Hustle and Bustle in the Marketplace
The marketplace is one of the more confusing aspects of sales tax. Many people assume a marketplace facilitator is a platform such as Amazon or eBay; however, in many states, the term marketplace facilitator is much more encompassing than what we usually think of as an online marketplace.
Some other online marketplaces besides Amazon and eBay are Etsy, Rakuten, Walmart.com, etc. However, in some states, even service companies like Airbnb, Grubhub, and Uber are considered marketplaces. The first step when selling property and/or services online is figuring out who the marketplace facilitator is if there even is one. Different states have different definitions of ‘marketplace facilitators’.
In Massachusetts, a marketplace facilitator is “a business that provides an electronic or physical forum, such as a shop, store, internet website, or dedicated software application, where businesses sell tangible personal property or services. Marketplaces engage in one or more of the following activities.” Furthermore, in Massachusetts delivery service fees are not taxable as long as they are stated separately from the fee for the tangible personal property or service being purchased.
In Georgia a marketplace facilitator is defined as “a person that contracts with a seller, in exchange for any form of consideration, to make available or facilitate a taxable retail sale by, directly or through any agreement or arrangement with another person; collecting, charging, processing, or otherwise similarly facilitating payment of such retail sale on behalf of the marketplace seller… such service may include, but is not limited to, promoting, marketing, advertising, taking orders or reservations for such retail sale.”
In this District of Columbia case, Instacart, a delivery service, processes purchases on behalf of a given grocery store and delivers groceries to the purchaser's front door. The District of Columbia’s definition of marketplace facilitator is similar to Georgia’s in that it includes all taxable sales and services. Based on the District of Columbia’s definition of marketplace facilitator, Instacart seems to be marketplace given that it “lists, advertises, stores, or processes orders for retail sales subject to sales tax for sale by marketplace sellers” (ie. grocery stores) “and directly or indirectly collects payment from a purchaser and remits payment to a marketplace seller…”
Unfortunately, some companies don’t realize that services are taxable in many states.
Whether it was a marketplace facilitator or not, Instacart was and is responsible for collecting tax on the delivery fees and other service fees. According to the complaint, the District of Columbia is looking to collect hundreds of thousands of dollars in back taxes on the delivery and service fees going back to 2014. That is a lot of money for not collecting tax on fees. To make matters worse, the District is looking for not just the regular civil penalty and interest, but additional penalties for negligence and or fraud.
So as a marketplace, Instacart needs to collect taxes on the purchases its customers make as well as its delivery fees. This being said, if they're collecting tax on the purchases then what are the responsibilities of the marketplace seller...in this case the grocery store? There are still a lot more questions than answers as states work through the issues surrounding marketplaces. Hopefully, states will work to correct potential problems and conflicts quickly, as many statutes were passed without thinking through all of the ramifications. We can only wait and see.
By: Priya Sorathia
This blog is intended for educational purposes and not as tax advice. Tax policies and procedures change frequently, so specific information, such as thresholds, rates, etc. included in this blog may have changed since it was originally published. Please request a consultation for more in-depth information.