As manufacturers continue to adapt to the challenges of COVID, complex marketplace facilitator laws need to be part of the planning.
By John Hayashi, Managing Director, Tax, BPM LLP
There is no question that 2020 was a strange year for most people around the world. Normal routines were no longer normal. We faced a new reality that saw us shelter in place, work from home, shop online, get a lot of home delivery, and manufacturing companies collecting sales taxes. Wait, what?
The last item may not be new. Several years before the pandemic, many manufacturers began their evolution from just being a B2B seller to adding B2C sales to their profitable revenue streams. However, B2C sales include the burden of collecting sales tax on transactions into states where the manufacturer has business operations or enough sales (dollar value or the number of transactions) that exceed the collection thresholds of the state. Some manufacturers are scared of B2C sales because of the complexity and expense of establishing their own sales tax process or completely outsourcing this function to a third-party. Other manufacturers have profit margins that can absorb this expense and stay profitable by adapting to eCommerce and thriving in the pandemic economy.
Manufacturers turned B2C sellers before 2018 did not have to worry as much about sales taxes. Back then, generally speaking, sales tax collection was only required where the company had a substantial business operation in the states where its buyers lived. That all changed dramatically in June 2018 when the United States Supreme Court ruled in South Dakota vs. Wayfair that states and cities could require an out-of-state seller with no in-state presence to collect tax on sales to its residents. The ruling confirmed the constitutionality of South Dakota’s in-state sales volume (either $100,000 of sales or 200 transactions) which created what is now commonly referred to as economic nexus with the state. Suddenly, B2C sellers faced a tremendous tax burden. They now needed to know the sales tax protocols for any state where they have established economic nexus and collect and remit sales taxes to a plethora of different taxing jurisdictions. That task can be complicated, to say the least.
Fortunately, alongside the economic nexus laws, states passed marketplace facilitator laws to make collecting sales taxes less cumbersome for both remote sellers and states. A marketplace facilitator is a multi-sided platform, such as Amazon, eBay, Airbnb or Apple’s App Store, that connects small businesses and their customers through an online platform. These platforms also work with companies to list their products, process payments and may even help with fulfillment and delivery. Most importantly, they are now required by law to collect and remit sales tax on behalf of the business, which completely shifts the sales tax collection obligation from the eCommerce seller to the marketplace facilitator. This is good news for a manufacturing company that is in the B2C market.
Manufacturers who are already making B2C sales or who avoid it due to the costly sales tax obligation, can now investigate a marketplace facilitator relationship in a new light. For these companies, the marketplace facilitator by law takes on 100% of the burden of collecting and remitting sales tax. It is also beneficial for the taxing jurisdictions because it allows governments to collect tax on more transactions from a concentrated number of entities. The only unhappy party with the shift in sales tax responsibilities are marketplace facilitators who now have to add their own sales tax collection and remittance process to the transactions they facilitate.
With a successful marketplace facilitator relationship, a manufacturing company takes on the added designation as a marketplace seller, which may open the door to the following benefits:
- No responsibility to collect or remit sales taxes.
- Simplified tax returns where required, since they can report no taxable sales and have no tax to remit.
- No need to keep track of sales tax laws changes, so the right amount of tax is always collected on sales.
- No concern about future audits on sales activity. The marketplace facilitator will be the subject of any audit on sales. (Marketplace sellers may still need to show an auditor the volume of sales facilitated by their marketplace facilitator(s).)
Marketplace sellers may still have some complexities with their sales tax obligations, however. Currently, Florida and Missouri do not have marketplace facilitator laws. Sales to these jurisdictions place the burden of collecting and remitting sales tax on qualified sellers, not the marketplace facilitator. However, the good news is that both states have proposed marketplace facilitator legislation, and many expect the laws to pass and be effective as early as January 1, 2022. Manufacturers also need to understand that any direct B2C sale that does not go through the marketplace facilitator may still require them to collect and remit sales tax.
Sales tax law remains a deceptively complex issue for manufacturing companies to address. However, each company should review the impact marketplace facilitator legislation could have on their revenue and profit. It might change the manufacturer’s view on entering or remaining in the B2C market.
John Hayashi is a Managing Director with BPM LLP, a California-based accounting and advisory firm ranking among the 50 largest in the country, where he helps lead the Firm’s state and local taxes (SALT) practice. With nearly 30 years of public accounting and private industry experience in SALT, John helps his clients respond to SALT issues, particularly sales tax and use tax related to the Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc. A leader in BPM’s SALT group, he listens to client needs to plan and implement strategies that minimize identified liabilities.