Marketplace Tax Laws Still Challenging, 4 Years After Wayfair

Marketplaces have grown significantly in recent years amid the pandemic-driven acceleration of ecommerce and the growth of omnichannel commerce. In fact, eMarketer predicts that U.S. marketplace sales will total more than $357 billion in 2022, making up nearly 35% of all online sales. As more customers flock to marketplaces, the opportunity to scale a business is evident, but thanks to marketplace tax laws, significant complexity stands in the way of growing sales with ease.

Marketplace facilitator laws, which impose an obligation on marketplaces to collect and remit sales tax on behalf of sellers, began to appear in 2017. They’ve dramatically increased since the Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc. As a result of the decision, most states with a general sales tax now require certain out-of-state retailers and marketplace facilitators to collect and remit sales tax. Nearly four years after the case’s ruling, 58% of respondents to our May 2022 survey of businesses noted that marketplace facilitator laws have had an impact on how their company conducts business, the highest percentage yet.

Beyond the sales tax complexity of marketplace facilitator laws, states have used the Wayfair decision to implement new rules for marketplaces. From policing stolen goods to expanded income tax obligations for remote sellers, marketplace tax laws are far-reaching.

Below are a few ways marketplace tax laws have evolved since the decision and how they can impact sellers leveraging multiple channels.

New Reporting Requirements for High-Volume Sellers

States are beginning to set rules that curb a wide array of dishonest business practices, fraud, theft and other crimes. In an effort to ensure high-volume third-party-sellers are valid entities and cut down on retail crime, several states, including Arkansas and California, have put the onus on marketplace facilitators to validate and provide additional details on third-party sellers.

While this type of oversight will help reduce a variety of practices that harm the integrity of marketplaces, these new requirements introduce another compliance challenge. Marketplaces need to be both fast and accurate with their reporting requirements, as some states like Arkansas permit marketplaces only three days to verify that third-party seller information is correct, and three days to verify any updates to that information, before being deemed non compliant.

Income Tax Obligations for Remote Sellers

As the Wayfair decision opened the floodgates for more aggressive nexus laws, some state taxing authorities are interpreting Public Law 86-272 in their own way to impose income taxes on those conducting out-of-state sales, including marketplace sellers. Both New York and California are proposing and implementing legislation that would remove existing income tax protections for remote sellers.

This type of legislation can extend as far as to retroactively apply corporate income tax obligations to out-of-state ecommerce sellers. As a result, many sellers with no presence in jurisdictions where these laws exist will be virtually unaware of their income tax liability.

While those impacted by this legislation are poised to offer legal challenges as it limits protections for online sellers, it’s evident that tens of thousands of sellers will still be affected in the short term. And we can expect other states to follow the lead of California and New York should these laws stand on legal grounds.

Back Sales Taxes for Marketplace Sellers

States and sellers have been battling back and forth on the issue of retrospective taxes for several years in the wake of Wayfair. In 2021, a federal judge in California dismissed a lawsuit by the Online Merchants Guild against the California Department of Tax and Fee Administration (CDTFA), which was holding Amazon sellers liable for back sales tax. This came after a similar complaint from an Illinois-based seller against the CDTFA was dismissed by a federal judge in Illinois.

Just this year, Pennsylvania’s Department of Revenue recently defended its decision to collect back taxes on third-party sellers that had inventory stored in Amazon warehouses in the state. Expect this power struggle to continue as we see more states attempt to collect back sales tax.

Staying on top of compliance obligations, both for marketplaces and marketplace sellers, can be a tedious, time-consuming and growth-constraining process, especially when marketplace facilitator laws differ within each jurisdiction and can change at any time. To make matters worse, the May 2022 Wayfair Decision Tracking Study from Avalara shows that overall awareness of marketplace facilitator laws has dropped to near all-time lows. As sellers scale their operations using marketplaces, collecting and remitting sales tax and handling other compliance obligations should not limit their growth potential.

Technology solutions that move away from manual calculations will automate the comprehensive compliance process to mitigate non-compliance risk while also helping sellers deliver a more streamlined, efficient customer experience. It can monitor for tax changes across marketplaces, including the ones noted above, to ensure you get the calculation right on every transaction. This reduced audit liability and leads to a quick and easy checkout process for customers. For many, it can be as easy a process as implementing new software within the tech stack.

By leveraging technology to automate the compliance process related to marketplace facilitator laws, you can expand your business, save valuable time, money and other resources, and empower better customer experiences.

George Trantas is senior director of global marketplaces at Avalara

Marketplace Tax Laws Still Challenging, 4 Years After Wayfair

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