Published: July 20, 2020

Marketplace Facilitators


As states push forward in testing the boundaries of the Supreme Court’s decision in South Dakota v. Wayfair, Inc., the new front line has become marketplace facilitators. Most states have enacted their own marketplace facilitator laws, thus establishing the requirement for these marketplaces to collect sales tax on sales made through their platforms. However, confusion arises on who is and who isn’t considered a marketplace facilitator, as well as which taxes must be collected.


What is a marketplace facilitator?

In general, a marketplace facilitator uses its own physical or electronic marketplace to facilitate sales on behalf of third parties. The facilitator must collect the payment from the purchaser and remit the payment to the seller less the agreed-upon commission. The facilitator doesn’t have to collect the payment using their own systems. They can contract with other parties to facilitate the collection of the payment. Although the law applies to marketplace facilitators with physical marketplaces, the focus is typically on electronic marketplaces because their sellers are usually smaller, more decentralized, and have far less infrastructure to properly handle the increased sales tax obligations. Therefore, it’s often more difficult for a state to identify those sellers for potential assessment/collection. However, auctioneers, trade show operators, flea market operators, gift show operators, swap meet operators, and similar businesses should exercise caution to be sure they do not run afoul of the marketplace facilitator laws.


What isn’t a marketplace facilitator?

Marketplace facilitator laws typically attempt to exclude advertising services and payment processors from the definition of marketplace facilitator. This would include marketplace platforms like Craigslist that never have direct knowledge of a sale between a seller and a buyer, including information essential to collect sales tax like the sales price.

To complicate matters, some states are creating carveouts for certain types of online marketplaces. For example, Utah recently passed legislation to exclude sales by restaurants from their marketplace facilitator legislation. Although New York’s statute doesn’t specifically exclude restaurants, the New York Department of Taxation and Finance has issued guidance that sales of food are not retail sales, so the sale of food is not encompassed by the marketplace facilitator law. In both cases, companies like Grubhub, DoorDash, Uber Eats, and EatStreet are not required to collect those states’ sales taxes on behalf of the restaurants. 1


Who must collect sales tax?

Marketplace facilitators are subject to the same nexus laws as standalone sellers. Although the economic nexus provisions for sellers and marketplaces are often the same, there are several states that set different standards. If the marketplace facilitator has a physical presence in a state, such as a warehouse, an office, or an employee, the facilitator must collect tax in that state if it has a marketplace facilitator law or the state applies other rules, such as rules applicable to auctioneers, that require the facilitator to collect tax. A small number of states will allow the marketplace facilitator to agree to let the seller collect the tax if certain conditions are met. The conditions typically have to do with the size of the seller measured by total sales. It’s very important that marketplace facilitators work with the marketplace sellers to document which party is going to collect and remit the tax if it is an option in a state(s).

In some states, if the marketplace facilitator is required to collect the sales tax, the marketplace seller is not required to register and file sales tax returns if all of their sales are made through marketplaces that collect the tax on their behalf. Requiring the marketplace facilitator to collect the sales tax makes enforcement easier on the states because they can audit one taxpayer – the marketplace facilitator – rather than the numerous individual sellers making sales through the marketplace. The marketplace seller must still collect the tax on sales made outside of the marketplace. For example, if the seller makes sales through and its own website, the seller must collect tax on all sales made directly on its website. The seller must also collect the tax if it has nexus with a state but the marketplace facilitator does not have nexus. 


What taxes must be collected?

In most cases the marketplace facilitator legislation specifies that the taxes that must be collected are state and local level sales taxes. For example, South Carolina states that tax must be collected “in accordance with this chapter.” “This chapter” is the sales tax chapter so other taxes, such as the hospitality tax imposed by some local jurisdictions in South Carolina, do not need to be collected by the marketplace facilitator. Similarly, Virginia’s marketplace facilitator law requires facilitators to collect “the tax levied under this chapter.” Some cities in Virginia impose a meals tax. Because these meals taxes are imposed by city code and not the sales tax chapter of the state code, marketplace facilitators are not required to collect the local meals taxes.

In other states, such as North Carolina, marketplace facilitators are required to collect taxes that are not typically considered sales taxes. The taxes North Carolina requires marketplace facilitators collect include the scrap tire disposal tax, white goods disposal tax, dry-cleaning solvent tax, and the 911 service charge for prepaid wireless telecommunications service. In addition, the North Carolina General Assembly has recently proposed legislation that would require marketplace facilitators to collect certain taxes that are not administered by the Department of Revenue, including local meals and occupancy taxes. 


What about exempt sales?

When a sale to an exempt customer is made through a marketplace, how does the marketplace facilitator document the exempt sale? Who is responsible for collecting the necessary documentation? Since the marketplace facilitator is considered the seller of record for these sales, the facilitator should collect the necessary documentation to support the sale made without collecting the tax. This includes collecting resale or exemption certificates. Since the facilitator might not have much contact with the customer, the facilitator may need to ask the seller to obtain the documentation from the customer. The facilitator will also need to be cognizant of the rules regarding valid certificates and other issues such as drop-shipment rules.


Next Steps 

Marketplace facilitators face myriad challenges in today’s sales tax world. First, they must determine whether they are even subject to a state’s jurisdiction and if they meet that state’s definition of a marketplace facilitator. Since every state is a little different, this analysis must be performed in each state. For those states in which the business is considered a marketplace facilitator, it must determine which taxes they have to collect on behalf of their sellers. Once that analysis is complete, the marketplace facilitator must next analyze how it will calculate, bill, and collect the applicable taxes on behalf of their sellers, along with how it will file its returns and remit the taxes collected. Additionally, the marketplace facilitator should determine how to collect, verify, and store the documentation required to avoid collecting tax on sales to purchasers that claim an exemption.

The complexities around the marketplace facilitator laws are numerous and varied. Let Clarus Partners Advisors be your partner in helping your business navigate these provisions. Please click the “Contact Us” link at the top of the page or call us at (614) 362-2730 for more information.


1 Note that though not required in Utah or New York, these sellers likely collect the tax and pass it to the restaurant anyway for final remittance to the state.