What Is a Marketplace Facilitator?
A marketplace facilitator is an online platform or third-party entity that facilitates sales between a seller and a buyer, and is responsible for collecting and remitting sales tax on behalf of third-party sellers. This concept falls under the broader umbrella of taxation and financial regulation, particularly within the realm of e-commerce and the digital economy. The marketplace facilitator model shifts the burden of sales tax compliance from thousands of individual remote sellers to a single, larger entity.
History and Origin
The concept of a marketplace facilitator arose primarily in response to the rapid growth of online retail and the evolving landscape of sales tax collection in the United States. Historically, states could only compel businesses with a physical presence, or "nexus," within their borders to collect sales tax. This precedent was established in cases like National Bellas Hess v. Department of Revenue of Illinois (1967) and Quill Corp. v. North Dakota (1992). However, as e-commerce exploded, states found themselves losing significant tax revenue from out-of-state online sales where sellers lacked a physical presence.
This changed dramatically with the U.S. Supreme Court's landmark decision in South Dakota v. Wayfair, Inc. in June 2018, which overturned the physical presence rule. The Wayfair ruling established that states could require remote sellers to collect sales tax based on their economic activity within the state, known as economic nexus. This opened the door for states to enforce sales tax collection on a much wider range of online transactions. Following Wayfair, many states quickly enacted laws requiring marketplace facilitators to collect and remit sales tax on sales made through their platforms. This was seen as a practical solution to streamline the collection of sales tax from the vast number of online transactions, placing the obligation on the platform rather than individual small businesses selling through them. Most states with a sales tax have now adopted economic nexus for marketplace facilitators4.
Key Takeaways
- A marketplace facilitator is an online platform responsible for collecting and remitting sales tax on third-party sales.
- The rise of marketplace facilitator laws followed the 2018 South Dakota v. Wayfair, Inc. Supreme Court decision, which enabled states to impose sales tax collection obligations based on economic activity, not just physical presence.
- These laws simplify sales tax compliance for individual vendors by shifting the burden to the larger marketplace.
- Marketplace facilitator rules vary by tax jurisdiction, often including thresholds for taxable sales or number of transactions.
Interpreting the Marketplace Facilitator
The concept of a marketplace facilitator fundamentally alters how sales taxes are handled in the modern retail environment, particularly for online sales. For consumers, this typically means that the correct sales tax is collected at the point of purchase, regardless of where the individual seller is located. For sellers, especially small businesses, it means they no longer have to worry about calculating, collecting, and remitting sales tax in numerous states where their customers reside, as long as they are selling through a platform that qualifies as a marketplace facilitator. This significantly reduces their administrative burden and potential tax liability.
Hypothetical Example
Consider "Crafty Corner," an online marketplace where independent artisans sell handmade goods. Prior to marketplace facilitator laws, if a seller from Oregon sold a unique pottery piece for $100 to a customer in Texas (which has a 6.25% sales tax), the Oregon seller would theoretically be responsible for collecting the $6.25 in sales tax and remitting it to the state of Texas. This became incredibly complex for sellers with customers across many states, each with different rates and rules.
Under marketplace facilitator laws, Crafty Corner, as the platform facilitating the sale, is now responsible. When the Texas customer buys the pottery piece, Crafty Corner automatically calculates and adds the $6.25 Texas sales tax to the total. Crafty Corner then collects the $106.25 from the customer and later remits the $6.25 sales tax directly to the state of Texas, handling all the associated reporting requirements. The individual artisan receives their $100 (minus Crafty Corner's commission) and does not need to separately manage sales tax for that transaction.
Practical Applications
Marketplace facilitator laws are a direct consequence of the shift from traditional brick-and-mortar retail to a pervasive e-commerce landscape. They are widely applied to major online platforms that host third-party sellers, such as large online retailers that allow other merchants to sell on their site, as well as digital marketplaces for goods and services. The IRS provides guidance on these laws, noting that a marketplace facilitator generally collects payments from customers and transmits them to the sellers3.
These regulations have a significant impact on state tax revenue and simplify the collection process for states. For businesses, while it centralizes the sales tax burden for the marketplace facilitator, it significantly eases the compliance burden for thousands of smaller sellers who utilize these platforms. The widespread adoption of these laws by states after the Wayfair decision has led to complex operational implications for businesses that operate across state lines or through multiple channels2.
Limitations and Criticisms
While marketplace facilitator laws streamline sales tax collection, they are not without limitations or criticisms. One primary challenge lies in the sheer complexity of sales tax rules across different states and even local jurisdictions. While the burden shifts to the marketplace, the marketplace itself must manage thousands of varying tax rates, product taxability rules, and reporting schedules. This necessitates robust technological solutions for accurate calculation and remittance.
For sellers who use a mix of sales channels (e.g., their own website and a marketplace facilitator), they still need to manage sales tax compliance for their direct sales, which can still be a significant undertaking if they establish economic nexus in multiple states. Additionally, debates persist regarding the fairness and potential for over-collection or misapplication of use tax in certain scenarios, particularly given the evolving nature of the digital economy and interstate commerce. While the Wayfair decision provided a framework, the implementation details vary, leading to ongoing complexities for businesses navigating the landscape1.
Marketplace Facilitator vs. Remote Seller
The terms marketplace facilitator and remote seller are closely related but distinct within the context of sales tax law.
A remote seller is typically any business that sells goods or services into a state where it does not have a physical presence, but does meet the state's economic nexus threshold (e.g., a certain dollar amount of sales or number of transactions). Before the Wayfair decision, remote sellers generally were not required to collect sales tax in states where they lacked physical presence. After Wayfair, remote sellers are generally obligated to collect and remit sales tax if they exceed the state's economic nexus thresholds, unless their sales are made through a marketplace facilitator.
A marketplace facilitator, on the other hand, is the platform or entity that enables sales for third-party remote sellers. Under current laws in most states, the marketplace facilitator takes on the responsibility for collecting and remitting the sales tax for sales made through its platform, thereby relieving the individual remote sellers of that specific tax obligation for those facilitated sales. Therefore, while a remote seller makes the sale, the marketplace facilitator handles the tax aspect for sales occurring on its platform.
FAQs
What does "marketplace facilitator" mean for my online purchases?
For you as a consumer, it means that when you buy something on a large online platform, the sales tax will likely be calculated and collected by the platform itself, simplifying the process and ensuring the correct tax is applied.
Do all states have marketplace facilitator laws?
Most states that impose a sales tax have enacted marketplace facilitator laws following the 2018 South Dakota v. Wayfair, Inc. Supreme Court decision. However, the specific thresholds for when a platform qualifies as a marketplace facilitator and the rules for calculation and remittance can vary by tax jurisdiction.
How do I know if a company is a marketplace facilitator?
Generally, large online platforms that enable multiple third-party sellers to list and sell products, and process payments for those sales, are considered marketplace facilitators. If you see sales tax automatically added to your purchase from a third-party seller on a major e-commerce site, it's highly likely that the platform is acting as a marketplace facilitator.
Does a marketplace facilitator collect both sales tax and use tax?
Marketplace facilitators primarily collect sales tax. Use tax is typically owed by the consumer directly to the state when sales tax was not collected by the seller (or marketplace facilitator) on a taxable purchase. However, by collecting sales tax, the marketplace facilitator prevents the need for the consumer to self-report and pay use tax on those specific transactions.