Passing broad sales tax laws is an approach that many legislators are taking to close loopholes, but the policies don’t always play out as intended. States like Kansas have drafted laws to force platforms that don’t handle payments to collect sales tax, making compliance challenging. In the new Next-Gen Sales Tax Tracker, National Retail Federation’s Vice President of Government Relations and Tax Counsel Rachelle Bernstein explains the obstacles and path to refining eCommerce sales tax.
The 2018 South Dakota v. Wayfair ruling paved the way for broadened U.S. tax laws, and some businesses and public sector stakeholders are now pushing back. The case ushered in a wave of state- and municipality-issued economic nexus laws that tax remote sellers based on economic activity rather than physical presence. The ruling also permitted marketplace facilitator laws that obligate eCommerce businesses to collect and remit taxes for sales made on their platforms. The Wayfair decision did not answer questions about these laws’ specifics, however, prompting stakeholders to make recommendations so businesses can comply more easily.
Marketplace facilitator laws have been particularly murky, as many are written in broad terms that have complicated compliance for eCommerce platforms, according to Rachelle Bernstein, vice president of government relations and tax counsel for the National Retail Federation (NRF), a Washington, D.C.-based organization representing sellers from more than 45 countries. NRF filed several friend-of-the-court briefs during the Wayfair case.
Stakeholders such as the NRF wish to refine marketplace facilitator laws and urge greater clarity following the Wayfair decision. The negotiation process may not be easy – proposals to change state and local tax laws must balance retailers’ hopes for unified standards that simplify selling across different jurisdictions with states’ and municipalities’ desires to fully control their tax policies.
The Case for Refining Marketplace Facilitator Laws
eCommerce marketplaces must wrestle with ample tax compliance challenges, as state and city policies often vary regarding which product types are subject to taxes. Companies may also struggle to determine whether a particular state considers them to be marketplaces.
“Some definitions of marketplace facilitator are so broad … that you’d have some problems determining who it is that’s supposed to be collecting the tax,” Bernstein noted.
Some policies define a marketplace as any platform-owning entity that lists purchasable items, even if it does not handle those items’ payments and cannot see into the transactions. Websites displaying clickable advertisements that redirect to merchant sites would get treated as marketplace facilitators under some state laws, even though the transactions are completed elsewhere, Bernstein said. This can be problematic because they lack easy access to the transaction details necessary for applying local tax rules.
“An advertising platform that doesn’t even know if the sale was consummated and doesn’t know where the product is being sold … could potentially be considered a facilitator,” she explained.
States have long debated how to write these definitions. A November 2018 draft white paper from the Multistate Tax Commission (MTC) noted that some states’ policies specify that an entity must handle related payments and have access to certain transaction details to be considered a marketplace, as well as qualifications that ensure the marketplace has the capability to collect and report taxes.
Other states are instead future-proofing their laws with far-reaching definitions intended to remain relevant as industries change. They designed broadly written legislation to block marketplaces from gaming the system and narrowly falling outside the rules. Bernstein noted that the expansive definitions could be accidental in some cases, due to a lack of awareness of the full ramifications.
Various organizations are now advocating for simpler marketplace facilitator laws, including the MTC, which is continuing to recommend refinements. The National Council of State Legislators designated a task force to develop model legislation that states can adopt in whole or in part, bringing more commonality to state policies, Bernstein said.
Weighing More Flexible Responsibility
This is not the only marketplace facilitator law adjustment under debate. Stakeholders are weighing another major policy adjustment: giving remote sellers the option of collecting taxes for their sales through marketplaces rather than requiring the latter to always bear responsibility.
Merchants might support this measure if states are underwhelmed with their marketplace tax collections. They know states may turn to sellers to correct such shortfalls, and not knowing marketplaces’ actions could leave merchants struggling to clarify their situations, Bernstein explained. It would thus not be an additional burden for sellers who collected taxes in these states prior to marketplace facilitator laws to continue handling that collection.
The Path to Change
Businesses desire more uniform marketplace facilitator laws because they simplify compliance work, but legislators with more mixed priorities may not prize uniformity as strongly, Bernstein pointed out. The U.S. Congress is unlikely to move quickly on the issue, which leaves the future of tax simplification with states and cities for now. A number of local governments have so far been reluctant to relinquish any control of their particular tax policies to follow others’ leads or adopt cross-state agreements.
“It’s always difficult for legislators to want to give up that authority,” Bernstein explained.
This individuality is not evident across the board, though, as 24 states currently abide by the Streamlined Sales and Use Tax Agreement (SSUTA), a promise to unify tax environments across intrastate localities, enable seller registration via one application and define common product categories. The latter provision is aimed at preventing issues in which some states count unsweetened carbonated water as a taxable “soft drink” while others do not.
Many states are open to tax policy improvements and working toward simpler, streamlined regulations now that they are seeing their laws in action, Bernstein noted. Marketplace facilitators may be shouldering new compliance burdens after the Wayfair ruling, but they may also find many policymakers ready to help.
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