Marketplaces are becoming the primary digital sales channel across retail, travel, and food. Chances are, you use services such as Amazon, Etsy, Walmart, DoorDash, or Uber Eats on a daily basis.
These marketplaces make it possible to buy and sell goods and services without having to leave a website or e-commerce platform, making it more convenient for buyers and sellers.
Although utilizing marketplaces is convenient on the surface, it’s important to consider the downstream effects, such as sales tax implications. Small businesses need to understand how marketplace facilitator rules apply, to avoid compliance gaps, unexpected liabilities, and audit exposure.
A marketplace facilitator is a connector of buyers and sellers through e-commerce platforms, so think third-party. Typically, marketplace facilitators support the transaction life cycle via their platform, including the following:
A straightforward way to determine if your small business is utilizing a marketplace facilitator is to determine if your customers are paying your business directly, or your marketplace. If payment transfers through your marketplace, you are likely utilizing a marketplace facilitator.
So, why is it important to understand how your payments are facilitated? Marketplace facilitator rules determine who is legally responsible for collecting and remitting sales tax. In most states, the marketplace, not the small business, collects and remits tax on facilitated transactions.
Failure to understand these distinctions may result in incorrect tax collection, filing errors, or missed registrations. This could result in penalties, interest, and limitations on transacting business in certain states.
With the rise in marketplace facilitators, states identified a new way to improve sales tax compliance and are shifting the calculation and collection from the individual sellers to the facilitators. Due to the wide range of marketplace transactions and variations in state laws, it is occasionally unclear who is responsible for relevant taxes and fees – the seller or the marketplace.
In general, most marketplace facilitator laws require the platform, rather than the individual sellers, to calculate, collect and remit the applicable taxes and fees. If a return or price adjustment occurs, the platform must process the tax corrections as well, not the seller.
This also shifts liability for errors and omissions (failure to comply with all applicable laws) to the platform.
A growing challenge with marketplace facilitators is double taxation. This problem occurs when both the facilitator and retailer tax the same transaction. This frequently happens when software solutions are unable to mitigate the tax liabilities associated with sales conducted via the e-commerce platform.
Some states resolve this problem by permitting one of the parties to claim a deduction on their sales tax return, thereby offsetting the double taxation.
Another issue, especially relevant to lodging intermediaries like Airbnb, concerns the differing state definitions of these service providers. With more than 10 different naming conventions for “marketplace facilitators” in the lodging industry, determining which laws the marketplace is subject to is difficult.
For example, California’s marketplace facilitator law doesn’t apply to lodging platforms. However, local jurisdictions may still require lodging platforms to collect local taxes on behalf of hosts. In New Mexico, entities that list and arrange accommodations for third parties are classified as marketplace providers and may be responsible for gross receipts tax on the transactions they facilitate.
The responsibilities are also different depending on whether the facilitator is acting on behalf of a hotel versus other types of short-term lodging. Tennessee’s marketplace facilitator law permits lodging marketplaces to seek a waiver of their tax obligation if “substantially all” of the sellers on their platform are registered with the Tennessee Department of Revenue.
Yet their short-term rental marketplace law doesn’t permit short-term rental marketplaces to seek a waiver from their state and local tax obligations. Each state takes a different approach, only adding to the complexity.
As legislation increasingly requires facilitators to collect and remit taxes in numerous states and local jurisdictions, it is essential for small businesses to establish correct procedures from the outset. Proper compliance helps prevent errors that may result in substantial fines, penalties, or other significant repercussions.
While marketplace facilitator laws shift many collection responsibilities to the platform, they do not eliminate a seller’s compliance obligations. For small businesses, understanding what remains on their plate is critical.
Even when a marketplace collects and remits sales tax on facilitated transactions, sellers may still have obligations for sales made outside the platform, such as through their own website or other direct channels. In addition, some states require businesses to file informational or zero-dollar returns, even when the marketplace remits the tax. Marketplace laws also do not automatically eliminate nexus or broader filing requirements.
Some states exclude marketplace-facilitated sales when determining whether a seller has exceeded sales tax thresholds. However, those same sales may still count toward registration requirements or toward income or gross receipts tax nexus determinations. Misinterpreting these distinctions can lead to unintentional noncompliance.
Audit risk remains an important consideration. States may examine whether transactions were properly classified as marketplace-facilitated, whether the correct party collected the tax, and whether exemption certificates and supporting documentation were properly maintained. Even when the platform handles tax collection, sellers are still responsible for maintaining accurate records and reconciling marketplace reports.
Improper system configuration can create unnecessary complications. Businesses that continue collecting tax on marketplace sales may trigger double taxation, customer confusion, refund exposure, or disputes with the platform. Aligning internal tax settings with marketplace collection responsibilities helps prevent these issues and protects the customer experience.
Small businesses should treat marketplace facilitator rules as a partial compliance solution, not a blanket exemption. A state-by-state review of sales activity is essential to ensure proper registration, collection, and reporting, especially as states continue to modify and enforce these rules.
SVA can assist you with determining where you have nexus, understanding the specific rules that apply to each region (state and local), and provide tools to simplify your sales tax obligations.
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