States will continue to rely on the Wayfair ruling as they look to require marketplace facilitators to collect sales taxes next year.
Controversial regulations and measures requiring large marketplace facilitators to register and collect on behalf of third-party vendors predate the U.S. Supreme Court's decision in South Dakota v. Wayfair Inc. But with many states now confident that their economic nexus laws pass constitutional muster, more will look to adopt marketplace facilitator rules.
Jonathan Maddison of Reed Smith LLP told Tax Notes that 2018 was a busy year for marketplace legislation and that he expects the trend to continue in 2019. “Seven legislatures adopted marketplace laws, while several others considered similar laws,” he said. States like Minnesota, Connecticut, and New Jersey were quick to change their rules and add marketplace facilitators to a list of those required to collect and remit sales taxes.
The trend is happening mainly because it is more fruitful for states to require collection by marketplace providers. “It makes a lot more sense for states to have marketplace platforms or facilitators registered and collecting rather than having to deal with hundreds or thousands of marketplace sellers individually,” said Marshall Stranburg, deputy executive director of the Multistate Tax Commission.
States that don't expand their remote sales tax collection requirements to marketplaces could "miss out on a huge chunk" of revenue, according to Richard Cram, also of the MTC. According to Cram, Amazon.com Inc. sells more through third-party marketplace sellers than it does directly. “States that don’t go that direction and don’t enact such legislation are missing the boat,” he said.
The MTC has been working with states and interested parties to create more uniform rules and definitions of marketplaces, marketplace facilitators, and marketplace sellers. However, Stranburg warned that states should carefully evaluate their existing laws to see how they can adopt marketplace legislation. “I think it is imperative for states to review their laws — whether it is statutes or regulations — to see whether they have the authority in their laws to handle marketplace sales,” he said. In cases where the authority can be questioned, Stranburg suggested that the state make the necessary changes to see what is most efficient and fair for all parties involved.
States such as Indiana and Texas are examining the potential problems that could arise from marketplace laws. Emily Landis, spokeswoman for the Indiana Department of Revenue, confirmed that adopting language dealing with marketplace providers will be discussed in an upcoming legislative meeting.
“We are participating in a broad discussion as to how such language could be adopted in Indiana and are weighing the costs and benefits of such an implementation in the post-Wayfair world,” Landis told Tax Notes. But she said that the DOR currently has “no official position” on whether marketplace language should be added to the Indiana code.
“The department is aware that there are unique issues relating to the application of sales tax collection responsibilities when a remote seller is utilizing a marketplace facilitator,” Landis said.
A recent MTC white paper on marketplace legislation shows that states disagree when it comes to drafting rules and definitions. The definition of a market facilitator is one sticking point. Cram said states like Georgia, Kentucky, and Minnesota support Washington’s broad definition for the term, while others like Alabama, Iowa, and Michigan want a narrower definition.
The key difference in the definitions concerns a marketplace's access to third-party sales payments, with states supporting a narrower definition saying that a marketplace's access to payment and relevant information is crucial.
Stranburg said it's important for states to discuss these issues to better understand the marketplaces. “They’re learning about the types of sellers that are in the marketplace and they’re trying to understand the products that are being offered for sale through the marketplace,” he said. The better the states understand the marketplaces, the better their laws will be, Stranburg said. “It would reduce some of that risk that may come up in a post-Wayfair world,” he said.
But one area states have been in general agreement on is language protecting marketplace facilitators from class action lawsuits. “While the specifics of each state law vary, many of the marketplace laws include class action protection for marketplaces,” Maddison said. “Because these laws exponentially increase the compliance burdens on marketplaces, including making taxability determinations on behalf of third parties, states should continue to include this protection in future legislation.”