State & Local Tax Blog

Sales Tax for Marketplace Resellers: What Are Your Compliance Obligations?

When it comes to sales tax liability, marketplace resellers are in a unique position. In this post, we review the challenges and obligations resellers face and how to get compliant.

After opening a new store with an online marketplace facilitator, resellers are inevitably confronted with a daunting question: what are my sales tax liabilities? The answer depends on a number of factors, including your nexus, facilitator laws and the sales tax legislation in every state.

Your Supply Chain

A business’s place in the supply chain has a huge influence on its sales tax liability. And the ecommerce supply chains of resellers can be complex. Most of them look something like this:

  • The reseller purchases a product from the wholesaler
  • The wholesaler sends the product to the prepper
  • The prepper ships the product to a marketplace facilitator warehouse
  • The reseller sells the product through the facilitator to a consumer
  • The facilitator ships the product to the consumer

In this scenario, who is responsible for collecting and remitting sales tax? And who pays for it? The answer is more complicated than you might think. Depending on the scenario, every party in this supply chain could be responsible for collecting or paying sales tax.

The wholesaler, reseller and facilitator could all have sales tax liability. And the tax will have to come out of the reseller or the consumer’s pocket – or both.

To hone in on the reseller’s liability, we’ll have to look at another factor that impacts your taxability: nexus.

Nexus & Taxability

Nexus is a link or connection to a state that allows that state to impose sales tax liability on you. There are two types of nexus.

Physical nexus is when your business has a physical presence in a particular state. This could be through business operations, employees or inventory in fulfillment centers. Fulfillment centers in particular are a nexus trigger that catches many marketplace sellers by surprise.

In contrast, economic nexus gives states the right to force out-of-state sellers to collect and remit sales and use tax if they meet or exceed a state’s economic threshold. In the last several years, this has dramatically increased the taxability of businesses, making them liable in states where they don’t have a physical presence.

The general rule of sales tax is if a business has nexus in a particular state, then the technically correct way for them to be compliant is to charge their customer for sales tax.

For resellers, this means there are situations where you could have to pay for sales tax for your inventory – which hurts margins – and then charge the customer for sales tax. So the same product would get taxed twice.

Obviously, this is not ideal for you, the reseller. Fortunately, there are two ways you can get around this.

Exemption Certificates

An exemption certificate is documentation that exempts a business from its sales tax liability. Wholesalers and resellers use them so a product is only taxed once in the supply chain.

Resellers can eliminate their ability to pay sales tax by providing their wholesaler with an exemption certificate. Effectively, this consolidates your liability so you only have to collect sales tax on final sales of the product.

An exemption certificate is only valid in one state. So you’ll have to repeat this process in every state you have nexus.

Both the reseller and the wholesaler need to maintain a copy of their exemption certificates on record. You may also have to upload them to your marketplace facilitator account. If a state audits you and you don’t have your certificates in order, they’ll assume you neglected your liability and penalize you accordingly.

Marketplace Facilitator Laws

After the Supreme Court introduced the concept of economic nexus, there was one big question that needed clarification: who is responsible for calculating, collecting and remitting tax for marketplace sales? Marketplace facilitators and marketplace sellers both thought the other should be responsible.

To clarify this issue, a vast majority of states have passed new legislation.

Marketplace facilitator laws require marketplace facilitators to collect and remit sales tax for marketplace sellers on their platform. Put simply, if you sell goods through marketplace facilitators like Amazon, Walmart and eBay, they are responsible for sales tax on your transactions.

So far, 43 states have passed laws requiring marketplace facilitators to collect and remit the tax.

For resellers, this is great news. It absolves you of any liability for collecting and remitting sales tax in the majority of states with sales tax.

Between exemption certificates and marketplace facilitator laws, you could have no sales tax liability for resale of products in most states.

However, when it comes to sales tax, there are always exceptions.

Sales Tax Exceptions

First, this only applies to economic nexus. If the facilitator stores your inventory in a fulfillment center, you’ll develop physical nexus and sales tax liability. If you have sales that aren’t made through a facilitator, you’ll be liable for them.

Second, there are a few states that don’t have marketplace facilitator laws: Kansas, Missouri and Florida. You can develop nexus and sales tax liability through marketplace sales in those states.

It’s also particularly easy to develop nexus in Florida.

Florida is a large and populace state, and some resellers find they can quickly conduct enough transactions to develop nexus there. It’s also likely that your inventory will eventually be stored in a warehouse in Florida. When that happens, you’ll immediately develop physical nexus in the state.

Before You Register

So far, we’ve established that resellers can use certificates and facilitator laws to minimize their sales tax liability. And that they can and likely will develop nexus in states without facilitator laws.

When this happens, you should register with the state and get compliant, right? Not necessarily.

It doesn’t always make sense to spend time and resources getting registered and compliant the moment you have nexus. Often the volume of sales and the revenue the state makes will be so low that it’s inconsequential.

Say, for example, you have physical nexus from inventory in Florida, but only $100 in sales. At an 8% tax rate, that’s only $20 in sales tax liability.

Hiring a firm to help with registrations will cost you at least hundreds or thousands of dollars. Doing this across multiple states just to collect maybe a few hundred dollars of tax often won’t make sense for your business. And the state auditors won’t spend thousands of dollars coming after you for twenty bucks.

Until your sales reach a couple thousand dollars per year in a given state, it’s usually immaterial to both you and the state’s department of revenue.

So, if you’ve developed sales tax liability but aren’t sure if you should register with the state, it’s a good idea to work with a specialist in state sales tax to evaluate your options.

Conclusion

Sales tax liability is a complex issue for marketplace resellers. The good news is there are strategies you can use to seriously minimize your liability and get compliant.

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