As discussed in our interview with Richard Cram, Marketplace facilitator laws have changed drastically in the years since Wayfair. While that interview addresses the broad issues surrounding changes in Marketplace facilitator laws, we felt it would also be helpful to create a blog that addresses some of the more technical details of these laws and their impact on economic and physical nexus. But first, some clarification on what “Economic” and “Physical” nexus mean:
“Physical Nexus” means you have a physical presence in the state you’re selling products into. This could be an office, warehouse, drop shipper, remote employee, or sales agent. Once you have “Physical Nexus” in a state, you are legally required to collect state and local sales taxes on everything you sell into that state and file a state sales tax return. If you do not have “Physical Nexus” in a state, then you do not have to collect sales tax or file returns in that state UNTIL you have met that state’s “Economic Nexus” threshold.
“Economic Nexus” is the term for when you have sold more than a specific amount into a state without having physical nexus. In the wake of the “Wayfair” decision, the majority of states now define “Economic Nexus” in terms of minimum number of transactions or a minimum amount of sales revenues into their state over a 12-month period.
Each state has their own rules about thresholds, and they vary in regard to what dollar or transaction amount will trigger the rule and which 12-month period should be used in measuring the sales. Some states will only look at the dollar amount of sales made, some will look at both dollar amounts and transactions period whichever comes first.
Once your business meets those criteria, then you officially trigger their legal requirement to both collect and remit sales tax on whatever your company sells into that state and file a sales tax return.
Additionally, the types of sales that count towards threshold vary from state to state. Many states include all retail sales. Even if you are selling an exempt product or selling to an exempt entity, your revenues and/or transactions still count towards your annual state threshold levels. Some states, like Arkansas, include only taxable sales while others, like California, include gross sales—both retail and wholesale sales.
You can learn more about what Marketplaces are in the aforementioned interview with Richard Cram, but generally they are third-party platforms (typically websites) where remote sellers list whatever products and/or services they sell and any interested buyers buy via the marketplace. Naturally, Amazon, Etsy and eBay come to mind immediately, but there are several hundred specialty marketplaces out there…such as minted.com, sellandbuy.com, kidizen.com and poshmark.com to name just a few.
As a result of the Wayfair ruling, these marketplaces become what is known as “the merchant of record” which means they handle the entire transaction on your behalf (calculate the amount your buyer must pay including sales tax and shipping and often add in credit card payment verification.) They are now, by law, also filing a state and local sales tax return of all sales tax made on their platform and will send any collected sales tax funds from your items directly to the state your buyer lives in. You do not have to file or remit taxes they collected for you if something was sold on their site to a buyer who lives in any of the 46 states or DC.
It is also important to note that, in 24 states and the District of Columbia, sales made through a marketplace facilitator count towards the seller’s threshold. This means determining whether or not your business has met threshold in these states will require you to aggregate any sales you’ve made through marketplaces with those made through your own site.
Specifically, the following 24 states and the District of Columbia now include your sales on marketplaces towards your own individual threshold:
Alaska, California, Connecticut, Washington D.C., Hawaii, Idaho, Iowa, Kentucky, Maryland, Michigan, Minnesota, Nebraska, Nevada, New Jersey, New York, North Carolina, Ohio, Rhode Island, South Carolina, South Dakota, Texas, Vermont, Washington, West Virginia, Wisconsin
So, if you are selling products through one or more marketplaces, then you will have to combine the sales you make through those marketplaces with any sales you make on your own site to determine if you’ve met the threshold in those states.
If you have any questions do not hesitate to ask…we’re happy to help!