Unintended consequences: Considerations for a marketplace seller

By Jasmine Gandhi, J.D., and Chandni Patel, LL.B., Washington, D.C.

Editor: Mary Van Leuven, J.D., LL.M.

With South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (U.S. 2018), on the books, most states now require collection and remittance of sales tax by remote sellers, and many states are expanding these obligations to marketplace facilitators. Although state definitions vary considerably, a marketplace facilitator generally advertises goods, transmits orders, and accepts and processes payments between a seller and buyer through a physical or electronic platform.

Twenty-five states enacted legislation or issued guidance, effective now or at a future date, establishing sales tax obligations for marketplace facilitators, including states that allow (for now) a collect-or-report election for marketplace facilitators. Moreover, another 19 states (as of April 12, 2019) have proposed legislation that, if passed, would impose sales tax obligations on marketplace facilitators.

Many believe that imposing registration, collection, and remittance obligations on marketplace facilitators will resolve compliance issues associated with marketplace sales. However, marketplace sellers, especially smaller businesses with limited resources, may face unexpected liabilities and obligations.

Marketplace sellers' liability for uncollected tax

Although states often require marketplace facilitators to collect and remit tax, marketplace sellers may not be relieved from liability. States with marketplace facilitator collection requirements generally also require marketplace sellers with nexus to collect and remit tax for marketplace sales if the marketplace facilitator is not, for whatever reason, required to collect and remit for the seller.Alabama, Iowa, South Carolina, Washington, D.C., Wisconsin, and Wyoming (as of March 1, 2019) explicitly impose this obligation on marketplace sellers. Even for states that are silent on the matter, it seems likely that the same principle is true. Thus, if a marketplace seller knows that the marketplace facilitator is not collecting tax, the seller should take steps to determine why and consider collecting the tax itself.

Eight states (as of March 1, 2019) with marketplace facilitator collection requirements — Connecticut, Iowa, Minnesota, New Jersey, Oklahoma, Pennsylvania, South Dakota, and Washington — address marketplace seller sales tax liability. In these states, marketplace facilitators can be relieved of liability for failure to collect and remit the correct amount of tax if the marketplace seller provides incorrect (or incomplete) information about the seller's product or the shipment location. While some states explicitly shift the liability to the marketplace seller in these situations, it seems safe to assume that liability would fall on the marketplace seller in the other states as well. Thus, a premium is placed on the marketplace seller's properly categorizing its products and services and sending accurate information to the marketplace facilitator so that tax can be correctly determined.

In some states, limited relief may be available to marketplace facilitators in certain situations. For example, South Dakota allows relief of up to 5% of the total sales facilitated if the failure was due to incorrect or insufficient information; even this limited relief is set to expire in 2024. If the failure to collect sales tax was not caused by a sourcing error and the marketplace facilitator and the seller were not affiliated, Connecticut relieves the marketplace facilitator from liability for up to 5% of sales occurring before Dec. 1, 2019, but is silent on whether the marketplace facilitator relief results in marketplace seller liability. Further, in both South Dakota and Connecticut, it is unclear whether and under what circumstances a marketplace seller would be liable for uncollected tax for sales made after the relief provisions expire. Note that a number of states currently have proposed bills with similar relief provisions.

Reporting and documentation

State reporting and documentation requirements are important considerations for marketplace sellers. In states imposing marketplace facilitator sales tax collection obligations, a marketplace facilitator that exceeds economic nexus thresholds must report sales made on behalf of a marketplace seller and associated tax in the facilitator's own sales tax return or a separate return. Most states are not clear on how a marketplace seller should report marketplace sales for which the marketplace facilitator has collected and reported tax.

In Connecticut, Office of the Commissioner Guidance, Regarding Marketplace Facilitators and Marketplace Sellers (OCG-8), imposes filing requirements on sellers registered with the state, even if sales to the state were made only through marketplaces, and marketplace facilitators collected and remitted sales tax for the sellers. Marketplace sellers already registered with Connecticut must report gross receipts from all sales in the state and then deduct any sales made through a marketplace. Marketplace sellers not registered with Connecticut that are required to register must do so and declare that all sales are being made through a collecting marketplace.

Some states, including Alabama, Pennsylvania, South Carolina, South Dakota, and Washington, require marketplace sellers to report all sales and then deduct any sales made through a marketplace. These deductions may be reported as a nontaxable sale, such as a "sale for resale" in South Dakota, or simply taken as a deduction, as in South Carolina. Conversely, Iowa takes the approach that a marketplace seller making sales solely through a marketplace is not required to register or report its sales with the state if a marketplace facilitator reports sales on its behalf. However, when a marketplace seller sells through a variety of methods, including a marketplace, Iowa takes an approach similar to Connecticut's (i.e., the seller must report the marketplace sales on its return in some manner). Other states, including Minnesota, Oklahoma, and Wisconsin, do not require seller registration or reporting when sales are made entirely through a marketplace (assuming the marketplace facilitator is reporting the sales).

In addition to reporting requirements, marketplace sellers should also understand state document-retention requirements. Complying with state requirements could allow the marketplace seller to avert penalties or interest potentially assessed as a result of an audit. Unfortunately, similar to the lack of guidance on reporting issues, states do not always clearly identify the documents a marketplace seller should retain. Many states require a marketplace facilitator to provide a marketplace seller with some sort of collection certificate, certifying that the marketplace facilitator is collecting and remitting sales tax on the marketplace seller's behalf. This certification will aid a marketplace seller in justifying a failure to collect and remit sales tax.

A marketplace seller generally should retain as much documentation as possible, including contracts and reports provided to marketplace facilitators, to show that the facilitator collected and remitted tax for the seller. Moreover, a marketplace seller that is making sales both directly in the state and through a marketplace should expect that a state, on audit, will request documentation identifying the various revenue streams and the sales for which tax was collected. A collection certificate alone would likely be insufficient to identify specific sales. Thus, a marketplace seller should work with its marketplace facilitator to document the specific sales for which the marketplace facilitator collected tax.


Marketplace sellers should be aware of compliance issues that may arise if the seller deals directly with customers following marketplace sales. Generally, when a buyer purchases a product from a marketplace facilitator, the buyer can return the product to the marketplace facilitator for a full refund, including any sales tax paid. As a result, a marketplace facilitator can seek a refund or credit for any sales tax refunded to the buyer. But what if a purchaser returns a product purchased from a marketplace directly to the marketplace seller (which is likely to happen if a marketplace seller has a physical storefront) and the seller then refunds the purchaser the sale price and sales tax? How would a marketplace seller recover the amount of sales tax refunded to the purchaser if the seller did not remit to the state?

Generally, states allow only the taxpayer that remitted the tax, and in some cases a buyer, to claim a sales tax refund. For example, New Jersey only allows either the "customer who has actually paid the tax" or the "person required to collect the tax" to claim a refund (N.J. Rev. Stat. §54:32B-20(a)). Many states with marketplace legislation or guidance have not directly addressed whether a marketplace seller can seek a refund for sales tax refunded to a marketplace buyer. Following conversations with state tax departments, it generally appears that the marketplace facilitator would need to reimburse the marketplace seller for any sales tax returned to a buyer, then claim a refund/credit from the tax department, if the seller is to be made whole. In a number of states, however, the law and guidance are silent as to whether the marketplace facilitator has an obligation to reimburse the seller for tax that is refunded.

The Connecticut Department of Revenue in OCG-8 holds a marketplace facilitator responsible for keeping record of all returns and exchanges of products sold on its marketplace and for handling refunds on returned goods. As a result, a marketplace seller may not be able to accept returns and provide refunds. If it chooses to do so, and a marketplace facilitator refuses to reimburse the seller, the marketplace seller may be out of pocket for the amount of sales tax refunded. Conversely, the Iowa Department of Revenue, in proposed regulation 701-215.8 (Notice of Intended Action, ARC 4292C), would require a marketplace facilitator to reimburse a marketplace seller for any sales tax returned to a buyer by the marketplace seller. After reimbursement, the proposed regulation would allow the marketplace facilitator to claim a credit on its Iowa sales tax return. Note, however, that the proposed regulation would not require a marketplace seller to accept returns from a buyer, nor would a marketplace facilitator be required to "allow returns to be made directly to a marketplace seller." Thus, it is unclear what would happen if a marketplace facilitator refuses to allow returns but the marketplace seller decides to provide the buyer a sales tax refund.

Consequently, a marketplace seller may be stuck with having to choose between satisfying its customer while paying tax out of pocket or compromising its customer service policy. If possible, however, the marketplace seller should attempt to come to an agreement with the marketplace facilitator to avoid this customer service dilemma.

Seeking clarity

Despite the attempts to simplify sales tax obligations for marketplace sellers, many states lack significant guidance on key compliance issues. Even if a state addressed these issues, marketplace sellers may still face unexpected requirements. This is further complicated by the fact that not all states have marketplace collection requirements. Thus, a marketplace seller will need to identify states in which it may or may not have collection obligations. Perhaps 2019 will bring further clarity with regard to marketplace seller obligations in states imposing sales tax obligations on marketplace facilitators.


Mary Van Leuven, J.D., LL.M., is a director, Washington National Tax, at KPMG LLP in Washington, D.C.

For additional information about these items, contact Ms. Van Leuven at 202-533-4750 or mvanleuven@kpmg.com..

Contributors are members of or associated with KPMG LLP. These articles represent the views of the author(s) only, and do not necessarily represent the views or professional advice of KPMG LLP. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

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