Editor: Mark G. Cook, CPA, CGMA
The California Department of Tax and Fee Administration (CDTFA) adopted an emergency regulation to provide rules and guidance related to the state's Marketplace Facilitator Act (MFA) (Cal. Code Regs. tit. 18, §1684.5 (June 29, 2020)). The CDTFA explained the background of the MFA and its reasons for issuing an emergency regulation in a Notice of Proposed Emergency Action and Finding of Emergency (NOPA) (available at www.cdtfa.ca.gov).
Within the emergency regulation the CDTFA also provided several examples of transaction scenarios to help taxpayers determine (1) when a seller or facilitator becomes either a "marketplace facilitator" or "retailer" for California sales and use tax purposes; and (2) when a taxpayer establishes a tax registration and filing responsibility in California based on its sales activity. This item discusses some of these examples in detail.
What is the MFA?
On April 25, 2019, the California Legislature enacted Assembly Bill (A.B.) 147 to include economic nexus provisions consistent with the 2018 U.S. Supreme Court's decision in South Dakota v. Wayfair, 138 S. Ct. 2080 (2018). In short, the Supreme Court opinion in Wayfair gave states the right to impose sales and use tax registration and filing obligations on out-of-state sellers where a seller's only contact with the state is a threshold level of sales and/or transactions. A.B. 147 included the MFA to address sales of tangible personal property through marketplaces (Cal. Rev. & Tax. Code §§6040-6049.5). The MFA went into effect Oct. 1, 2019. In its development of the emergency regulation and subsequent notice to taxpayers, the CDTFA cited some key provisions of the MFA statute that may require additional clarification.
For marketplace facilitators, the CDTFA noted the following provisions under the MFA: (1) A marketplace facilitator is considered the seller and retailer for each sale facilitated through its marketplace on behalf of a marketplace seller, for purposes of determining whether the marketplace facilitator is required to register with the CDTFA; (2) any marketplace facilitator that is registered or required to register with the department and that facilitates a retail sale of tangible personal property on behalf of a marketplace seller is the retailer making the sale of the tangible personal property sold through its marketplace, which makes the marketplace facilitator, not the marketplace seller, the retailer required to pay any sales taxes and collect any use taxes due (Cal. Rev. & Tax. Code §6043); and (3) to determine whether a marketplace facilitator has total combined sales of tangible personal property into California to qualify as a retailer engaged in business in California (requiring registration and collection), the MFA provisions require the marketplace facilitator to add together:
- Sales made on its own behalf;
- Sales made by related persons; and
- Sales facilitated on behalf of marketplace sellers (Cal. Rev. & Tax. Code §6044(a)).
For marketplace sellers, the CDTFA noted the following provisions under the MFA: (1) A marketplace seller must register with the CDTFA for retail sales made on its own behalf and "not facilitated through a registered marketplace facilitator" (Cal. Rev. & Tax. Code §6045); and, (2) to determine whether it meets the sales threshold to become a retailer engaged in business in California (requiring registration and collection), the marketplace seller must add:
- Sales made on its own behalf; and
- Sales facilitated through any marketplace facilitator's marketplace (Cal. Rev. & Tax. Code §6044(b)).
Reasons for the emergency regulation
Though the MFA addresses a number of sales scenarios between marketplace sellers and marketplace facilitators, the CDTFA concluded that the guidance provided within the MFA was either incomplete or too ambiguous for taxpayers to determine the ultimate responsibility for collecting and remitting sales and use tax in a number of situations. According to the NOPA, CDTFA staff determined that:
- The MFA contains undefined terms that may create confusion;
- Marketplace facilitators and marketplace sellers may have trouble understanding their new registration requirements beginning Oct. 1, 2019; and
- Marketplace facilitators and marketplace sellers may have trouble determining who is the retailer responsible for paying sales tax or collecting use tax on marketplace sales on and after Oct. 1, 2019 (NOPA, p. 5).
Taxpayer examples provided in Section 1684.5
Section 1684.5 provides several examples for taxpayers to determine whether they qualify as a marketplace facilitator and when direct retail sales and sales through a facilitator are combined to create sales and use tax registration and filing obligations for both facilitators and nonfacilitators.
Example 1: Company A owns and operates a website where third-party sellers offer to sell merchandise for delivery in California. Company A also enters into contracts to facilitate the sale of third-party sellers' merchandise through its website for a fee and provides payment processing services for sales of these sellers' merchandise sold through its website. Therefore, Company A is a marketplace facilitator (Cal. Code Regs. tit. 18, §1684.5(a)(2)(B), Example 1).
Comment: Taxpayers should pay attention to the first sentence of this example (operation of a website for third-party sellers, without reference to a specific fee structure). Section 1684.5(a)(2) makes clear that a company can qualify as a marketplace facilitator regardless of whether it extracts fees from a transaction as its consideration. Website owners that do not believe they are considered a marketplace facilitator because of their fee structure should examine these provisions closely to determine whether they are actually relieved of registration and filing obligations.
Example 2: Company A is a marketplace facilitator that facilitates sales of tangible merchandise by marketplace sellers through its website. In addition, Company A sells advertising space on its website and allows sellers to include the picture, description, and sales price of their merchandise. Company A also allows the sellers to provide an internet link to the seller's website so that Company A may refer potential purchasers to these sellers to complete sales of the tangible merchandise advertised for sale on Company A's website. Company A does not otherwise participate further in the sales, such as taking orders or providing payment processing or fulfillment services. Therefore, Company A is not facilitating the sales of tangible merchandise made through the advertisements on its website, and Company A is not a marketplace facilitator for purposes of those sales (Cal. Code Regs. tit. 18, §1684.5(a)(16), Example 2).
Comment: Taxpayers must (1) closely examine their website offerings and activity to see if such activity is in fact limited to allowing third-party sellers to post internet links and photos, e.g.; and (2) determine whether they are able to track sales in separate buckets of facilitator and nonfacilitator receipts.
Example 3: The facts are the same as in Example 2, except that Company A offers an email relay service to sellers that advertise on its website whereby Company A provides a fabricated email address to both the buyer and seller to mask their personal email addresses. The provision of such an email relay service does not constitute participation in the sale of the tangible merchandise advertised for sale on its website beyond advertising the merchandise for sale and referring the purchaser to the seller to complete the sale. Therefore, Company A is not facilitating the sales of tangible merchandise made through the advertisements on its website, and Company A is not a marketplace facilitator for purposes of those sales (Cal. Code Regs. tit. 18, §1684.5(a)(16), Example 3).
Comment: This example adds more detail to the analysis of which activities are facilitator activities. It also makes clear that the CDTFA distinguishes between advertising and actual solicitation. The distinction between referrals and facilitation is more challenging. By their very nature, referrals would appear to fall within the definition of "facilitation," so taxpayers whose business model is based on referrals may have difficulty distinguishing when they are acting as a facilitator.
Example 4: The facts are the same as in Example 2, except that Company A also contracts to provide payment processing services to sellers that advertise on its website to make it easier for them to sell their merchandise through the website. Therefore, Company A is facilitating the sales of the tangible merchandise made through the advertisements on its website, and Company A is a marketplace facilitator for purposes of those sales (Cal. Code Regs. tit. 18, §1684.5(a)(16), Example 4).
Comment: This example makes clear that the addition of payment processing services puts the marketplace taxpayer within the definition of "facilitator" for purposes of the regulation.
Example 5: Company A is a marketplace facilitator with no physical presence in California. Company A did not make or facilitate any sales of tangible merchandise for delivery in California during 2018. From Jan. 1, 2019, to Sept. 30, 2019, Company A sold $300,000 of tangible merchandise for delivery in California on its own behalf and facilitated sales of $250,000 of tangible merchandise for delivery in California through its marketplace for Seller A, a marketplace seller. Since the total combined sales of tangible merchandise for delivery in California exceeded the $500,000 threshold in Revenue and Taxation Code Section 6203, Subdivision (c)(4), during 2019 and prior to Oct. 1, 2019, Company A is a retailer engaged in business in this state on Oct. 1, 2019, and must register with the department for a Certificate of Registration — Use Tax, and collect and remit use tax beginning Oct. 1, 2019 (Cal. Code Regs. tit. 18, §1684.5(b)(1), Example 5).
Comment: This example clarifies that for a facilitator that also acts as a direct seller, if its own (direct) sales meet California's filing threshold when combined with sales by third parties (where the facilitator meets the definition of a "facilitator"), the facilitator will be considered a retailer for California sales and use tax purposes. This also means that the marketplace seller in this scenario, which previously may have met the definition of "retailer," is no longer considered a "retailer" in California for purposes of these sales.
Example 6: Seller A is a marketplace seller that has no physical presence in California. Seller A did not make more than $500,000 in sales of tangible merchandise for delivery in California during 2018, and from Jan. 1, 2019, to Sept. 30, 2019, Seller A made $200,000 in sales of tangible merchandise for delivery in California that were facilitated through a marketplace facilitator's marketplace and made $299,500 in sales of tangible merchandise for delivery in California through its own website. Therefore, on Oct. 1, 2019, Seller A is not a retailer engaged in business in this state and is not required to be registered with the department. However, on Oct. 2, 2019, Seller A made a $900 sale of tangible merchandise for delivery in California through its website that, when combined with its other sales, exceeded the $500,000 threshold in Revenue and Taxation Code Section 6203, Subdivision (c)(4). Therefore, Seller A is a retailer engaged in business in this state and is required to register with the department for a Certificate of Registration — Use Tax immediately after the $900 sale on Oct. 2, 2019. Also, Seller A is required to collect and remit use tax on its subsequent retail sales to California customers, except for its retail sales facilitated by marketplace facilitators that are the sellers and retailers for purposes of those sales pursuant to Subdivision (c) of this regulation (Cal. Code Regs. tit. 18, §1684.5(b)(2), Example 6).
Comment: Example 5 addressed the perspective of the marketplace facilitator. From the perspective of the marketplace seller, Example 6 clarifies that the filing threshold for a marketplace seller includes total receipts from both direct sales and sales through a facilitator. That does not change the existing approach under the MFA. However, marketplace sellers must be aware that even if their direct sales (for which they could ultimately be required to collect and remit tax) do not meet California's registration and filing threshold, such sales must be added to any marketplace sales to determine whether the registration and filing threshold is met. If the combination of direct and marketplace sales meets the threshold, the marketplace seller has a registration and filing obligation, even if the marketplace seller is only required to collect and remit tax on a fraction of the total sales.
Example 7: Seller B is a marketplace seller that leases space in a California warehouse where it stores some of its inventory and fulfills some of its orders. However, on and after Oct. 1, 2019, Seller B will only make sales of tangible merchandise in California or for delivery in California that are facilitated by Company C, a marketplace facilitator that will be the seller and retailer for purposes of those sales pursuant to Subdivision (c) of this regulation. Therefore, on and after Oct. 1, 2019, Seller B will not be the retailer responsible for paying sales tax or collecting and remitting use tax on its sales in California or for delivery in California, and Seller B will not be required to be registered with the department for a seller's permit or Certificate of Registration — Use Tax on and after Oct. 1, 2019 (Cal. Code Regs. tit. 18, §1684.5(b)(2), Example 7).
Comment: This example may represent the clearest difference between sales tax administration prior to and after the passage of California's MFA. In prior periods, taxpayers would receive guidance from nearly any practitioner that the ownership or leasing of a warehouse (with inventory) clearly creates a tax registration and filing obligation in California. For taxpayers previously under a registration and filing obligation in California due to the existence of inventory in the state, additional guidance may be necessary to clarify whether any continued registration and filing obligation exists, or whether taxpayers in that situation can easily de-register from California and cease all current filing obligations.
Example 8: Company A is a marketplace facilitator that is currently registered for a seller's permit with the department. Company A enters into an agreement with Company B, a third-party retailer and marketplace seller, to facilitate sales of Company B's tangible merchandise through Company A's marketplace. Company B provides Company A with sufficient information for Company A to determine the correct amount of tax due on the retail sales of Company B's merchandise for delivery in California. Therefore, when Company A facilitates a retail sale of Company B's tangible merchandise for delivery in California through its marketplace on or after Oct. 1, 2019, Company A is the retailer selling or making the sale of the merchandise sold for delivery in California and the retailer responsible for paying sales tax or collecting and remitting use tax on that sale, and Company B is not the retailer responsible for paying sales tax or collecting and remitting use tax on that sale (Cal. Code Regs. tit. 18, §1684.5(c), Example 8).
Comment: This example clarifies that, for periods beginning on or after Oct. 1, 2019, any company that (1) meets the definition of "marketplace facilitator" and (2) has "sufficient information" from its customers to accurately collect and remit tax on those sales also meets the definition of "retailer" for California sales and use tax registration and filing purposes. Because the accuracy (in filing sales tax returns) for marketplace facilitators would partly depend on information provided by a third party, marketplace facilitators may request additional guidance to that already provided in Cal. Rev. & Tax. Code Section 6046 for situations where they believe information is not sufficient (or timely) to submit accurate sales and use tax returns. Cal. Rev. & Tax. Code Section 6046 provides for relief where a taxpayer can demonstrate "to the satisfaction of the [CDTFA] that the marketplace facilitator has made a reasonable effort to obtain accurate and complete information . . . about a retail sale." What constitutes a "reasonable effort" will likely require additional guidance. It is unclear whether the CDTFA means to say that the determination of a taxpayer's "reasonable effort" should be analyzed in a way similar to a showing of "reasonable cause" in the late-filing penalty context (Cal. Rev. & Tax. Code §6592).
Example 9: The facts are the same as in Example 8, except that Company A is not registered or required to be registered with the department for a seller's permit or Certificate of Registration — Use Tax on Oct. 1, 2019, because it does not have a physical presence in California; it did not make any sales for delivery in California during 2018; and it only made or facilitated $250,000 in total combined sales of tangible merchandise for delivery in California from Jan. 1, 2019, through Sept. 30, 2019. Also, Company B is required to be registered with the department for a Certificate of Registration — Use Tax on Oct. 1, 2019, because it made $550,000 in sales of merchandise for delivery in California from Jan. 1, 2019, through Sept. 30, 2019, and it makes sales for storage, use, or other consumption in California that are not facilitated through a registered marketplace facilitator. Therefore, when Company A facilitates a sale of Company B's merchandise through its marketplace on Oct. 1, 2019, Company B is the retailer selling or making the sale of the merchandise and the retailer responsible for collecting and remitting use tax on that sale, and Company A is not the retailer responsible for collecting and remitting use tax on that sale (Cal. Code Regs. tit. 18, §1684.5(c), Example 9).
Comment: This example makes clear that marketplace sellers cannot assume that just because they make sales through a marketplace facilitator they carry no obligation to collect and remit tax on those sales. If marketplace sellers do not want the burden of collecting and remitting tax on marketplace sales into California, they must confirm that the marketplace facilitator is under obligation to collect and remit tax or, if that is not the case, request confirmation from the marketplace facilitator that it will collect and remit tax, regardless of whether the facilitator is obligated to do so under California's marketplace-facilitator rules.
Observations
For many taxpayers, Section 1684.5 will add welcome guidance to some of the confusion surrounding California's MFA. Not surprisingly, a central theme throughout these examples is the importance of determining who meets the definition of marketplace facilitator for California purposes and who does not. The fact that a taxpayer acts as a marketplace facilitator for third parties does not guarantee that the taxpayer will meet the marketplace facilitator definition for California sales and use tax purposes.
From the perspective of the practitioner advising both marketplace facilitators and marketplace sellers, understanding when a taxpayer (or the taxpayer's business partner) meets the definition of a marketplace facilitator under California's rules will be critical to determining whether any registration and filing obligations exist, and when they exist. The examples in Section 1684.5 provide taxpayers a short list to guide their determination of whether they meet the definition of marketplace facilitator (or retailer) for purposes of California's MFA and general sales tax rules. The general analysis, based on the guidance provided by the examples, is shown in the chart, "Activities That Create Marketplace Facilitator or Retailer Status." (below).
Lastly, the ultimate determination of whether a particular facilitator is a marketplace facilitator for purposes of California's MFA and Section 1684.5 may rely on a combination of factors, some of which are not specifically enumerated within the regulation. No language within Section 1684.5 suggests that its examples are an exhaustive list of situations to consider in making the determination. Despite such limitations, the new regulation should provide some needed clarification on key issues surrounding the marketplace facilitator analysis.
The authors would like to thank Ashley Schmelzer, J.D., Los Angeles, for her assistance with this article.
EditorNotes
Mark G. Cook, CPA, CGMA, MBA, is the lead tax partner with SingerLewak LLP in Irvine, Calif.
For additional information about these items, contact Mr. Cook at 949-261-8600 or mcook@singerlewak.com.
All contributors are members of SingerLewak LLP.
