Richard Cram is the Director of the Multistate Tax Commission’s National Nexus Program in Washington, D.C. The National Nexus Program provides a Multistate Voluntary Disclosure Program that 38 states and the District of Columbia participate in. Cram has recently contributed articles to Tax Analysts State Tax Notes and has presented as a co-panelist at the Georgetown Law School Advanced State and Local Tax Institute and the Paul J. Hartman SALT Forum. Prior to his current position, Cram served for 15 years as the Director of Policy & Research in the Kansas Department of Revenue, and for 2 years as an attorney in the Legal Services Bureau of the Department, in Topeka, Kansas. He has worked as a research attorney for the Kansas Supreme Court, and practiced law as an associate in law firms in Chicago, Illinois and Goodland, Kansas. Cram graduated from the University of Kansas School of Law. He currently resides in Alexandria, Virginia.
Richard, thanks for being with us today and wading into the complicated world of marketplace facilitator laws and their requirements.
For those of you who think tax administrators are not fun, you should know that Richard enjoys ballroom dancing. He has mastered intricate steps in tax and on the dance floor.
There are a lot of intricacies in marketplace facilitator laws that we don’t have the time to get through, so today I’d like to focus on some of the larger questions around these laws.
Russ: But let’s start with the most basic question. What is a marketplace?
Richard: Some states have defined that term in their statutes. For example, Connecticut defines “forum” as follows: “a physical or electronic place, including, but not limited to, a store, a booth, an internet website, a catalog or a dedicated sales software application where tangible personal property or taxable services are offered for sale.”
When that term “marketplace” is used nowadays, everyone thinks of an electronic platform or website on which products are marketed, although states defining that term are careful not to limit it to electronic, out of concern not to run afoul of the Internet Tax Freedom Act.
Russ: I can’t think of any group of major sales and use tax law changes that comes close to the rapidity of adoption and their impact and ramifications as the various marketplace facilitator laws adopted over just a few years. What do you think accounts for this? Was it simply a gold rush by the states to grab revenues?
Richard: State tax laws are usually about 10 years or more behind the times in keeping up with trends in business or technology. While states were still focused on how to increase seller compliance with internet sales generally starting in the 1990’s (facing the Quill physical presence nexus rule as the major obstacle), the marketplace facilitator business model took off in the early 2000’s and has experienced phenomenal growth since then, now accounting for the dominant share of internet sales transactions. The marketplace facilitator business model was cleverly structured to make the marketplace seller the party responsible for registering and complying with sales tax laws.
With the Quill physical presence nexus rule, marketplace sellers generally thought they were “off the hook” from collecting any sales taxes, because they lacked physical presence in the states where their internet customers were located. But as marketplace facilitators’ footprints expanded with warehouses in many states, and as marketplace seller inventory filled warehouses, sales tax liability exposure greatly increased for marketplace sellers. States soon recognized that it would be much more efficient to require marketplace facilitators to collect and remit the sales tax on facilitated sales, rather than attempting to track down many thousands of small marketplace sellers and get them in compliance.
However, states also realized that their sales tax laws were not structured to accommodate the marketplace facilitator business model. Unless their laws changed to make the marketplace facilitator the retailer instead of the marketplace seller, states were not going to succeed in collecting any significant sales tax revenues from facilitated internet sales, which were rapidly becoming the largest portion of internet sales.
Colorado’s successful 2016 litigation in Direct Marketing Association v. Brohl upheld their new sales tax compliance law that gave remote sellers above a certain sales volume threshold the option of either collecting sales tax on their remote sales or reporting those transactions to the state tax department. This set the stage for states to begin putting in place a viable collection model for facilitated internet sales. A few states put in place such laws in the 2017 legislative session.
For marketplace facilitators, it was obviously simpler to comply with the tax collection requirement rather than go through the reporting process—in addition to the customer relations issues that would create, so they began complying with those new laws. Other states saw the great promise of those laws, so many looked forward to putting similar laws in place in the 2018 legislative session.
After the 2018 Wayfair decision, which did away with the physical presence nexus rule, states quickly realized that the “option” to report or collect was no longer needed. A collection requirement could be imposed on marketplace facilitators—as well as direct internet sellers. This was the states’ chance to greatly expand sales tax compliance with internet sales: require all remote sellers above the specified economic nexus threshold to collect sales tax, and also require that marketplace facilitators be the tax collectors on facilitated internet sales.
Because facilitated internet sales had become the largest portion of internet sales, states needed to enact both sales tax economic nexus laws and laws requiring marketplace facilitators to collect on facilitated sales in order to effectively capture any significant sales tax revenue from internet sales. It was literally an “all or nothing” proposition for the states, so that made it a very easy decision for them to proceed with enacting those laws—which all states that impose sales tax have now done. Even so, marketplace facilitators and sellers operated for a good ten years (at least) without any effective sales tax collection mechanism in place in state law, before states finally began to catch up.
Russ: You ran the Multistate Tax Commission (MTC) process that developed a white paper on Marketplace facilitators. What was that process like? But first can you give us a quick explanation of what the Multistate Tax Commission is?
Richard: The Multistate Tax Commission is an intergovernmental state tax agency working on behalf of states and taxpayers to facilitate the equitable and efficient administration of state tax laws that apply to multistate and multinational enterprises.
That was a very exciting time in the wake of the Brohl and then the Wayfair decisions, as states scrambled to put in place the laws that would allow them to collect desperately needed sales tax revenue on internet sales. Major companies also realized that these laws were coming, so industry representatives were anxious to get involved in the process of their development, in hopes of seeing some uniformity and administrative simplification in them. By the time the Uniformity Committee took up this project in the fall of 2018, a few states had already put in place marketplace facilitator laws, and several state legislatures had such laws pending. So, it was important to get a work product from the Committee out as soon as possible, in hopes of providing guidance to states considering adopting such laws.
The Committee formed a work group and recruited participants from the states and industry, and thereafter the work group developed a list of about a dozen key issues to go through and attempt to resolve, seeking input from all interested parties as we proceeded through each issue. Because some states already had marketplace facilitator sales tax laws in place, it soon became apparent that the work group was not going to come up with a single, uniform model legislative proposal. The best that could be achieved was to summarize a couple of major approaches to each issue, along with the pros and cons of each approach. For example, one of the biggest issues was how to define “marketplace facilitator.” Washington had developed a “broad” definition, which some states had copied, while a “narrow” definition surfaced in other states’ legislation.
The business community overwhelmingly preferred the “narrow” definition because it required the facilitator to handle the customer’s money, while the broad definition was not so limited. Also, the business community worked with the NCSL (National Conference of State Legislatures) SALT (State and Local Tax) Task Force to develop model legislation for states to consider using in imposing sales tax economic nexus and marketplace facilitator collection laws. This model is included in the White Paper as an appendix. The work group succeeded in producing the White Paper in time for its use by 2019 state legislatures in developing their laws. The White Paper has been updated each year since the 2018 version to include additional states’ legislation. The 2021 update includes the legislation adopted by all sales tax states. The White Paper remains posted as a resource on the MTC website.
Russ: NCSL did adopt a model statute. How do you think that fits in with the findings of the MTC White Paper?
Richard: As mentioned, the White Paper does include the NCSL model in its appendix. The MTC was asked by industry representatives to endorse the NCSL model, but the state participants in the work group and the Uniformity Committee indicated a reluctance to do that, particularly because many states already had their sales tax economic nexus and marketplace facilitator laws in place, many of which differ from the NCSL model.
However, it is clear that the NCSL model has been influential on state legislatures, particularly with the states that have most recently adopted this legislation. The NCSL model includes the “narrow” definition of marketplace facilitator, and as of now, most of the states adopting marketplace facilitator collection requirements are using the “narrow” definition. The NCSL model also recommended adding flexibility to the marketplace facilitator law by including exclusions for certain industries (such as payment processors, advertisers, etc.), allowing the facilitator and marketplace seller to agree on which party has the collection obligation, and allowing the department to waive the collection obligation. Some of the states have adopted those features.
Russ: So there are marketplace facilitator giants that are household names like Amazon, Wayfair, and Ebay. And some very large retailers who also are marketplace facilitators, like Walmart. Who else is out there? Can you describe the variety, numbers, and niches they fill to any degree. And how does this create opportunities for sellers?
Richard: I have to confess a lack of knowledge concerning this. Etsy, of course, should be added to the list. I understand there are some small, very specialized marketplace platforms in certain niche industries out there that were surprised to find that they fit within the “facilitator” definition in certain states.
Russ: It seems like a lot of those marketplaces, especially the smaller ones, could benefit from CSPs. Have you seen any of that? How could that be encouraged?
Richard: Again, I’ll have plead lack of knowledge concerning this. I would think that smaller marketplaces would certainly be a good market for CSP’s, especially if they will have new tax collection return filing responsibilities as a result of the state’s facilitator legislation. Marketing efforts to these business would certainly be productive, I would think.
Russ: Are there traps or dangers sellers need to be aware of among the proliferation of marketplaces?
Richard: I don’t claim any special knowledge here, but certainly, anytime you are looking to “sign up” with a contractor of any kind, you want to be aware of their history, financial solvency, reputation, etc. and feel comfortable dealing with them. Certainly, you should carefully read and understand the provisions in any agreement that you enter into with a facilitator, know what your contractual obligations are, and also those of the facilitator. In terms of marketplace facilitator laws, the major issue to be aware of is that generally most of these laws will allow the marketplace facilitator to shift liability for failing to collect the tax to the marketplace seller, if the marketplace facilitator can show that the marketplace seller failed to provide certain information to the facilitator or the information provided was incorrect. You should agree up front with the facilitator what information, if any, you are responsible to provide to them.
Be sure to maintain good records, in case the time comes where the facilitator claims you provided incorrect information or failed to provide certain information, and the facilitator is attempting to pass liability to the state for uncollected tax off to you. It would also be helpful to be aware of the marketplace facilitator law provisions in the states you are selling into. A few of those states may still require you to register and file returns—even when you are using a marketplace facilitator. You may be required to report your facilitated sales as a deduction on your return. Also, if you are a multichannel seller, you likely have an obligation to collect and file on your direct internet sales into the state.
Russ: Are there traps or dangers new or small marketplaces need to be aware of?
Richard: Again, no special expertise claimed in this area, but you want to be familiar with the sellers you are dealing with. Since most state facilitator laws allow you to pass liability for failure to collect to the seller when the seller provides incorrect information or fails to provide information, you also need to keep good records so such failures can be documented and proven. Of course, you need to be thoroughly familiar with the laws and tax administration procedures of the states in which you are facilitating sales, since you will be collecting sales tax and filing returns on those facilitated sales.
Russ: What do small or new marketplaces need to be aware of as they develop?
Richard: Staying up to date on the states’ tax laws in which they are selling is of utmost importance. Also, a growing trend is for states to expand the collection requirement to include other types of excise taxes that may apply to certain taxes (local lodging taxes, battery or tire fees, 911 fees, other telecommunications taxes, etc.). You need to be aware of any new tax collection obligation that may apply to any of your facilitated sales.
Russ: This sea change in tax administration, collection, remittance, and the varying requirements is dizzying not just to the average taxpayer, but to the average tax practitioner. Definitions of marketplace facilitators, thresholds, and other key terms vary enormously. So do reporting requirements. How can an ordinary businessperson make sense of it all?
Richard: This is where a top flight CSP or other SALT tax advisor comes in! You are seeing a few trends toward uniformity with the economic nexus thresholds: most states are using $100,000 sales volume and are starting to drop the transactions threshold. Also, as mentioned, most states are now using the “narrow” definition of marketplace facilitator.
Russ: Is it possible some businesses might be marketplaces and not even realize it? What specifically should they be looking for? Are they OK if they never handle the money?
Richard: Yes, certainly in states that use the “broad” definition of “marketplace facilitator.” For a state that has adopted the “broad” definition but has not adopted any exclusions from that definition, advertising or payment processing activity could be enough to fall within the definition. Handling the customer’s money is not required under the broad definition. If the definition includes exclusions, or the state’s law allows the parties to negotiate who has the collection obligation or allows the department to waive the collection obligation, this adds some flexibility.
The narrow definition requires the facilitator to handle the customer’s money. However, even if the facilitator does not directly handle the money but appears to have control over the entity that does, states using the narrow definition may still view that control as being equal to directly handling the money. A ruling should be sought from the state tax department when there is doubt.
Russ: Many taxpayers are familiar with physical nexus and the requirement to collect if you have physical presence in a state (locations, staff, inventory). Economic nexus thresholds are newer. Did the U.S. Supreme Court Wayfair decision allowing states to collect sales tax from remote sellers directly lead to economic nexus thresholds and marketplace facilitator laws?
Richard: The New York “click-thru” nexus law (which many states also adopted) and the Colorado “option to collect or report” law litigated in Direct Marketing vs. Brohl had $10,000 economic nexus thresholds in them, but Wayfair certainly ushered in the $100,000 gross sales volume/alternative 200 transactions threshold that many states have now adopted. As discussed above, the marketplace facilitator laws got off the ground in 2017, before Wayfair, but Wayfair certainly accelerated their adoption afterwards.
Russ: These thresholds seem to be all over the map. The size, what sales are included, receipts vs. number of transactions. Why do you think states took such different approaches, including the usually uniformity conscious Streamlined Sates, in setting thresholds? If you ruled the world, what type of threshold would make the most sense?
Richard: South Dakota included the $100,000 gross sales/200 transactions threshold in its economic nexus law, which was successfully litigated in Wayfair. A number of other Streamlined states adopted similar legislation, either contemporarily with South Dakota, or immediately after the decision. The fact that the Court did not strike down South Dakota’s threshold probably convinced a lot of states to simply adopt that same threshold, since it had already passed court scrutiny. Some states are beginning to eliminate the transactions threshold, discovering that a seller could easily hit that threshold, even with a very low sales volume, if inexpensive items are sold in large volume. The $100,000 sales volume threshold has been adopted by almost all of the sales tax economic nexus states. Only a few states have adopted higher thresholds (TX NY CA $$500,000, MS AL $250,000), although varying criteria are used in measuring sales volume (gross sales vs. retail sales vs. taxable sales).
A $100,000 sales volume threshold based on retail sales seems to be the sensible threshold right now. This would exclude wholesale sales, which are not taxable. As everyone gets more used to sales tax collection in the electronic environment, states are hoping that some day the $100,000 sales volume threshold can head downward.
Russ: How does an individual seller’s sales on their own platform or at their own physical location work in conjunction with their facilitated sales?
Richard: This varies by state. Many states require the seller to measure its economic nexus sales volume threshold by including both direct and facilitated internet sales into the taxing state. Some states do not require facilitated sales to be included in the sales volume threshold, if the facilitator is required to collect on those sales. For sales taking place at the physical store location, obviously, sales tax is due on all of those sales to the home state.
Russ: It doesn’t seem like states have been quick to adopt NCSL recommended provisions or make extensive use of the MTC White Paper. Of course during this period they were occupied with the Covid pandemic and responding to that. Most states have done better than expected with revenues. As things settle down are you optimistic that states will achieve more uniformity in how they treat marketplace facilitators and sellers? How can interested businesses influence these decisions?
Richard: The NCSL model was not officially approved by the NCSL until after many states had already adopted their marketplace facilitator tax collection laws, so that is probably the main reason so many state statutes do not include its provisions. My experience with state legislatures has been that legislators are much more likely to pay attention to a lobbying effort by the business community than by the state tax department. Thus, strong business community lobbying efforts to move states toward the NCSL model could be fruitful. However, there is always a certain amount of inertia that will be encountered against making changes to an existing statute, particularly when it has been on the books only a few years and appears to be working OK. If a showing is made that a particular provision (or lack of a provision) has created problems, legislatures are more likely to be amenable to make changes to correct the problem.
Russ: Richard, thanks for helping us understand the marketplace facilitator world. There are lots of resources to show you what you have to do to comply. But you’ve given us a lot of context for understanding the why–the history and confluence of events that help explain how we ended up with such a variety of provisions in these laws. You have also given us a great window in to how the MTC works with states and business stakeholders.