What is a Marketplace?
Michael J. Fleming is the founder and president of Sales Tax and More, a full-service consulting and solutions firm with a passion for state tax. He is one of the country's leading authorities on sales tax issues such as consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers.
Michael is a renowned writer and speaker, and he regularly presents on webinars. He is also the host of the Sales Tax and More Podcast, where he shares his wisdom and learnings with his audience in order to help them navigate the tricky world of taxes.
In this episode…
What exactly is a marketplace? Well, it depends—every U.S. state defines a marketplace a bit differently. However, a common definition involves a person contracting with a seller, including compensation and the facilitation of a sale. Typically, there must also be additional services to make the marketplace complete.
For example, in the state of Georgia and many other states, if a person or company only collects compensation and does not provide any additional services, then it is not a marketplace. Examples include sites like Shopify, WooCommerce, or BigCommerce, as these allow an eCommerce seller to set up an online store and collect payment, but do not provide the services defined under a marketplace.
In this week's episode of the Sales Tax and More Podcast, Michael J. Fleming, the Founder of Sales Tax and More, sits down with his co-host Ellie Moffat to explain the ins and outs of marketplaces. They discuss the connection between economic nexus and marketplaces, the various caveats to selling on a marketplace, and the best practices for business owners selling on their own websites. Stay tuned.
Here’s a glimpse of what you’ll learn:
What exactly is a marketplace?
Michael J. Fleming shares examples of marketplaces and non-marketplaces
The importance of knowing what a marketplace is and whether or not you are selling on one
The connection between marketplaces and economic nexus
Michael discusses the various caveats to selling on marketplaces and deregistering for sales tax
Michael's advice to businesses selling on their own websites
Resources Mentioned in This Episode
Ellie Moffat's email: emoffat@salestaxandmore.com
Connect with Michael
Sponsor for This Episode
Sales Tax and More assists companies and their trusted advisors like CPAs with sales tax needs. They offer consulting and research, registrations, returns, and so much more. Over the years they have assisted thousands of sellers both foreign and domestic with their tax issues in the United States and in Canada.
To learn more about their services, visit https://www.salestaxandmore.com/.
Make sure to register and join the Sales Tax and More Webinar to get access to complex materials on tax in an easy-to-understand format.
Episode Transcript - Audio Version
[0:10] Intro: Welcome to Sales Tax and More, your go-to resource for all things state tax-related. Now here is your host, Michael Fleming.
[0:26] Mike: Hi, Mike Fleming here. I'm the founder of Sales Tax and More and today's co-host of the Sales Tax and More Podcast, where we talk about everybody's favorite subject, which is, of course, sales tax. Today, my co-host, Ellie Moffat and I, we're gonna be talking about a question that comes up in virtually all of our webinars. Now, whenever we start talking about marketplaces, which I had assumed everyone knows what a marketplace is, we get a lot of questions, what is a marketplace? So I guess, shame on me for assuming anything, but we figured we were going to have today's podcast be all about a marketplace. So before we start talking about marketplaces, or actually having Ellie interview me about marketplaces, let's turn it over to Ellie.
[1:18] Ellie: Hi everyone, Mike, really great to be here. I'm gonna do a quick introduction for Sales Tax and More, and then we can go ahead and get started. So Sales Tax and More is a full-service consulting and solutions firm. We have a really great team here of experienced tax professionals who are very dedicated to fulfilling any of your state tax and related needs. So we do a lot of sales tax returns, sales tax registration, sales tax audits, consulting, research, and like our name states, more. So if you have questions about our services, please reach out and ask we'll give you plenty of ways to do so in the years coming up. So if you are trying to fulfill any of your needs, let us know we'd love to help you. So Mike, as you were just mentioning, one of the most frequent questions we get when we do any of our next webinars is what is a marketplace? Without fail, there's always like, there's always just a handful of these questions in there. And so I thought I would ask you a couple of questions about marketplaces and state tax. Are you ready?
[2:21] Mike: I'm ready.
[2:22] Ellie: All right. So let's just start really basic here. Mike, what is a marketplace?
[2:29] Mike: Okay. I could start off with, it depends. But I'm going to go in a different direction. And while that seems like it's a basic question, and it is, it's certainly not a simple answer. And the reason why it's not a simple answer is because every state defines what a marketplace is, differently. One thing that all of the states say is that it involves a person that contracts with a seller, and you got to have some compensation in there, you got to be getting paid some way, and you facilitate the sale somehow. So that's the language that these states use. But, you know, what does facilitation mean? That's, that is the big question here. And that's, that's the part that varies widely by state. So most states break it down into two different concepts. And the first one, pretty easy to understand you got to be collecting the money. So lots of different ways to collect the money. That's fairly simple. But then you have to provide additional services. So it's, it's not just collecting money, it's providing additional services that helped the transaction to close. And these services vary widely by state. I'm going to read you what Georgia says. Georgia is one of the most comprehensive states out there. So let's take a look at this. Services may include, say may include but are not limited to promoting, marketing, advertising, taking orders or reservations for such retail sale, providing the physical or electronic infrastructure that brings purchases and marketplace sellers together for such retail sale or otherwise similarly, assisting the seller in making such retail sale or transmitting or otherwise similarly, communicating the offer and acceptance between the marketplace seller and the purchaser for or otherwise similarly, assisting the seller for such retail sales. That's a mouthful. A lot of things in there, some states, you know, are going to limit it to just tangible personal property when they're talking about these things. But you can see Georgia was very, very specific in here on a lot of different things. And that's because they tax or they consider the marketplace to not only be someone who's selling tangible personal property but perhaps services. Or they also Airbnb. So services like that grub hub, you know, food delivery services, and even ride share programs like Lyft or Uber. So it can be a lot of different things. What it's not, GA specifically excludes this, as most states do. If you're just merely collecting the payment, then that is not a marketplace. You've got to be providing one of these other services that I've just gone through.
[6:03] Ellie: So Mike, are you trying to make it confusing? Just because I thought it was easy, or?
[6:09] Mike: I thought about giving you a hard time about that. But no, it's just a tough question to answer. Perhaps I can give some examples. And that will better help clarify this. Maybe I should have done the examples first. So we've all shopped, on Amazon, I would assume by this point, or all know who Amazon is. Amazon is a marketplace. eBay is a marketplace, Walmart.com is a marketplace, Etsy and similar companies. They're all marketplaces. Now, what are not marketplaces are sites like Shopify, or WooCommerce, or Big Commerce, or your own website, however, you've got it posted. These are not marketplaces. And the difference between the two. You know, companies like Shopify and WooCommerce, big commerce, they give you the ability to set up a store. And, you know, they are collecting the payment, but they're not providing any of these other services like we've talked about, whereas Amazon is accepting the order and relaying the order. And they are, you know, if you go to a site like Amazon, you can type something in, it's going to give you a list of all the sellers that are offering that product, same thing on any of these other marketplaces. But you can't do that on sites like Shopify, WooCommerce, or big commerce. So the big difference is, is being able to go to that marketplace and being able to find out everything that they have for sale based on a search feature. At least, that's the way I simplify it. I hope that's making it a little bit easier. Because I'm going to throw you a curveball. And we said, not your own website. However, what we're finding out is that many companies, especially those selling software, or software as a service, they're finding out that their business models they're putting together nowadays could actually fit. Or they're offering services over the internet, these could actually fit the definition of a marketplace. So we have a lot of companies that wake up one morning and all of a sudden say, oh, am I a marketplace? And we are providing a lot of guidance. Sometimes we say no, you're definitely not a marketplace. Other times we say yeah, we think that you could be considered a marketplace. So while we, you know, it's easy to think of these marketplaces as just Amazon or just eBay or, you know, Airbnb, or companies like this could actually be our own websites. So in general, if you're just selling tangible personal property, you're not contracting with anybody else to sell their products and services, your own website is fine. But if you've got other people involved on your website, chances are you might be a marketplace.
[9:20] Ellie: Well, thank you so, so much, it does make it a little bit easier to understand. So I think the next question that is important to ask here, Mike, why is knowing what a marketplace is so important?
[9:38] Mike: Well, I think this question is easier to understand. So states have players past what we call the marketplace facilitator laws. And what that simply means is the state is now requiring third parties to collect and remit the sales tax on behalf of third-party sellers. Prior to this, the third-party seller was if they had Nexus and was responsible for collecting and remitting the tax. So the reason why this is such a good thing for these marketplace sellers if you're only selling in a marketplace. Is that once the marketplace begins collecting the tax, you no longer have a responsibility for that sale, it becomes a sale of the marketplace, for sales tax purposes, income tax purposes, a whole other story. But for sales tax purposes, you're not responsible anymore. And all the states except for Florida, Kansas, and Missouri have implemented these marketplace collection statutes, even Alaska, on their local taxes have, you know, said that the marketplaces have to collect. So if you're only selling on a marketplace, this is great, because now, you can actually de-register in states once the marketplace begins collecting. Or if you're not registered, you no longer have to worry about that sales tax. So very, very good. If you're only selling on a marketplace, if you're not selling on a marketplace only, I mean, maybe you're selling on Amazon and your own website, or Amazon and Shopify. Well, those are selling on a marketplace and not selling in a marketplace. And now you still may have to continue being registered. So that's why it's so good. It provides such relief to a lot of these smaller sellers out there and even larger sellers who are selling only on marketplaces.
[11:47] Ellie: So, Mike, I have to ask, Is there any other reason for knowing what a marketplace is? No reason I left unturned here.
[11:57] Mike: Yeah, and actually, I should have mentioned this. But this is probably one of the reasons why we get this question so much. Since the Wayfair case, we have economic nexus. An economic nexus simply means that this link or connection, that's what the nexus means, can now be created by having just a certain level of sales into a state or a certain number of transactions into a state. And some states include marketplace transactions, but many states exclude marketplace transactions. So when you figure out if you're over the thresholds or not, you get to know which does which and by the way, we have a great site on a chart we'll link to, but it tells you who includes it, and who doesn't include it. So that's a very, very important thing to know. Because when you're figuring out if you should register or not register if most of your sales are through marketplaces, and they don't include this, well, all of a sudden, you are not, you don't have nexus in the state, because those marketplace sales are excluded, you don't count them in your threshold calculations. Very, very important to realize this, because most of the software companies out there, these software companies who, you know, say I got a great nexus tool, it's not such a great tool, most of them, they're going to give you a lot of false positives, because they're not getting granular enough, and they're not excluding sales. So you're going out and getting registered in more states or your clients are going out and getting registered in more states than they actually need to. That chart that Ellie's going to link with this podcast here. It's a great tool, it's really going to help you out and you know, if you want to use a software company, great, but go ahead and check their recommendations, go ahead and make sure that you actually do have nexus once you exclude all the different types of sales, some states, you know, exclude sales for resale, some states exclude exempt sales. Most of the time, this software is just looking at total sales. So lots of exemptions in the chart will really help you on that. But one of the biggest exemptions is these marketplace sales.
[14:30] Ellie: So Mike, if I'm hearing and understanding you correctly, this does sound like great news. Are there any caveats?
[14:39] Mike: Well, of course, you know Ellie, we're talking about sales tax here. They're always caveats.
[14:43] Ellie: Always every single time.
[14:46] Mike: Alright, so one of the biggest things I see is people only hear what they want to hear. So when we're talking about people who are selling on marketplaces can now deregister We see a lot of people who are trying to deregister. And they have tons of sales on these other platforms like, you know, Shopify or eBay, excuse me, Shopify, or WooCommerce, or their own website. eBay is a marketplace. So if you're selling on different channels, you know, some marketplaces, and some are not marketplaces, you know, you've got to look at materiality, we got to look at, you know, the thresholds, but there's a good chance you need to get registered or stay registered if you're selling on more than just a marketplace. So it can get a little confusing in there. If you're just selling on marketplaces, then you can deregister you, you're not worried about sales tax going forward. Once the state passes, these collection laws and the marketplaces actually have been collected but you gotta make sure that that's all you're doing. So that's number one. Number two is the marketplaces don't pay your income tax. And income tax nexus sometimes is the same as sales tax nexus, sometimes it's different. In a lot of these states, even though you do register for sales tax, you still have a responsibility to pay their income tax. Again, you know, sometimes people don't look at this, because the exposure just isn't material. But for any of the larger sellers out there, income tax is going to be a much, much bigger problem going forward. And even just if you're selling on Amazon or one of these other, you know, e-commerce marketplaces, I don't… I think we all have to start paying more attention to income tax going forward. A couple of reasons for it. But basically, the states are just getting a lot more aggressive in pursuing income tax. And then, you know, you don't want to deregister in Florida, Kansas, and Missouri. Amazon has warehouses in those states. So if you're already registered there, you know, these states have not yet passed marketplace collection laws, I thought they were going to pass them this year. But then we had the COVID-19, you know closures, and even the state legislature is closed down. So that's a big issue. You don't want to deregister in your home state that can create lots of problems. So that's a big caveat. And anywhere that you're, you know, California, you have to be registered in California in order to issue a valid resale certificate. So anywhere that your vendors are asking you for resale certificates, you got to look and say, okay, can I give them some type of alternative documentation? Or do I need to stay registered in this state? So I can issue a valid resale certificate? Or can I ask them to ship to another state, other than California, or similar type situations?
[18:12] So those are some of the big caveats. And then, you know, a lot of these software companies out there and even some, you know, other providers, you know, they make their money when they're doing your sales tax returns. A lot of them are saying, hey, even after, you know, the marketplace, starts collecting the tax, you need to continue filing returns, and there are zero dollar returns, that's how they make their money. So they got their thumb on the scale a little bit there. I say, you know, first of all, the states, a lot of the states say, we don't want to do extra work, we don't want to have to process these zero dollar returns. And most of it, the penalties and interest are going to be related to the amount of tax you owe. So if you don't have a responsibility to collect tax, you know, who cares? So, even in the states that say, yes, you should still be registered, then I think, you know, we got to use some common sense, you know, if the, if it's these sales, are now the responsibility of the marketplaces, I think that we can go ahead and deregister. Now, if you are, are selling on your own website, a lot of times we see someone has, you know, a couple of million dollars in sales in their Amazon business, but only a couple thousand dollars of sales a year on their own website. I think we need to use common sense here too because technically, in a lot of these states, you should still be collecting the tax on your own website and remitting it to the state, but I went through one the other day, and their current provider told them Oh, yeah, you need to stay registered here, I think that they were turning in $240 worth of tax spread out amongst all of the states, they were registered. To me, that just doesn't make sense. I mean, you're better off deregistering. And, you know, the state doesn't say you can do that, the state says you should stay registered in-state collecting. But all of the penalties and interest and back tax, you know, it's not material. So if any of these states find you, you would be better off waiting for them to come to look for you to pay them back tax, the penalty, and interest out of your pocket, because it's cheaper than the compliance costs. So I'm a little bit different here, I think that we have to take the cost of compliance into account. And, you know, when we're figuring out what materiality is, just because the state says you shouldn't do something, doesn't mean it makes good business sense to do. So the flip side of that is, if your sales are material, I think that this is something you need to do sooner rather than later. Because the states are just getting a lot more aggressive. And, you know, the higher your sales get, the more material they are, they really could leave a mark, they sometimes they could actually put you out of business. So material, sales get registered, when they're below a certain level. They don't worry about it.
[21:41] Ellie: Thank you for all of that information. I just want to throw one more thing out there to you. Do you have anything to add to this?
[21:51] Mike: I'd really just want to drive the point home. If someone's telling you you need to continue filing, that's pretty much hogwash. Give us a call, we'll give you the straight in there want it sometimes, you know, especially if you're selling on, you know more than a marketplace, you're going to want to continue filing. But most of the time, if you're just selling on a marketplace with the caveats that I gave you before, it's time to deregister Stop worrying about sales tax going forward. There are some states that California is still trying to the procedure for the back sales tax, but not on the sales tax going forward.
[22:30] Ellie: Thank you so much. Again, Mike. And I just want to put out there that again, we offer a lot of sales tax services here. So if you have questions, if you have needs, please reach out and talk to us about it. We'd love to give you all the information you're looking for. So you can reach out to me directly with those questions about our services. My email is emoffat@salestaxandmore.com. Or just visit our website, wwww.salestaxandmore.com. In addition to the services that we offer, we have a long list of resources for you on our website as well. We have a whole series of webinars. We have this podcast, we have a bunch of charts on our website that are free for you to use, as well as our paid portion of our website as well. So thank you, everyone, and yeah, thank you for joining us.
[23:24] Mike: Yes, thank you for joining us for this podcast where we did talk about marketplaces and state tax. And we do hope that you join us on an upcoming webinar, excuse me, webinars as well as podcasts. And hope that y'all have a great day. Thank you.
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