

Washington State takes an alternative route, deeming a marketplace facilitator “to be an agent of any marketplace seller making retail sales through the marketplace facilitator’s marketplace.” RCW § 82.08.0531(1). Similarly, in Iowa, a marketplace facilitator is deemed “to be an agent of any marketplace seller making retail sales through a marketplace of the marketplace facilitator.” Iowa Code § 423.14A.d(3)(d).

In contrast, in New York, a marketplace facilitator is granted certain rights and obligations but is not explicitly deemed the seller. New York law grants to a marketplace facilitator “all the obligations and rights of a vendor.” N.Y. Tax Law § 1132(l)(1). These obligations and rights include, but are not limited to, “the duty to obtain a certificate of authority, to collect tax, file returns, remit tax, . . . accept [exemption certificates], the right to receive [a] refunds authorized [by New York law] and the credit [allowed by N.Y. Tax Law § 1137(f)].” Id.

Finally, certain states, including the District of Columbia and New Mexico, do not deem a marketplace facilitator to be a seller or agent. Nor do their laws explicitly confer upon a marketplace facilitator the obligations and rights of a seller.

Why this is important: If the marketplace facilitator is considered the seller, this may impact the rights and obligations of the marketplace and may also create tax implications. For example, it may impact whether the marketplace facilitator is able to file a refund claim, is eligible for vendor compensation or is able to claim sales and use tax credits. Additionally, if the marketplace facilitator is considered the seller, then other charges that are included as part of the sale may thereby become taxable. Finally, the classification of a marketplace facilitator as a seller could also impact the treatment of coupons or other promotional items offered by the marketplace.

What to prepare for: The inconsistent classification of marketplace facilitators among the states may result in the same marketplace transaction having different taxability consequences in different states. This may create some confusion for purchasers. Marketplaces may need to anticipate these issues in order to determine how to handle purchaser inquiries.

Next Monday: Exemptions Certificates

The Multistate Tax Commission (MTC) held its annual meeting in Boise, Idaho August 5, 2019 through August 8, 2019. As part of the meeting, the MTC’s Uniformity Committee (“Committee”), which established the Marketplace Facilitator Work Group (“Work Group”) in 2018, provided an update. By way of background, at its April 25, 2019 meeting in Denver, Colorado, the Uniformity Committee approved a new project to reconvene the Marketplace Facilitator Work Group, to address any follow-up issues arising from the recent enactment of marketplace collection laws in approximately 36 states. The follow-up issues primarily focused on implementation and compliance problems with marketplace collection tax laws. The Work Group sent a survey to Uniformity member states on July 11, 2019 requesting that the states identify and rank the “top 12” issues by priority, from a list of 19 issues provided. The purpose of the survey and study was to develop recommendations to be considered by the Committee at its next meet in San Antonio in November.

The Committee presented the results of the survey at the annual meeting. The Committee indicated that 22 states participated in the study and prioritized the issues as follows:

  1. Definition of marketplace facilitator/provider
  2. Whether marketplace facilitators should have the same rights as a retailer
  3. Recordkeeping, audit exposure and liability protection for marketplace facilitators and remote sellers
  4. Marketplace seller-marketplace facilitator/provider information requirements
  5. Collection responsibility determination between marketplace facilitator and marketplace seller
  6. Marketplace seller economic nexus threshold calculation
  7. Remote Seller sales/use tax economic nexus threshold issues
  8. Development of certification requirements for marketplace facilitators
  9. State information sharing to assist in noncompliance by marketplace facilitators
  10. Whether states should publish clear guidance on taxability and exemptions to assist marketplace facilitators
  11. Return simplification for marketplace facilitators and sellers
  12. Enforcement considerations for foreign sellers

There were seven issues that did not make the “top 12” issues list. These issues include class action lawsuit protection, retroactivity, local sales/use taxes, assessment and notices, registration, security protocols and overall information on implementation.

Based on the survey results, the Work Group will develop recommendations to present back to the Committee. The Committee decided that based on the recommendations, a white paper will be prepared in time for the 2020 state legislative sessions. It was decided that the Committee would not have adequate time before the 2020 legislative sessions to draft and approve a model statute.

The Committee also noted that the National Conference of State Legislatures (NCSL) SALT Task Force met in Nashville, Tennessee on August 4th and August 5th. The Task Force is currently working on considering proposed model statutory provisions to address some of these issues. The Committee indicated that the Work Group efforts ideally would dovetail with the work of the Task Force.

Why this is important: States will likely consider legislative amendments to their marketplace collection laws in the 2020 legislative sessions. The Work Group and Task Force efforts will be influential in legislative revisions proposed by states. To the extent that there are specific concerns or challenges with marketplace collection laws, it will be important to monitor and provide feedback to the Work Group and Task Force.

Next Monday: Treatment of Marketplace Facilitator (Retailer or Not a Retailer)

The New York State Tax Appeals Tribunal held that a taxpayer was required, for years before 2015, to apportion its receipts based on the location of the work that generated its receipts, and not based on the location of its customers.

Read our full Legal Alert here.

The Tennessee Court of Appeals held that a commercial printing company’s sales of bank checks and other printed products were subject to Tennessee sales tax even though the products ultimately were sent to out-of-state destinations. Under the company’s standard sales contracts, title to the products it sold transferred in Tennessee when the company tendered its shipments to USPS or a common carrier. The court concluded that the sales were not of products manufactured in Tennessee for export, and thus did not qualify for the manufactured for export exemption from sales tax.

The court also concluded that the company’s sales of “blow-in cards” inserted into magazines did not qualify for a sale for resale exemption. Because the cards were placed in magazines for advertising purposes, and were meant to be torn out and returned to the company, the court determined that the cards did not become “component parts” of the finished magazines.

Check Printers, Inc. v. Gerregano, No. 15-598-IV

Qualification as a “marketplace facilitator” does not by itself give rise to a tax collection obligation. A marketplace facilitator must also have sufficient nexus with a state before it may be obligated to collect the state’s sales and use tax on marketplace sales.

Nexus for marketplaces is generally measured under a similar economic standard as that for retailers. For retailers, the overwhelming majority of states have adopted “economic nexus” laws similar to South Dakota’s threshold of $100,000 of sales or 200 separate transactions in the state as was upheld by the U.S. Supreme Court in South Dakota v. Wayfair, Inc., 138 S.Ct. 2080, 201 L.Ed.2d 403 (2018). However, the calculation of sales and transactions for marketplaces presents additional complications.

First, states vary in determining which sales count towards the economic nexus thresholds for marketplaces. Some states consider only sales made through the marketplace by sellers to determine if the economic threshold has been met, while other states also consider the marketplace facilitator’s direct sales into the state. For example, Washington State law provides that marketplace facilitators should include both the gross receipts and separate transactions from its own direct sales and the cumulative gross receipts and separate transactions from all sales facilitated on behalf of marketplace sellers, including marketplace sellers that otherwise would not be required to collect tax, to determine if the nexus thresholds have been exceeded. RCW § 82.08.052(1). Conversely, Oklahoma recently enacted legislation to revise their marketplace collection law so only sales made through the marketplace facilitator’s forum on behalf of a marketplace seller count towards determining if the marketplace facilitator has nexus. S.B. 513, 57th Leg., 1st Reg. Sess. (Okla. 2019).

Additionally, states vary in how they determine the timing of when these economic nexus thresholds have been met. Some states look to the previous calendar year to determine if the threshold was met to impose collection and remittance requirements, while other states look to both the previous and current calendar year. For example, Alabama’s marketplace collection law applies to any marketplace facilitator that has more than $250,000 in retail sales in Alabama for the preceding twelve months. Ala. Code § 40-23-199.2(b). However, Iowa’s marketplace collection law applies to any marketplace facilitator that has more than $100,000 in Iowa sales for the current or previous calendar year. Iowa Code § 423.14A(3)(d).

There is also additional nexus considerations for sellers that sell through marketplaces because state laws differ in whether a marketplace seller counts sales facilitated by a marketplace facilitator for purposes of determining whether the marketplace seller is required to collect and remit tax on their separate direct sales. For example, California requires a marketplace seller to include all sales made on its own behalf and sales facilitated through a marketplace facilitator’s marketplace in determining whether the marketplace seller has met the state’s economic nexus threshold. Cal. Rev. & Tax. Cd. § 6044. Whereas, Oklahoma’s newly enacted law explicitly states that a seller’s sales made through a marketplace forum are not included in determining whether the seller has met the state’s economic nexus thresholds. S.B. 513, 57th Leg., 1st Reg. Sess. (Okla. 2019). As a result, marketplace sellers may find that their own tax collection obligations will vary in each depending on whether marketplace sales are counted in their own nexus determinations.

Why this is important: The lack of uniformity in the economic nexus provisions means that marketplace facilitators must carefully review the laws of each state to determine if and when it has exceeded the economic thresholds requiring it to register and collect and remit sales or use taxes. Similar transactions may also result in different treatment under the laws of each state. Marketplace sellers must also be aware of the economic nexus provisions in order to ensure that they are complying with their own tax collection obligations.

What to prepare for: Even though a state has an existing marketplace law in place, changes and modifications to those provisions may occur. States have been adjusting their economic nexus provisions by increasing or decreasing the dollar thresholds, abandoning the transaction threshold and revising the sales that count towards the economic nexus thresholds. Furthermore, as state’s issue guidance on existing laws, it is possible there will be further variations made to economic nexus determinations.

Next Monday: The MTC’s “Top 12” Marketplace Collection Tax Issues

On April 10, 2019, the Utah Tax Commission issued a private letter ruling to a video streaming provider (“Taxpayer”) finding that the Taxpayer’s sales of subscriptions entitling subscribers to enhanced features on the Taxpayer’s streaming platform, are not subject to sales and use tax. On its internet-based platform, the Taxpayer provides a video streaming service that is available without charge. The Taxpayer also sells subscriptions to its platform that permit subscribers to enjoy ad-free viewing, chat function enhancements, additional time to save videos and customer support. The Commission determined that since none of the additional services provided through a subscription are separately subject to Utah sales and use tax, the Taxpayer’s sales of subscriptions were also not subject to tax. In particular, the Commission applied the “essence of the transaction” doctrine to find that even though some of the transactions involved use of the Taxpayer’s software and hardware, the Taxpayer was not selling prewritten computer software or tangible personal property to its subscribers.

Utah Tax Commission, Private Letter Ruling 18-002 (April 10, 2019).

This is the second quarter edition of the Eversheds Sutherland SALT Scoreboard for 2019. Since 2016, we have tallied the results of what we deem to be significant taxpayer wins and losses and analyzed those results. This edition of the SALT Scoreboard includes a discussion of the United States Supreme Court’s recent decisions in Kaestner and Hyatt, insights regarding Colorado’s combined reporting litigation, and, to celebrate the opening of our new Chicago office, a spotlight on Illinois tax cases.

View our Eversheds Sutherland SALT Scoreboard results from the second quarter of 2019!

It looks like we have a tax professional on our hands! We’re excited to welcome the newest member of the Eversheds Sutherland SALT Tot team, Reese. She and her proud father, David Gardener, Director of Global Tax at Sonder, are happy, healthy and ready to take on even the toughest tax challenges.

Please join us in congratulating David and his family on their new SALT tot.