Collection Responsibility Determination
At the end of December, the Uniformity Committee of the re-convened Wayfair Implementation and Marketplace Facilitator Work Group (“Work Group”) released its annual white paper (“2019 White Paper”). The paper addresses issues arising from the enactment of sales/use tax laws implementing economic nexus and requiring marketplace facilitators/providers to collect sales/ use tax. It includes the Work Group’s findings concerning the Committee’s prioritized list of issues and is intended to provide guidance to state legislatures and tax agencies considering such laws or amendments during their 2020 legislative sessions. The 2019 White Paper follows up and supersedes (to the extent inconsistent with) the White Paper dated November 20, 2018 (“2018 White Paper) (www.mtc.gov).
This blog is the sixth in a series in which I review and comment on a number of the issues raised in the white paper and will cover the question of collection responsibility determinations.
Issue: Should the marketplace facilitator/provider and the marketplace seller, under certain circumstances (such as when the marketplace seller has already been collecting the tax, etc.), be able to contractually agree which party has the sales/use tax collection obligation?
Most of the states that have enacted marketplace facilitator/provider sales/use tax collection requirements do not permit the marketplace facilitator/provider and marketplace seller to negotiate which party has the collection and reporting responsibility and do not allow the state tax agency to waive that collection or reporting requirement. However, some states have included provisions in their laws allowing the marketplace facilitator/provider and marketplace seller to contractually negotiate which party has the collection and reporting requirement. A few states include provisions allowing the state tax agency to waive the marketplace facilitator/provider collection and reporting requirement, under certain circumstances. The NCSL working draft model suggests waiver language, subject to certain limitations. Several business participants urge the states to provide more flexibility in their laws, by either allowing the parties to negotiate collection responsibility or waiver provisions. States considering such negotiation or waiver provisions should balance the need to address special situations against the risk of undermining the effectiveness of the marketplace facilitator/provider collection model if those provisions are made too widely available.
One way to preclude marketplace facilitator/provider’s collection requirements from applying to certain industries might be to restrict those collection requirements to only certain portions of the state’s tax base, such as sales of tangible personal property but not services. However, states that have enacted marketplace facilitator/provider collection requirements generally apply those to the full extent of their tax bases: retail sales of tangible personal property, taxable services, and taxable digital products. Some business participants expressed support for that. Only a few states have limited the marketplace facilitator/provider collection requirements to sales of tangible personal property.
When the sales transaction involves other applicable taxes or fees, besides sales/use tax, the question arises: who (marketplace facilitator/provider or marketplace seller) should be responsible to collect those other taxes or fees? Generally, state laws requiring marketplace facilitators/providers to collect tax limit that collection requirement only to sales/use tax. The NCSL working draft model contains a provision that would allow the parties to negotiate which party has to collect and remit other applicable taxes, subject to certain limitations. Telecommunications industry participants urged that one party or the other should collect all applicable taxes. Otherwise, a customer may receive multiple invoices for the same transaction. Other participants wanted the marketplace facilitator/provider collection requirement limited to sales/use tax.
Information requirements between the marketplace seller and marketplace facilitator/provider should be clear and standardized. Several business participants suggested that the marketplace seller should be required to provide to the marketplace facilitator/provider information needed to properly categorize the product, but should not be responsible for making the taxability determination. When the marketplace seller retains the obligation to collect sales/use tax, the marketplace facilitator/provider should be required to provide the marketplace seller the information needed to properly complete the sales/use tax return.
Mark Friedlich’s Comment
The COVID-19 pandemic has resulted in a dramatic increase in e-commerce activity. That will continue to increase significantly and is likely to be the new normal. It will be the way most consumers and many businesses get what they need for the foreseeable future. Amazon, Walmart, eBay marketplaces are experiencing a huge spike in demand. Amazon announced it is hiring 100K warehouse and delivery workers to meet the demand. Third-party sellers on these marketplaces have experienced similar spikes in orders to customers in many states and many municipalities in which they will now have Wayfair-economic nexus, and therefore will be subject sales tax compliance obligations. Therefore, the issues I have been discussing in this series of blogs are increasingly more important to millions of businesses who sell their goods online and the marketplaces on which they sell many or most of their goods.
The need for absolute clarity as to who (the third-party seller or the marketplace) is responsible to collect, remit and otherwise comply with sales tax and other state tax compliance obligations is essential now. States need to provide clarity regarding these issues so that businesses can plan and properly comply.