The California marketplace facilitator regulation has been updated, and will have an impact on delivery network companies, such as DoorDash and Uber Eats. On Wednesday, August 28, California adopted the final version of Reg. Section 1684.5 1regarding marketplace sales.
The intent of this regulation is to first, supplement the state’s Marketplace Fairness Act (“MFA”)2 and second, to clarify (1) registration requirements for marketplace facilitators and sellers, (2) when a marketplace facilitator is considered both the seller and retailer, and (3) the MFA’s advertising exclusion.
The original regulation3 was adopted under an emergency action in June 2020, which expired on June 28, 2022. The final California marketplace facilitator regulation was updated after taking public comments on the regulation in the first half of 2023, California only slightly modified the original version of the rule, but still maintained the broad definition of a “marketplace facilitator.” Maintaining this broad definition should close loopholes, reduce the chances that a marketplace could reorganize its structure to evade the MFA’s registration and collection requirements, provide a means to account for potential future changes more effectively in the industry and technology, and not limit the MFA so it only applies to businesses that handle or process or otherwise have access to the customer’s payment.4
What is a Marketplace Facilitator?
A marketplace facilitator, as defined by Re. 1684.55, is, a marketplace facilitator is “a person who contracts with marketplace sellers to facilitate for consideration, regardless of whether deducted as fees from the transaction, the sale of the marketplace seller’s products through a marketplace operated by the person or a related person and who does both of the following:
- Directly or indirectly, through one or more related persons, engages in any of the following:
- Transmitting or otherwise communicating the offer or acceptance between the buyer and seller.
- Owning or operating the infrastructure, electronic or physical, or technology that brings buyers and sellers together in a marketplace.
- Providing a virtual currency that buyers are allowed or required to use to purchase products from the seller.
- Software development or research and development activities related to any of the activities described in subdivision (a)(10)(B) of this regulation, if such activities are directly related to a marketplace operated by the person or a related person.
- Directly or indirectly, through one or more related persons, engages in any of the following activities with respect to the marketplace seller’s products:
- Payment processing services.
- Fulfillment or storage services.
- Listing products for sale.
- Setting prices.
- Branding sales as those of the marketplace facilitator.
- Order taking.
- Providing customer service or accepting or assisting with returns or exchanges.
Impact On Delivery Network Companies
While it’s more clear that companies like Amazon, Etsy and eBay fall under the definition of a “marketplace facilitator” in California and websites like Craigslist that merely host users’ ads fall under the advertising exclusion present in this regulation and the MFA, there is a stipulation that delivery network companies, such as DoorDash and Uber Eats, “may elect to be deemed a marketplace facilitator” if they meet the marketplace facilitator definition. Note, however, that this is unchanged from the original, emergency action version of this regulation.
Under the Marketplace Fairness Act5, delivery network companies are businesses that maintain an internet website or mobile application used to facilitate delivery services for the sale of local products and are not marketplace facilitators.
The MFA required the California Department of Tax and Fee Administration (CDTFA) to establish criteria for delivery network companies to obtain and retain an election to be a marketplace facilitator6, and the adoption of Reg. 1684.5 satisfies this requirement, as subdivision (e) of the regulation outlines such criteria7. Unlike in the other subdivisions of Reg. 1684.5, there are no examples provided to help guide a delivery network company to know when they may or may not have met the definition of a marketplace facilitator, so they will need to rely on some of the other examples provided earlier on in the regulation.
If a delivery network company elects to be a marketplace facilitator, they will need to do so in their registration for a California seller’s permit or use tax account (whichever is applicable) or, if already registered, submit a signed—written or electronic—statement to the CDTFA requesting to make the marketplace facilitator election. They must also maintain their registration with the CDTFA while their election is in effect.
Like all other marketplace facilitators, the delivery network company that has made this election for the same will be treated as a retailer when it facilitates retail sales of tangible personal property made by marketplace sellers through its platform for delivery to California customers, and thus will be required to collect, report, and remit applicable sales or use tax to the CDTFA. In order to cancel such election, the delivery network company must make a signed—written or electronic—statement notifying the CDTFA of such cancellation.
To see how the most well-known delivery network companies have responded to Reg. 1684.5, we checked out the Marketplace Facilitator FAQ pages provided by DoorDash8 and Uber Eats9 on their websites. Both companies provide a general definition of the term “marketplace facilitator” and have listed the states they are registered in as marketplace facilitators. As of September 19, 2023 (the writing of this article), Uber Eats has elected to be a marketplace facilitator in California, while DoorDash has not. It was interesting to find out that two very similar companies have opposite responses to this regulation, which provides delivery network companies with the option—rather than the requirement—to register as marketplace facilitators.
If you have questions about California’s update of the marketplace facilitator regulation….
If you have questions about California’s adoption of this marketplace sales regulation or how it may affect you and your business, Clarus Partners can provide you with its consulting and advisory services to answer those questions and, if needed, help guide you further in responding appropriately to these rules.
- Cal. Code Regs. 18 §1684.5 (2023). (https://www.cdtfa.ca.gov/taxes-and-fees/Reg1684-5-Text-2023-Final.pdf) ↩︎
- Cal. Rev. & Tax. Cd. §§6041-6041.6. (https://leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?lawCode=RTC&division=2.&title=&part=1.&chapter=1.7.&article=1.) ↩︎
- Cal. Code Regs. 18 §1684.5 (2020). (https://www.cdtfa.ca.gov/lawguides/vol1/sutr/1684-5.html) ↩︎
- Final Statement of Reasons for the Proposed Adoption of California Code of Regulations, Title 18, Section 1684.5, Marketplace Sales. (2023). Retrieved September 15, 2023, from https://www.cdtfa.ca.gov/taxes-and-fees/Reg1684-5-FSOR-2023.pdf. ↩︎
- Cal. Rev. & Tax. Cd. §6041.5. (https://leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?lawCode=RTC&division=2.&title=&part=1.&chapter=1.7.&article=1.) ↩︎
- Cal. Code Regs. 18 §1684.5(e) (2023). (https://www.cdtfa.ca.gov/taxes-and-fees/Reg1684-5-Text-2023-Final.pdf) ↩︎
- US Merchant Marketplace Facilitator FAQ. (n.d.). DoorDash Merchant Support. Retrieved September 19, 2023, from https://help.doordash.com/merchants/s/article/Marketplace-Facilitator-FAQ?language=en_US ↩︎
- Marketplace facilitator: frequently asked questions. (n.d.). Uber Eats for Merchants. Retrieved September 19, 2023, from https://merchants.ubereats.com/us/en/resources/learning-center/marketplace-facilitator/ ↩︎