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Online Sellers Crowdsource Sales Tax Compliance Advice

Posted on Feb. 25, 2019

Third-party e-commerce sellers have been discussing tax advice online in the face of a patchwork of state remote sales tax laws.

Among the sellers posting on forums for Amazon and eBay sellers, the general sense seems to be confusion and frustration when it comes to tax collection and registration requirements, particularly among small sellers. Many are sharing details from the conversations and email exchanges they have had with state revenue departments, and some are airing grievances over incorrect tax rates applied to wrongly coded goods and improper tax collection on sales of coin and bullion.

One author in a thread debating calculations of origin-based sales taxation in Texas suggested that the original poster “pay ‘em in cattle.”

“People are definitely confused and either panic, thinking they need to be collecting tax everywhere, right now, or on the other end of the spectrum, they think it’s all unconstitutional and they aren’t aware of what Wayfair is saying,” said Andrew Johnson, co-founder of tax consulting firm Peisner Johnson .

Johnson predicts that around 90 percent of third-party sellers on Amazon — which make up 53 percent of the retail giant’s sales — don’t collect state sales taxes. According to an Amazon spokesperson, the company has been in favor of requiring marketplace facilitators — or marketplace providers, as they are known in some states — to collect taxes on behalf of the sellers who use their platform to sell goods.

Scott Peterson, vice president of U.S. tax policy and government relations at tax compliance software maker Avalara Inc., told Tax Notes that marketplace sellers are “more frustrated than confused.”

“Only a dozen states have done something with marketplaces, then another 15 to 16 are debating legislation, then you have these marketplaces that are in various stages of being in compliance,” Peterson said. He predicts that all states will have remote seller laws in place by the end of 2019 and marketplace facilitator laws by the end of 2020.

Adding to the confusion is that the laws and definitions in the states that have enacted marketplace seller laws are far from uniform. In Minnesota, for example, marketplace providers are exempt from collecting and remitting tax on behalf of remote sellers whose sales don’t exceed $10,000 in a 12-month period. Other states, like Connecticut, apply the same thresholds to marketplace sellers that apply to remote sellers.

The Minnesota Department of Revenue has said it’s received positive feedback on the tools it has made available to help taxpayers find the correct state and local rate, particularly the new visual sales tax rate map. “We’ll continue to work with our customers to make sure they’re meeting their obligations under Minnesota law, and we take seriously our responsibility to ensure that all taxpayers are treated fairly under Minnesota’s tax laws,” DOR spokesman Ryan Brown told Tax Notes.

Washington state was another early adopter of marketplace seller laws. A spokesperson for the Washington DOR told Tax Notes that “it is more efficient to have marketplace facilitators collecting the sales tax as opposed to hundreds of thousands of marketplace sellers.”

Amazon has been collecting sales taxes on behalf of third-party sellers in eight states with marketplace facilitator rules, and an Amazon spokesperson said it is compliant with all laws. EBay has been slower to start collections — it currently collects in three states but will collect and remit sales taxes for eight as of July 1.

In a February 13 statement to Tax Notes, eBay said the company is “complying with all applicable tax laws and . . . working with various states on the recent and pending changes that have potential impact on marketplace facilitators. With any complex implementation of a sales tax system that involves millions of transactions and numerous types of buyers and sellers, there will be ongoing improvements made as we continue to move forward.”

Etsy has also missed collection deadlines in several states, but recently announced that it will be collecting in additional states.

Amazon provides optional sales tax calculation services to marketplace sellers. According to the company, sellers who use the tax calculation services must pay Amazon 2.9 percent of “all sales and use taxes and other transaction-based charges,” which the company retains “in the event of any refund on related transactions.” The company collects the tax from customers and remits it to the seller, who is responsible for remitting the taxes to the taxing authorities.

Despite being in favor of marketplace laws, however, Amazon has also negotiated an agreement with Mississippi under which the company is not required to collect sales taxes on behalf of third-party sellers, according to a statement made to WLBT News by the Mississippi DOR.

Paul Rafelson, constitutional law professor at Pace University and head of the Online Merchants Guild, noted that some state legislatures only meet biennially and said he thinks relief will come too slowly for some sellers. “Marketplace is the first step and I’m hopeful states continue to roll out those laws, but until they do, they don’t deserve a dime,” he said.

Rafelson pointed to difficulties for very small sellers on Amazon’s Fulfillment by Amazon (FBA) platform, through which Amazon advertises, sells, processes payments, and ships products supplied by individual sellers. Many states argue that FBA sellers have physical nexus in their state, since the company retains the sellers’ goods in its warehouses located in more than 25 states, and that physical nexus would require individual sellers to calculate, collect, and remit sales taxes on sales that would not otherwise meet a state’s threshold for reporting.

Rafelson said some of his clients think they need to register for a sales tax permit in 50 states before they make any sales. “A lot of people are folding up their businesses, and new entrepreneurs think this isn’t for them,” he said. “It’s the cost, the time, the fear they are doing everything wrong. These are not tax professionals.”

Rafelson cited Pike v. Bruce Church Inc., a U.S. Supreme Court decision holding that a law interfering with interstate commerce cannot unduly burden business. “You are asking 5 million people to do this tax work. This is the largest burden in history,” he said.

As a result, some sellers have taken a “come and get it” attitude toward tax compliance. Some states have been more than ready. For example, in an effort to bring taxpayers into compliance, Massachusetts has negotiated agreements with Amazon to turn over data on third-party sellers that have sales and inventory in the state.

Connecticut has also turned to retailers for information on sellers. In a 2018 interview, then-Department of Revenue Services Commissioner Kevin Sullivan told the Hartford Courant that major companies have given the department data on online customers. “Usually we don’t have the data, but in several cases companies have said . . . we’ll squeal on our customers and you can beat up on them,” Sullivan said.

Proponents of remote seller laws have long argued that they would create parity between brick-and-mortar businesses and online sellers. For U.S. remote sellers, however, tax compliance can put them at a disadvantage compared with international sellers that may not collect or remit taxes.

In a viewpoint for Tax Notes, Robert Plattner — former New York deputy commissioner for tax policy analysis and a state and local tax consultant for Amazon — wrote that “some dishonest third-party sellers, particularly foreign sellers, operating beyond the legal reach of the states, collect the tax and keep it.”

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