Many online sales in the United States take place on shopping portals that connect buyers and sellers. Amazon, Etsy, eBay, Walmart, and many other well-known websites allow third parties to list items for sale.
And these websites do more than just provide a platform for sellers to connect to new and existing customers. Depending on the role they play in the transaction, shopping portals or platforms may also be obligated to collect sales tax from customers and to remit payments to tax authorities across the country.
They have this obligation because of marketplace facilitator laws.
Marketplace facilitator laws were passed by nearly all states after a 2018 Supreme Court case called South Dakota v. Wayfair changed longstanding rules that governed the taxation of goods and services. The Supreme Court decision in that case allows states to require businesses to collect sales tax even if they don’t have a physical presence in the state.
Once the court opened this door, many states wanted to capture as much revenue as they could from online sales. As a result, they began passing marketplace facilitator laws to ensure that they could collect sales tax even from remote sellers doing a small volume of transactions — if those transactions occurred on third-party platforms.
While these laws help state governments to avoid missed revenue, they also place a substantial burden on shopping platforms that are classified as marketplaces. The laws create some challenges for sellers as well.
This guide will explain what marketplace facilitator laws are, how they impact online sellers, and when they apply to different online sales platforms.
The evolution of marketplace facilitator laws
Most states charge sales taxes as a way to fund government programs and services. States require that sellers of goods and services collect those taxes on taxable items. However, a state government can impose this requirement only if the seller has established nexus in the state (by meeting an economic or physical threshold).
Before 2018, a state could compel a company to collect sales tax only if the company had a physical presence there, such as offices, inventory or employees — this is known as physical nexus. If a business did not have physical nexus, the state couldn't make the company act as its tax collector. Instead, consumers who bought from out-of-state sellers were supposed to report the transactions on their tax returns and pay local sales taxes.
Unsurprisingly, compliance with this rule was very low, as there was no clear way for the government to track online sales. As a result, states were missing out on revenue when people shopped online, and local businesses were at a significant disadvantage.
But things changed with Wayfair. With that case, the court established that a state could also require a business to collect sales tax if the company had economic nexus in the state. A company establishes economic nexus in a state when it does a certain amount of business there — for example, $200,000 in sales or 200 distinct transactions in a year (different states have different nexus thresholds).
Under these laws, however, small sellers were still able to avoid having sales tax obligations imposed on them, since they often didn't meet the thresholds necessary to establish economic nexus. That's where marketplace facilitator laws come in.
In the jurisdictions that passed these laws, marketplaces that connect customers to third-party sellers were required to collect sales tax — so all those transactions taking place on the marketplace could be taxed.
This shifted the responsibility for compliance to the big names in the e-commerce world, rather than requiring small shops that had just a few transactions to try to figure out how to navigate disparate sales tax rules across the United States.
What sellers need to know
A marketplace facilitator facilitates, or enables, retail sales by allowing third parties to sell goods to customers directly on its platform. Marketplace facilitators could play various roles in a transaction, including:
- Listing products for sale and/or allowing buyers to search a database of products sold by third-party sellers.
- Taking payment for products sold by third parties.
- Assisting in the shipment of products that are sold by third parties.
Some of the biggest websites on the Internet are marketplace facilitators, including:
- Amazon: Independent sellers sold more than 4.5 billion items on Amazon in 2023, and more than 60% of sales in Amazon stores come from third-party sellers.
- eBay: Sellers can list items for sale using an online auction format. Customers can bid on products or pay a set sale price.
- Etsy: Etsy focuses on handmade and vintage goods.
- TikTok Shops: TikTok facilitates e-commerce sales on this platform best known for short videos.
- Walmart Marketplace: Walmart offers a growing number of third-party products for sale through its online marketplace. This allows sellers to put products in front of the more than 255 million people who shop at Walmart online and in-store each week.
However, not every online website that helps companies sell products is a marketplace facilitator. For example, Shopify offers software for sellers to run their own independent online stores. It does not facilitate transactions in a way that makes it a marketplace provider, because it doesn't handle payments, ship products for sellers, or meet other criteria that would make it a marketplace.
(Shopify's Shop App does function as a marketplace and, as a result, is obligated to collect sales tax for sellers.)
How marketplace facilitator laws affect sellers
Marketplace facilitator laws benefit sellers who use marketplaces. That's because the burden of tax compliance is on marketplaces, not the sellers who use them.
Sellers do not have to understand and follow complex sales tax rules in all the states where they do business, because the marketplace takes care of this obligation for them.
However, there are some downsides or challenges that sellers may face, including:
- Loss of control over tax settings: Sellers cannot make any manual adjustments to the collection of sales tax on marketplace sales. The tax collection happens automatically.
- Sellers must still comply with sales tax obligations outside of marketplace sales: If sellers make any direct sales, they must comply with sales tax rules. This can create added complications because transactions that take place on the marketplace can still count toward establishing economic nexus.
- Complex reporting requirements. Marketplace sellers still need to track where sales tax has been collected and reported to ensure that they are in compliance with the law and can prove they paid as required if they are subject to a sales tax audit.
The best way for sellers to manage these complexities is to use an automated tax solution such as Numeral. Numeral helps sellers to track taxes paid, understand when they have established economic nexus, register to collect sales tax, file sales tax returns, remit payments, and store data in case of an audit. This can make sales tax compliance effortless.
Understanding state tax laws and regularly reviewing the tax obligations that apply to their non-marketplace sales can be beneficial for businesses, and Numeral can make this process much less stressful and time-consuming.
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State-by-state variations in marketplace facilitator laws
One of the biggest challenges for marketplace facilitators is the substantial variation in state sales tax laws. This variation can relate to:
- The thresholds at which marketplace facilitator laws apply: For example, California has a $500,000 threshold before marketplace facilitator laws apply, while Indiana has a $100,000 threshold.
- Which transactions are taxed: States have different rules for when they impose taxes on goods and services. This is especially an issue when it comes to digital goods and software, as laws on electronically delivered intangible products are still evolving.
- What exemptions apply: Many states exclude Some services or industries from sales tax requirements.
It is up to the individual marketplace facilitators to understand the different sales tax laws that apply, based on both where their physical location is and the amount of business that is transacted in each state.
The table below provides some insight into the differing rules across the U.S.:
What marketplaces need to know
Individual states have established their own marketplace facilitator laws. While there is variation in the rules from one location to the next, there are also some common factors in the laws, including:
1. Tax collection and remittance requirements
In states with marketplace facilitator laws, marketplaces are obligated to collect and remit sales tax on behalf of third-party sellers when sales are made through their platform. This applies to taxable goods and, in some cases, to digital products and services.
This means the marketplaces must have systems in place for determining how much tax is due on each transaction, charging the tax at the time of sale, and filing and remitting tax payments to the correct local authorities.
2. Economic nexus thresholds
States establish their own thresholds for economic nexus, which determines whether an entity is responsible for collecting sales tax. They can be based on the volume of sales or number of transactions, and they vary by state.
For example, in Arkansas, the threshold is 200 transactions or revenue above $100,000.
Online platforms need to know these thresholds so they can take action when nexus is triggered.
3. Registration and compliance
Marketplace facilitators must register with the appropriate taxing authorities as soon as they meet economic nexus thresholds. Once they are registered, they have many additional compliance obligations, including:
- Calculating taxes due and collecting the appropriate amount for each sale.
- Reporting tax liabilities across multiple jurisdictions
- Remitting taxes on schedule, which could be quarterly, monthly, or semi-annually, depending on transaction volume and state rules
4. Liability for errors and noncompliance
Marketplaces are obligated to collect and pay sales tax, and they can be held responsible for a failure to comply with this obligation. There are fees and penalties for failure to file, for delayed filing, or for paying the incorrect amount of taxes.
In some states, marketplace facilitators can seek indemnification from sellers in case of seller misrepresentation. Sales that sellers make outside of the marketplace also remain the responsibility of those individual sellers.
Challenges and controversies surrounding marketplace facilitator laws
Marketplace facilitator laws have benefits and drawbacks for small sellers and for marketplaces.
For the marketplaces, assuming the responsibility for sales tax compliance for hundreds of thousands of individual sellers can be a significant burden.
While this is a value-added service that can encourage sellers to use the platform rather than selling directly to consumers, marketplaces are still left dealing with the confusion of inconsistency in state sales tax laws, as well as with the significant burden of understanding tax rules in multiple jurisdictions and complying with each state's regulations.
There is also a cost associated with establishing systems and processes to collect taxes on each transaction, register with each state where there is nexus, and fulfill all the other sales tax obligations.
Sellers also face some challenges due to this arrangement, including the potential for double taxation if marketplace sales tax collection results in discrepancies, as well as the added complexity of tracking sales on-and-off marketplace to determine whether they have established economic nexus and must register their business and pay taxes on their outside transactions.
In light of the challenges that many businesses face in coping with these complicated issues, some industry leaders have argued for unified national laws to simplify operations for marketplace facilitators.
However, states are likely to be very resistant to any mandates or top-down laws that would interfere with their ability to set local sales tax policy in a way that best supports their revenue needs.
Future outlook for marketplace facilitator laws
Marketplace facilitator laws have passed nationwide in the wake of the Wayfair case, as lawmakers have sought new ways to collect revenue. States are coming to rely on this money to keep local coffers filled and budgets stable, as a growing number of transactions take place online instead of in brick-and-mortar stores.
Because marketplace facilitator laws maximize the taxes collected and simplify the enforcement process for states, these laws are likely to expand over time. In fact, more states are moving to tax the sale of digital goods, including software as a service (SaaS).
Marketplace facilitator laws could also increasingly be applied to international sellers to capture more revenue, especially after the EU changed its tax rules on imports to require the collection of VAT even on small transactions.
Online marketplaces must remain up-to-date with changes to state law, as well as with changes on the international level if they facilitate cross-border sales for online sellers operating on their platforms. They will also need to carefully monitor business activities to determine when they have established nexus and if tax obligations are triggered.
Automated solutions like Numeral can ensure compliance and make keeping abreast of legislative changes effortless. Numeral allows companies to manage their sales tax obligations in as little as five minutes a month by automating much of the process of tax compliance.
Marketplaces can turn to Numeral to track when nexus is established, to register with states when required, and to comply with other obligations including collecting the correct amount of sales tax, filing the required forms by the deadline, and remitting the amount due.
With Numeral, even large marketplaces can spend just minutes a month managing sales tax compliance and collection.
The bottom line
South Dakota v. Wayfair drastically changed sales tax collection in the world of online commerce. While Wayfair made it possible for states to collect the revenue they'd otherwise have lost in the shift to e-commerce, it was marketplace facilitator laws that allowed states to capture billions in revenue and collect sales taxes even from small sellers with just a few transactions each year.
As states rushed to establish laws determining when a seller had economic nexus, marketplace facilitator laws further transformed the collection and enforcement process to put the burden of tax collection on large marketplaces that lawmakers believed were more equipped to comply.
While this undoubtedly simplifies the tax collection process for both the seller and local tax authorities, marketplaces and any online platform with third parties selling goods must be aware of the complexities of this obligation.
