Audit and Liability: Who is Responsible — Marketplace Provider or Seller?
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 fourth in a series in which I review and comment on a number of the issues raised in the white paper and will cover the questions of recordkeeping, audit exposure and liability protection.
Issue: Do clearer, simpler standards need to be put in place (such as defining the specific information the marketplace facilitator/provider can rely on for the marketplace seller to provide, and vice versa) in assigning liability for failure to collect between the marketplace facilitator/provider and the marketplace seller and in determining which party is subject to audit under what circumstances?
Most states that have enacted marketplace facilitator/provider sales/use tax collection requirements provide that the marketplace facilitator/provider is subject to audit and liability for failure to properly collect sales/use tax, not the marketplace seller. However, if the marketplace facilitator/provider can show that the failure to collect was due to the marketplace seller providing erroneous information to the marketplace facilitator/provider, then the audit risk and liability can shift to the marketplace seller for those transactions. The 2019 White Paper (pp. 13-14) addressed this. The NCSL working draft model suggests provisions shifting liability from the marketplace facilitator/provider to the marketplace seller when failure to collect is attributable to erroneous product information from the marketplace seller.
Some state tax agency staff and other Work Group participants have suggested that for administrative efficiency, states should look solely to the marketplace facilitator/provider for recordkeeping, audit and liability for non-collection of sales/use tax. Otherwise, the state may end up conducting two audits: first the marketplace facilitator/provider, then the marketplace seller. The marketplace facilitator/provider and marketplace seller should negotiate between themselves any shifting of the liability risk for non-collection. Other business participants believe that at least for a transition period, liability protection needs to remain in place for marketplace facilitators/providers for non-collection, due to receiving erroneous information from marketplace sellers. However, all agree on the need for clear guidance on what specific information the marketplace seller must provide to the marketplace facilitator/provider.
Mark Friedlich’s Comment
State auditors typically look to the marketplace facilitator/provider when conducting an audit of a marketplace seller. But, not so fast. First, the MTC Work Group, after first indicating that most states place liability for non-collection of sales/use tax on the marketplace facilitator. Therefore, the facilitator should be the target of a state audit on the seller if the facilitator can show that the failure to collect was the fault of the seller (gave erroneous information to the marketplace facilitator/provider), then the audit risk and liability can shift to the marketplace seller for those transactions.
Further, as I described in my comments to blog #3 in this series, state courts at the highest levels have begun to side with the facilitators/providers as far as sales/use tax liability is concerned. Thereby placing the direct burden for such liability and audit exposure on the individual sellers. As I wrote previously — and bears repeating — one very recent example of this approach is a highly anticipated case in Louisiana, where the state’s Supreme Court reversed the state’s lower courts and held that the taxpayer, Wal-Mart.com, who operates an online marketplace, did not contractually assume through the Marketplace Retailer Agreement the obligation of the third-party retailers to collect and remit sales tax.
This decision has potentially significant effects for businesses that are sellers participate in online marketplaces. As the first decision by a state high court to consider marketplace provider or facilitator sales tax collection obligations, this case may influence courts in other states with pre-Wayfair time period cases similar to consider.
Another example is a case involving the obligation of a marketplace facilitator to collect sales tax from third-party retailers which is being reviewed by the South Carolina Court of Appeals for a period prior to SCOTUS’s decision in Wayfair.
The Louisiana and South Carolina decisions may go a long way in informing other states as to whether they will audit and place collection and remittance requirements on marketplace providers or sellers for pre-Wayfair periods that remain open under the statute of limitations.