Are Online Marketplace Providers, like Amazon, Being Targeted by States for Sales Tax?
2017 was the first year in which states enacted sales tax legislation aimed specifically at requiring “marketplace providers” to collect and remit sales tax on sales by third-party sellers.
By Jeff Glickman, SALT partner
For at least a decade now, states have been fighting a sales tax battle against remote sellers. The Internet has greatly expanded the geographic reach of small businesses; it is now commonplace for a consumer in Florida to purchase goods from a seller in Washington. As a result, states have enacted rules, such as use tax reporting requirements and sales tax economic nexus (the latter is still being litigated), in an effort to persuade or force remote sellers to collect sales tax.
Amazon was the poster child for the remote seller that fought states on sales tax collection. However, as Amazon has expanded its business presence (in an effort to provide quick shipping options), it has agreed to collect sales tax and currently does so in every state with a sales tax.
Despite this, Amazon only collects on sales of goods that it sells. Through its “Fulfillment by Amazon” (“FBA”) program, Amazon provides fulfillment services for millions of products sold by third-party sellers on Amazon’s website. Members of FBA provide Amazon with the goods, and Amazon essentially takes care of all aspects of the sale.  Currently, Amazon only collects sales tax on behalf of FBA sellers based on the states that the FBA seller indicated when it signed up for the program (presumably based on where the FBA seller has nexus).
2017 was the first year in which states enacted sales tax legislation aimed specifically at requiring “marketplace providers” or “marketplace facilitators” to collect and remit sales tax on sales by third-party sellers. Those states are Minnesota, Washington, Rhode Island and Pennsylvania.  Like the remote seller sales tax economic nexus rules, these laws typically require marketplace providers to collect sales tax or comply with use tax reporting requirements if the level of sales revenue from in-state customers or the number of transactions with in-state customers reaches a certain level.
For example, Washington’s law (H.B. 2163) is effective Jan. 1, 2018 and requires a marketplace facilitator to elect to collect and remit sales tax or comply with use tax reporting requirements if the level of sales sourced to Washington (whether its own sales or those on behalf of another seller) in the current or preceding calendar year is at least $10,000. A taxpayer is considered a marketplace facilitator, for example, if it operates the infrastructure (whether electronic or physical) that brings buyer and seller together and it engages in one of the following activities for the seller, such as (but not limited to):
- payment processing
- fulfillment or storage services
- listing products for sale, or
- providing customer service or accepting or assisting with returns or exchanges.
Perhaps because Washington is the state where Amazon is headquartered, in November 2017, Amazon announced that it will begin complying with Washington’s law and will collect sales tax for marketplace sellers beginning Jan. 1, 2018.  This news could certainly encourage more states to enact similar laws.
Below is a brief summary of the three other states to enact similar laws in 2017:
- Pennsylvania (H.B. 452): Effective March 1, 2018, marketplace facilitators with aggregate sales in Pennsylvania of at least $10,000 must elect to either collect and remit sales tax or comply with use tax notification requirements.
- Rhode Island (H.B. 5175): Beginning Jan. 15, 2018, a retail sale facilitator that has, in the prior calendar year, at least $100,000 in Rhode Island sales or 200 or more separate transactions delivered into Rhode Island must notify the Department of Taxation of (i) the retailers for whom the retail sale facilitator collected sales and use tax during the prior calendar year and (ii) the retailers who used the retail sale facilitator to serve Rhode Island customers for whom the retail sale facilitator did not collect sales and use tax.
- Minnesota (H.F. 1): Effective the earlier of July 1, 2019, or the date that either the courts or Congress authorize states to impose sales and use tax collection on remote sellers, marketplace providers are required to collect and remit sales tax on Minnesota sales. Note that Minnesota does not have a threshold.
In addition to these new laws, South Carolina and Amazon are currently engaged in litigation over this issue. South Carolina, which has not enacted a marketplace provider sales tax law, is asserting that under its current laws, Amazon is required to not only collect South Carolina sales tax on Amazon’s sales in the state, but any South Carolina sales made by Amazon FBA sellers. The state claims that for just the first quarter of 2016, Amazon owes $12.5 million.  The state also estimates that over the next five years, Amazon’s failure to collect sales tax on FBA sales could cost the state $500 million. 
Of course, these rules are not just aimed at Amazon, but at all online marketplace providers, such as Etsy, eBay and others. This is clearly one of, if not the most, fascinating state tax developments of 2017, and it clearly will be a continuing hot issue in 2018 and beyond. If you are at all concerned about how these rules might affect your business, speak with your tax advisor.
This article was featured in the November/December 2017 SALT Newsletter.
 You might have noticed when you buy something on Amazon, sometimes it says “shipped and sold by Amazon” and sometimes it says “fulfilled by Amazon.”
 On Sept. 20, 2016, Arizona issued a ruling with similar effect.
 You can see the news on one of Amazon’s seller forums, but you must be a registered Amazon seller to see the information on Amazon’s website.
 See this CNBC report.
 See this Investopedia article.
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.