Arizona Explains Who is Responsible for Tax Collection for Online Marketplace Transactions
An Arizona tax ruling states that an online marketplace is responsible for the state’s Transaction Privilege Tax if it provides certain services to third-party merchants and has control over fulfillment.
By Alissa Graffius, SALT senior associate
Online sales have skyrocketed due to the Internet. A majority of those sales are sold on retailers’ websites; however, online marketplaces have also become quite common. An online marketplace is a platform operated by one party that allows other parties to sell their goods, and the party operating the online marketplace may also sell their own goods. Amazon is probably the most well-known online marketplace, and other retailers may also allow third parties to sell their products through the retailer’s website. As with any non-traditional sales transaction caused by technological advancement, the sales tax implications of online marketplaces are complicated because it is unclear as to who the retailer truly is. On Sept. 20, 2016, Arizona issued a tax ruling to give guidance on this issue with regard to their Transaction Privilege Tax (“TPT”). 
Arizona’s TPT is commonly referred to as a sales tax, but it is different from a traditional sales tax imposed by most states because (i) it is imposed on the privilege of conducting business in the state (sales tax is imposed on the sale of property or services), and (ii) it is legally imposed on the seller who is allowed to pass the tax on to the purchaser (sales tax is imposed on the purchaser and the seller is responsible for collecting and remitting it). Therefore, the ruling notes that a broader set of transactions are likely to fall under the TPT than under a traditional sales tax, and the law recognizes that a person other than the retailer of record may be held liable for the remittance of TPT.
Typically, an online marketplace provides the following types of services to its third-party merchants: (1) serving as the primary point of contact for the customers with regard to general customer service inquiries as well as providing customers with information about their orders; (2) processing payments and refunds and (3) marketing the online marketplace under a single brand to attract customers who may then purchase the third-party merchant’s products. In this instance, even though there are technically two retailers in the transaction, Arizona treats the online marketplace as the “retailer” for TPT purposes because the online marketplace is considered to be representing the merchant(s) collectively and is providing those underlying services to the merchants. 
Once an online marketplace is determined to be the retailer, in order for it to be liable for paying TPT, there must be a sale of property. A “sale” includes transfers of title or possession “in any manner and by any means whatever.”  Even though online marketplaces typically do not have legal title to the property sold by third parties, they usually have possession of the property, either actual or constructive. Constructive possession typically exists where one has control over property without actual possession (i.e., control over the fulfillment process), and this can be established where the online marketplace has the ability to direct the party with actual possession to deliver the property to another or where the online marketplace accepts returns and issues refunds for property that it directs be delivered back to the third-party merchant.
Therefore, the ruling concludes that an online marketplace may be a retailer subject to liability for TPT when it has nexus with Arizona and it (i) provides services for third-party merchants such as handling customer service inquiries and processing payments and refunds and (ii) has control over the fulfillment process. If the online marketplace does not conduct fulfillment or otherwise have control over the property being sold, then the online marketplace does not have constructive possession. In that case, it may still be considered a retailer but would not be responsible for the TPT because it would not be viewed as making the “sale.”
Aprio’s SALT team has experience providing assistance to clients regarding the proper tax treatment for online and other multi-party transactions (e.g., drop-shipments, etc.). We want to ensure that you are in compliance with these complex (and often unclear) state tax rules and do not have exposure. We constantly monitor these and other important state tax issues, and we will include any significant developments in future issues of the Aprio SALT Newsletter.
This article was featured in the November/December 2016 SALT Newsletter. To view the newsletter, click here.
 Arizona Transaction Privilege Tax Ruling TPR 16-3, Sept. 20, 2016.
 A.R.S. §42-5001(13).
 A.R.S. §42-5001(14).
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.