Platforms: The Sequel

Walter Hellerstein

John A. Swain

Jonathan E. Maddison

 

 

 

 

 

 

 

Walter Hellerstein is the Distinguished Research Professor Emeritus and the Francis Shackelford Professor of Taxation Emeritus at the University of Georgia Law School and chair of the State Tax Notes Advisory Board. John A. Swain is the Chester H. Smith Professor of Law at the James E. Rogers College of Law, University of Arizona. Jonathan E. Maddison is an associate at Reed Smith LLP in Philadelphia. All errors or omissions in the article are those of the authors.

In this article, the authors discuss recent developments on sales and use tax reporting and collection obligations imposed on platforms that facilitate taxable sales of tangible personal property or services.

I. Introduction

A little more than a year ago, we reported on “recent state-tax-related platform developments in this rapidly evolving universe.”¹ A lot has changed in the state tax world over the past year, but one thing that has not is the significance of platforms. Despite the continuing (and, indeed, increasing) significance of platforms in connection with enforcement of taxes on online sales, the U.S. Supreme Court’s decision in South Dakota v. Wayfair Inc. ² fundamentally changed the constitutional premises underlying the original design of state platform legislation.³ These changes are already having a dramatic impact on the structure of preexisting legislation and of platform legislation that has been adopted and proposed following Wayfair. In this sequel to our earlier article, we once again report on “developments in this rapidly evolving universe.”

II. Marketplace Platform Legislation

A. Overview of Platform Legislation

As the following discussion reveals, the precise details and operation of state platform regimes vary from state to state. Despite such variations, it may be helpful at the outset to provide an overview of the general features of state platform legislation. Viewed in most general terms, state platform legislation is directed at three categories of actors: (1) the platforms themselves, that is, the entities that operate the marketplaces (often called “marketplace providers” or “marketplace facilitators”); (2) referrers, those who bring buyers and sellers together to consummate a sale over a platform but do not collect receipts from the buyer; and (3) remote sellers, including those who sell over platforms, sometimes called “marketplace sellers.” These categories of actors are not airtight. While platforms typically are online marketplaces⁴ that list third parties’ products for sale on their websites, in many circumstances platforms not only facilitate sales of third parties’ products but also sell products of their own. Referrers may operate as marketplace platforms or as sellers in their own right regarding some of the transactions in which they engage, potentially triggering different reporting or collection obligations for specified classes of transactions. Remote sellers, as just noted, may or may not sell over platforms, and that distinction can be critical in determining their exposure to tax collection or reporting obligations. Platform legislation raises the following basic questions regarding the platform-related obligations imposed on platforms, referrers, and marketplace sellers.⁵

1. Does the law impose a collection or reporting obligation on the actor in question? Does the actor have a choice between the two?

As a matter of logic, one might assume that platform legislation would generally impose a tax collection obligation on platform-related actors. But as Justice Oliver Wendell Holmes wisely told us many years ago, “a page of history is worth a volume of logic.”⁶ The pertinent history is that before the U.S. Supreme Court’s decision in Wayfair, courts drew a distinction between states’ constitutional power to impose tax collection obligations and their constitutional power to impose tax reporting obligations.⁷ Physical presence was required (under Quill⁸) for the imposition of tax collection obligations, but not for the imposition of tax reporting obligations. State platform legislation adopted before the Wayfair decision often reflects that distinction, which contributes to its complexity.

In the future, however, one would think that the days of information notice and reporting regimes will be numbered, at least for the platform-related actors that exceed the economic nexus thresholds endorsed by Wayfair. These report-or-collect regimes were designed to induce remote out-of-state actors “voluntarily” to collect and remit tax notwithstanding their protection from required collection obligations under Quill, because the burden of reporting would exceed the burden of collecting. But without such protection in the post-Wayfair world, states can now compel those actors to collect the tax, thereby minimizing the need for states to adopt reporting and notice regimes as a mechanism for inducing collection. Indeed, the two platform laws enacted post-Wayfair do not impose reporting and notice obligations on platforms — they simply require platforms to collect tax.

That being said, notice and reporting regimes will remain relevant to the extent they apply to persons who are not required to collect tax whether as a matter of state law or in light of whatever constitutional distinction may be drawn in the future between the power to impose tax collection as distinguished from tax reporting obligations. For example, these report-or-collect regimes may apply to persons falling beneath the state’s quantitative nexus thresholds as well as to referrers (defined above and considered in detail below), who are sometimes required to comply with notice and reporting requirements even though they are not treated as taxpayers or tax collectors. There may also be “legacy” regimes that continue to provide platforms with an “election” to either collect tax or comply with notice and reporting requirements.

2. Does the law extend to all taxable transactions or only to sales of tangible personal property?

Although state sales and use taxes have historically been confined largely to sales of tangible personal property, marketplace platforms facilitate sales not only of tangible personal property, but also of an increasing volume of services and “digital products,”⁹ many of which are subject to tax. The platform legislation enacted in some states applies broadly to all taxable transactions, whereas other states’ platform laws are limited to tangible personal property. From a practical perspective, requiring platforms to collect tax on sales of taxable services and digital products may create burdens for platforms in determining what services and digital products are subject to tax in each state, as well as determining the state in which such services or digital products are sold.¹⁰

3. Is there a sales, transaction, or similar threshold for determining the point at which a platform-related actor acquires a tax collection or reporting obligation?

Virtually all platform legislation to date includes a threshold or thresholds, and the trend is likely to continue in light of the Court’s explicit reference to the existence of thresholds as one of the reasons for sustaining the remote seller collection statute at issue in Wayfair. Thus, the Court observed that “South Dakota’s tax system includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce,” among them “a safe harbor to those who transact only limited business in South Dakota.”¹¹ Indeed, absent a reasonable threshold, a state might well be found to lack sufficient “economic or virtual contacts” with a remote seller (and presumably, a remote platform) that the Court identified as essential to a finding of “substantial nexus.”¹²

B. States’ Platform Legislation

With this overview of platform legislation in mind, we turn our attention to the specific platform-related laws adopted in various states, as well as the National Conference of State Legislatures’ draft model legislation. Table 1 provides a state-by-state summary of enacted platform legislation, which is discussed in greater detail below.

1. Alabama

In 2015 Alabama adopted the Simplified Seller Use Tax Remittance Act, which at the time of its adoption, constituted a “voluntary” tax regime designed to ease the compliance burdens of nonphysically present sellers (before the U.S. Supreme Court’s repudiation of the physical presence nexus standard in Wayfair).¹³ Benefits of participating in the simplified system include the ability to collect and remit tax at a single statewide rate and the right to retain 2 percent of the collected tax on the seller’s first $400,000 of taxable Alabama sales.¹⁴ Effective January 1, 2019, marketplace facilitators making or facilitating Alabama retail sales of $250,000 or more in the prior 12 months must elect either to participate in this regime or to comply with specified tax notice and reporting requirements (generally of the same variety as those upheld in Direct Marketing and imposed by other platform legislation).¹⁵

In general, a “marketplace facilitator” is a “person that contracts with marketplace sellers[¹⁶] to facilitate . . . the sale of the marketplace seller’s products through a physical or electronic marketplace.”¹⁷ However, the particulars of the Alabama definition, which are similar to those included in the Washington platform legislation,¹⁸ cast a very broad net. For example, a person who contracts with sellers to “list[ ] products for sale” and who “operat[es] the infrastructure . . . that brings purchasers and marketplace sellers together” would appear to qualify as a marketplace facilitator even if the person is not involved in the collection or processing of payments or the fulfillment of orders.¹⁹ In some aspects, this broad definition of marketplace facilitator may incorporate a subset of persons acting as “referrers” as that term is defined by most other states that have adopted platform legislation.²⁰ Similar concerns were raised by the Electronic Transactions Association in public comments provided to the Multistate Tax Commission’s Wayfair Implementation and Marketplace Facilitator Work Group. Specifically, this association expressed concern that the broad definition of “marketplace facilitator” may “inadvertently be construed to include businesses that are only payment processors.”²¹

Marketplace facilitators electing to participate in the simplified program must collect and remit tax on all sales made through their marketplace by marketplace sellers.²² The treatment of sales made by marketplace sellers on their own behalf, however, appears to be governed by the regime applicable to persons making Alabama sales generally.²³ Thus, marketplace facilitators with physical presence in Alabama apparently are required to report under Alabama’s general (“non-simplified”) sales and use tax regime, while non-physically present marketplace facilitators must collect and remit tax on their own sales under either Alabama’s simplified regime or its traditional regime.²⁴

Finally, the Alabama legislation provides that “[n]o class action may be brought against a marketplace facilitator in any court of this state on behalf of customers for an overpayment of simplified sellers use tax collected and remitted on sales facilitated by the marketplace facilitator.”²⁵

2. Connecticut

Connecticut enacted platform legislation, effective December 1, 2018, that treats a “marketplace facilitator” as a retailer subject to tax collection and remittance obligations for taxable items sold on its forum, including taxable services and digital products.²⁶ A “marketplace facilitator” is a person who, for consideration, facilitates retail sales of at least $250,000 during the prior 12-month period by providing a forum for marketplace sellers and that, directly or indirectly through agreements or arrangements with third parties, collects customer receipts and remits payment to marketplace sellers.²⁷

As a consequence, “marketplace sellers” who hold valid sales and use tax permits are not required to collect or remit tax on sales facilitated by a marketplace facilitator with whom they have a contract providing (or a certificate of collection certifying) that the facilitator will collect and remit tax on behalf of the seller and for which the failure to collect the proper amount of tax was not the result of improper information that the marketplace seller supplied.²⁸ A “marketplace seller” is any person “who has an agreement with a marketplace facilitator regarding retail sales of such person, regardless of whether or not such person is required to obtain a [sales tax] permit.”²⁹

The Connecticut statute also requires “referrers” to comply with specified tax notice and reporting requirements (generally of the same variety as those upheld in Direct Marketing and commonly imposed by other platform legislation).³⁰ A “referrer” is a person who does all of the following: (1) “agrees with a seller to list or advertise for sale one or more items of tangible personal property by any means . . . provided such listing or advertisement includes the seller’s shipping terms or a statement of whether the seller collects sales tax”; (2) “offers a comparison of similar products offered by multiple sellers”; (3) receives consideration “in excess of [$125,000] during the prior twelve-month period . . . for such listings or advertisements”;³¹ (4) “refers, via telephone, Internet web site link or other means, a potential customer to a seller or an affiliated person of a seller”; and (5) “does not collect payments from the customer for the seller.”³²

3. Iowa

Effective January 1, 2019, a “marketplace facilitator” that makes or facilitates 200 or more separate transactions or $100,000 or more in Iowa sales in the immediately preceding or current calendar year is required to collect and remit tax on all taxable sales that they either make on their own behalf or facilitate.³³ Subject to the same thresholds, “referrers”³⁴ will, in effect, have the option to collect and remit tax on referred sales or comply with specified tax notice and reporting requirements (generally of the same variety as those upheld in Direct Marketing and commonly imposed by other platform legislation).³⁵ A “marketplace facilitator” is broadly defined to include a person who engages in a variety of facilitation activities and would include, for example, a person who “lists” the products of a marketplace seller³⁶ in its marketplace and “charges listing fees,” regardless of whether the person is involved in payment processing or order fulfillment.³⁷ However, the statute does provide liability relief in instances when the marketplace facilitator can “demonstrate[ ] to the satisfaction of the department that the marketplace facilitator has made a reasonable effort to obtain accurate information from the marketplace seller about a retail sale and that the failure to collect and remit the correct tax was due to incorrect information provided to the marketplace facilitator.”³⁸

The Iowa statute also provides that marketplace facilitators and referrers “are deemed to be [the] agents” of the marketplace sellers using their platform or referral services.³⁹ The intent of this provision is not entirely clear, but under the now overruled Quill physical presence test, the physical presence of an agent was a common means by which taxing authorities could assert jurisdiction over otherwise non-physically present sellers.⁴⁰ Importantly though, a state’s characterization of marketplace facilitators and referrers as “agents” of marketplace sellers cannot resolve the question whether a marketplace seller has a physical presence in a constitutional sense, because the state, by its mere statutory say-so, cannot resolve issues of constitutional law. Nevertheless, in light of the Court’s repudiation of the physical presence rule in the Wayfair decision, this provision no longer has the constitutional significance the legislature thought it once did.

4. Minnesota

In what is generally heralded as “the nation’s first marketplace nexus provision,”⁴¹ Minnesota enacted legislation in 2017 that imposes tax collection obligations on or attributable to “marketplace providers.”⁴² The legislation accomplishes this objective by amending the definition of a “retailer maintaining a place of business in this state,” on which the statute imposes tax collection obligations, to include a “retailer having a representative, including . . . a marketplace provider . . . operating in this state.”⁴³ A retailer is represented by a marketplace provider “if the retailer makes sales in this state facilitated by a marketplace provider that maintains a place of business in this state.”⁴⁴ A “marketplace provider” is “any person who facilitates a retail sale by a retailer by”:

A marketplace provider must collect sales and use tax on all “facilitated sales” for a retailer unless the retailer has registered to collect sales and use tax.⁴⁶ This collection obligation applies not only to sales of tangible personal property, but also to sales of digital products and taxable services.⁴⁷

Although Minnesota does not adopt a sales threshold to determine when a marketplace provider must collect and remit tax for its facilitated sales, it imposes tax collection obligations only on “a marketplace provider . . . operating in this state”⁴⁸ and only “[t]o the extent allowed by the United States Constitution and the laws of the United States.”⁴⁹ Thus, under the Wayfair decision, any marketplace provider who “avails itself of the substantial privilege of carrying on business”⁵⁰ in Minnesota will be subject to a tax collection obligation.

5. New Jersey

New Jersey adopted its platform statute following the Court’s decision in Wayfair.⁵¹ As a result, New Jersey had little incentive to provide a report-or-collect option to platforms and simply imposed a mandatory collection obligation on persons who facilitate sales of marketplace sellers. Like many other states, New Jersey expansively defines “marketplace facilitators” to include persons who “directly or indirectly” engage in a broad variety of activities, including a person who “transmit[s] or otherwise communicat[es] an offer or acceptance of a retail sale,” “[p]rovides or offers fulfillment or storage services for a marketplace seller,” “[b]rands or otherwise identifies sales as those of the marketplace facilitator,” “[c]ollects the sales price of a retail sale,” “[p]rovides payment processing services for a retail sale,” or “charges, collects, or otherwise receives selling fees, listing fees, referral fees, closing fees, fees for inserting or making available [products and services] on a marketplace, or other consideration from the facilitation of a retail sale.”⁵²

A “marketplace seller” is defined to include a seller making sales through a marketplace “even if such seller would not have been required to collect and pay the tax imposed . . . had the sale not been made through such marketplace.”⁵³ Thus, marketplace facilitators are required to collect tax on the facilitated sales of all sellers, including those whose aggregate sales do not exceed the state’s $100,000 annual sales volume or 200 annual transactions thresholds.⁵⁴ Interestingly, there is no express aggregate sales volume or transactional threshold for marketplace facilitators. In light of Wayfair, however, it is possible, but by no means certain, that the New Jersey taxing authority would construe the thresholds to apply to the aggregate facilitated sales of marketplace facilitators as well.

The New Jersey statute provides liability relief if a marketplace facilitator “can demonstrate to the satisfaction of the” taxing authority that it has made “a reasonable effort to obtain accurate information from the marketplace seller” and “that the failure to collect and pay the correct amount of tax . . . was due to incorrect information provided . . . by the marketplace seller.”⁵⁵

6. Oklahoma

In April 2018, two months before Wayfair was handed down, Oklahoma adopted legislation requiring marketplace facilitators,⁵⁶ referrers,⁵⁷ and remote sellers⁵⁸ with aggregate Oklahoma taxable sales of tangible personal property of at least $10,000 during the preceding 12-month period to elect either to collect and remit tax or to comply with tax notice and reporting requirements (generally of the same variety as those upheld in prior litigation when a distinction was drawn between the constitutional nexus requirements for collection requirements and reporting requirements and commonly employed in other pre-Wayfair platform legislation).⁵⁹ Failure to make the election is deemed to be an election to comply with the tax notice and reporting requirements.⁶⁰ The first election was required by July 1, 2018, and by June 30 annually thereafter.⁶¹

The election to report rather than to collect tax is carefully circumscribed to apply only to circumstances in which there is no jurisdiction to require tax collection (at least under pre-Wayfair standards).⁶² Thus, the statute generally leaves undisturbed the tax obligations of sellers that “maintain a place of business in this state”⁶³ under pre-Wayfair standards, while encouraging collection of tax on sales made by remote sellers. We would not be surprised, however, if Oklahoma soon amended its definition of maintaining a place of business in this state, which generally looks to physical presence,⁶⁴ to embrace the “economic and virtual contacts” identified in Wayfair as sufficient to require remote sellers (and, by implication, remote platforms) to collect taxes due on online sales to in-state customers. Indeed, this observation would apply to the existing sales tax regimes of many other states as well.

Oklahoma’s election for referrers is worthy of additional comment. A referrer’s election pertains only to sales:

• directly resulting from a referral of a purchaser to a marketplace seller that does not maintain a place of business in Oklahoma;

• directly resulting from a referral of a purchaser to a remote seller; and

• of the referrer’s own products if the referrer does not maintain a place of business in Oklahoma.⁶⁵

The statute is somewhat unclear about whether the election applies to sales other than sales of tangible personal property. While selling or facilitating the sale of tangible personal property is a prerequisite to qualifying as a marketplace facilitator or a remote seller,⁶⁶ the more ambiguous term “product” is used in connection with defining referrers.⁶⁷ Moreover, the transactions to which an election applies are described broadly as “sales,”⁶⁸ which might include sales of taxable services and intangibles that are also made by marketplace facilitators, referrers, and remote sellers.

Finally, while preserving purchasers’ right to seek a refund under other provisions of the Oklahoma tax statutes, the Oklahoma platform statute bars purchasers from bringing a class action lawsuit against a marketplace facilitator or referrer that is “in any way related” to an overpayment of tax collected by the facilitator or referrer.⁶⁹

7. Pennsylvania

On October 30, 2017, Pennsylvania enacted its version of platform legislation effective March 1, 2018.⁷⁰ Pennsylvania’s platform legislation bears striking resemblance to legislation adopted by Washington,⁷¹ with several notable differences, including Pennsylvania’s limitation of its legislation to sales of tangible personal property.⁷² The legislation requires “marketplace facilitators” and “referrers”⁷³ with $10,000 in aggregate sales of tangible personal property delivered to locations in Pennsylvania to file an election with the department of revenue either to (1) collect and remit sales tax on sales of tangible personal property within Pennsylvania, or (2) comply with tax notice and reporting requirements (generally of the same variety as those upheld in Direct Marketing and imposed by other platform legislation).⁷⁴

A “marketplace facilitator” is defined as a “person that facilitates the sale at retail of tangible personal property.”⁷⁵ A person “facilitates” a sale at retail if the person or an affiliated person:

• lists or advertises tangible personal property for sale at retail in any forum;⁷⁶ and

• either directly or indirectly through agreements or arrangements with third parties collects the payment from the purchaser and transmits the payment to the person selling the property.⁷⁷

The definition of marketplace facilitator does not specify for whom the marketplace facilitator facilitates sales of tangible personal property. However, the statute answers this question by including a definition of “marketplace seller.”⁷⁸ A “marketplace seller” is defined as “a person that has an agreement with a marketplace facilitator pursuant to which the marketplace facilitator facilitates sales for the person.”⁷⁹

A “referrer” is defined as “a person, other than a person engaging in the business of printing or publishing a newspaper, that, pursuant to an agreement or arrangement with a marketplace seller or remote seller, does the following:

• agrees to list or advertise for sale at retail one or more products of the marketplace seller or remote seller in a physical or electronic medium;

• receives consideration from the marketplace seller or remote seller from the sale offered in the listing or advertisement;

• transfers by telecommunications, Internet link or other means, a purchaser to a marketplace seller, remote seller, or affiliated person to complete a sale; [and]

• does not collect a receipt from the purchaser for the sale.”⁸⁰

The statute explicitly excludes from the definition of referrer a person that “(1) provides Internet advertising services; and (2) does not provide the marketplace seller’s or remote seller’s shipping terms or advertise whether a marketplace seller or remote seller collects a sales or use tax.”⁸¹

As noted above, the Pennsylvania platform legislation bears striking resemblance to Washington’s platform legislation and thus raises similar issues.⁸² Like Washington’s legislation, Pennsylvania’s legislation limits the availability of the “election” for marketplace facilitators to (1) facilitated sales “made by or on behalf of” marketplace sellers not maintaining a place of business in the state, and (2) the marketplace facilitators’ own sales if the marketplace facilitator does not maintain a place of business in the state.⁸³

Because Pennsylvania defines “maintaining a place of business” in the state to include “[h]aving any contact” that “would allow the [state] to require a person to collect and remit tax under the Constitution of the United States,”⁸⁴ in the wake of Wayfair the obligation of a marketplace facilitator to report sales of marketplace sellers may be significantly limited, because many marketplace sellers will now be deemed to be maintaining a place of business in the state.

8. Rhode Island

Although it does not impose tax collection obligations on online marketplace platforms, effective January 15, 2018, Rhode Island requires “retail sale facilitators” to provide state tax authorities with:

• a list of names and addresses of the retailers for whom, during the prior calendar year, the retail sale facilitator collected Rhode Island sales and use tax; and

• a list of names and addresses of the retailers who, during the prior calendar year, used the retail sale facilitator to serve in-state customers but for whom the retail sale facilitator did not collect Rhode Island sales and use tax.⁸⁵

The obligation applies only to retail sales facilitators that either have gross revenue of at least $100,000 “from the sale” of property or services delivered into the state or have “sold” such property or services in at least 200 separate transactions.⁸⁶ Also, there is no obligation regarding facilitated sales by retailers that are registered with the state or have a Rhode Island or a Streamlined Sales and Use Tax Agreement exemption certificate.⁸⁷

A retail sale facilitator is any person that facilitates a sale by a retailer by engaging in the following types of activities:

• using in-state software to make sales at retail of tangible personal property, prewritten computer software delivered electronically or by load and leave, and/or taxable services; or

• contracting or otherwise agreeing with a retailer to list and/or advertise for sale tangible personal property, prewritten computer software delivered electronically or by load and leave, and/or taxable services in any forum, including, but not limited to, an Internet website; and

• either directly or indirectly through agreements or arrangements with third parties, collecting payments from the in-state customer and transmitting those payments to a retailer.⁸⁸

The Rhode Island legislation also imposes tax reporting obligations on “referrers,” subject to the same thresholds and exceptions applicable to retail sale facilitators.⁸⁹ Effective July 15, 2017, whenever a referrer receives more than $10,000 from fees, commissions, or other compensation paid to it by retailers with whom it has a contract or agreement to list or advertise tangible personal property, prewritten software computer software, or taxable services, the referrer must provide written notice to all such retailers that their sales may be subject to the state’s sales and use tax.⁹⁰ “Referrers” are defined as every person who: 

• contracts or otherwise agrees with a retailer to list and/or advertise the in-state sale of tangible personal property, prewritten computer software delivered electronically or by load and leave, and/or taxable services in any forum, including, but not limited to, an Internet website;

• receives a fee, commission, and/or other consideration from a retailer for the listing and/or advertisement;

• transfers, via in-state software, Internet link, or otherwise, an in-state customer to the retailer or the retailer’s employee, affiliate, or website to complete a purchase; and

• does not collect payments from the in-state customer for the transaction.⁹¹

Finally, the Rhode Island legislation imposes tax collection or reporting obligations on “non-collecting retailers,” subject to the same thresholds applicable to retail sale facilitators and referrers.⁹² A non-collecting retailer is a person who engages in any of a long list of activities, including “[e]ngaging in, either directly or indirectly through a referrer, retail sale facilitator, or other third party, direct response marketing targeted at in-state customers.”⁹³ The portion of the Rhode Island platform legislation directed at non-collecting retailers was plainly designed to present remote sellers that had formerly been protected by Quill’s physical presence rule, before its abrogation by Wayfair, with the Hobson’s choice of either (1) collecting a tax that could not be constitutionally compelled to collect, or (2) complying with detailed reporting obligations that the state may in principle impose under the authority of Direct Marketing.⁹⁴ As in the case of other state legislation drafted before Wayfair, it remains to be seen whether Rhode Island will amend its law to extend its taxing jurisdiction as far as the Wayfair decision allows.⁹⁵ Based on recent developments with regard to remote sellers generally, the odds of such an eventuality appear to be good.

9. South Dakota

Flush with its victory over Wayfair Inc. in establishing its right to require remote sellers to collect tax on online sales, South Dakota was the first state to adopt platform legislation in the post-Wayfair era. The South Dakota statute reflects a simpler approach than that reflected in much of the pre-Wayfair platform legislation discussed above. As a result of Wayfair’s repudiation of the physical presence test of nexus for enforcement of tax collection obligations, South Dakota was liberated from the requirement of either identifying some platform-based or seller-based physical presence to justify tax collection requirements or alternatively to rely on a report-or-collect option to induce compliance with such requirements. Instead, the South Dakota statute embraces the same thresholds that the U.S. Supreme Court endorsed in Wayfair regarding online sellers, and it imposes tax collection requirements on marketplace providers in respect to all sales that the marketplace provider makes itself and facilitates on behalf of marketplace sellers, if either the marketplace’s own sales or its facilitated sales exceed the thresholds.

The statute requires a “marketplace provider” to collect and remit sales tax on all sales that it “makes or facilitates for a marketplace seller,” provided that during the current or previous calendar year either its own sales or its combined facilitated sales exceed $100,000, or the number of its own transactions or combined facilitated transactions equals or exceeds 200.⁹⁶ “Marketplace provider” is defined to mean “any person that facilitates a sale for a marketplace seller through a marketplace by . . . [o]ffering . . . by any means [products or services] for delivery into this state; and . . . [d]irectly, or indirectly . . . collecting payment from a purchaser and transmitting the payment to the marketplace seller, regardless of whether the person receives compensation.”⁹⁷ A “marketplace seller” is defined to mean “a retailer that sells or offers for sale [products or services] for delivery into this state, through a marketplace that is owned, operated or controlled by a marketplace provider.”⁹⁸

The statute takes a novel approach to insulating marketplace sellers from liability by providing that a “marketplace seller making a sale through a marketplace provider that is subject to the provisions of this Act shall consider the sale as a [nontaxable] sale for resale.”⁹⁹ At the same time, marketplace providers “may be relieved of liability if [failure to collect or remit tax] was due to incorrect or insufficient information provided to the marketplace provider by a marketplace seller.”¹⁰⁰ This conceivably creates a gap in enforcement, although other provisions of South Dakota law may provide the South Dakota taxing authorities with recourse against marketplace sellers that provide incorrect or insufficient information.

10. Washington

Washington enacted legislation (effective January 1, 2018) “to address the significant harm and unfairness brought about by the physical presence nexus rule.”¹⁰¹ Among other things, the legislation requires “marketplace facilitators” and “referrers” to elect either to (1) collect and remit sales and use tax on all taxable sales into the state, or (2) comply with specified tax notice and reporting provisions.¹⁰² The legislation is complex and convoluted, but we will do our best to describe its principal features and identify some questions it raises.

A “marketplace facilitator” is a “person that contracts with sellers to facilitate . . . the sale of the seller’s products through a physical or electronic marketplace operated by the person,” whose own or facilitated sales in the state equal or exceed $10,000, and who engages in any of the following activities:

• transmitting or communicating the offer or acceptance between buyer and seller;

• owning or operating the infrastructure that brings buyers and sellers together;

• providing a virtual currency that buyers are allowed or required to use to purchase products from the seller;

• software development or research regarding the electronic marketplace;

• with respect to the seller’s products, payment processing, fulfillment, or storage services; listing products for sale; setting prices; order taking; advertising; customer service; assisting with returns or exchanges.¹⁰³

A marketplace facilitator “is deemed to be an agent” of any marketplace seller that makes retail sales through the marketplace.¹⁰⁴

A “referrer” is a person who agrees with a seller to list or advertise an item for sale in any medium (including a website); receives a commission from the seller for the listing; transfers the purchaser to the seller; does not collect receipts from the purchaser; and whose gross income from referral services and from retail sales sourced to the state exceeds $267,000.¹⁰⁵ A referrer “is deemed to be an agent” of any marketplace seller whose retail sales directly result from a referral of the purchaser by the referrer.¹⁰⁶

The provision of an election for marketplace facilitators and referrers to collect or report is confined, at least explicitly,¹⁰⁷ to situations in which the marketplace seller lacks a physical presence regarding facilitated or referred sales and in which the marketplace facilitator or referrer lacks a physical presence regarding their own sales. Thus, the statute provides that the election applies only in respect to sales through the marketplace facilitator’s marketplace “by or on behalf of marketplace sellers who do not have a physical presence in this state”¹⁰⁸ and only in respect to the marketplace facilitator’s own sales “if the marketplace facilitator does not have a physical presence in the state.”¹⁰⁹ Similarly, regarding sales resulting from a referral of the purchaser to a marketplace seller, the statute provides that the election applies only when the “marketplace seller . . . does not have a physical presence in the state”¹¹⁰ and only in respect to the referrer’s own sales “if the referrer does not have a physical presence in the state.”¹¹¹ Accordingly, when such a physical presence does exist, tax collection is required, and there is no option to report or collect.

There is an additional fact pattern, however, in which a strong (or at least a plausible) case for imposing platform-related tax collection obligations would exist (without offering a collect-or-report option) but regarding which the statute is ambiguous at best. When marketplace sellers with no physical presence in the state make sales either (1) through a marketplace operated by a marketplace facilitator with physical presence in the state or (2) directly resulting from a referral by a referrer with physical presence in the state, one could certainly maintain that there is sufficient physical presence to justify the state’s imposition of a tax collection obligation either on the marketplace seller or on the marketplace facilitator or referrer.¹¹² Moreover, the statutory provisions deeming a marketplace facilitator “to be an agent” of any marketplace seller that makes retail sales through the marketplace¹¹³ and deeming a referrer “to be an agent” of any marketplace seller whose retail sales directly result from a referral of the purchaser by the referrer¹¹⁴ would arguably lend additional support to the proposition that the marketplace seller has a physical presence in the state.¹¹⁵ Nevertheless, the Legislature’s failure explicitly to remove the collect-or-report option under these circumstances, particularly when it explicitly removed the option under the circumstances described above, leaves open the question of how that issue might ultimately be resolved.

The foregoing limitation of the reporting/collection option constituted a bow to the reality of the state of the law at the time the Washington platform statute was adopted, under which the state could not require a non-physically present person to comply with sales and use tax collection obligations under Quill, but nevertheless could impose sales and use tax information reporting obligations on such non-physically present persons under Direct Marketing.¹¹⁶ By offering a collect-or-report option to marketplace facilitators and referrers when the marketplace seller or the marketplace facilitator lacks physical presence in the state, the Legislature presumably hoped to induce them to collect the tax because the collection burden might well be less onerous than the reporting obligation.

After the U.S. Supreme Court’s decision in Wayfair, which overruled Quill insofar as the decision limited states’ power to impose sales and use tax collection obligations on out-of-state sellers to those with physical presence in the state, one of the major premises underlying the structure of the Washington platform statute has been removed. This possibility was anticipated by the Washington State Legislature, which provided that if a later change in federal law “creates a conflict” with the platform legislation, such as “allow[ing] states to impose greater sales and use tax obligations on remote sellers, referrers, or marketplace facilitators than provided for,” the Department of Revenue may determine that any conflicting provisions have “no further force or effect” and may adopt rules “that impose sales and use tax collection obligation . . . to the fullest extent allowed under state and federal law.”¹¹⁷ In August 2018 the Washington DOR took advantage of this legislation by requiring platforms with $100,000 of annual sales or 200 annual transactions (including both the platforms’ own sales and the sales of sellers made over the platforms), regardless of their physical presence in the state, to begin collecting tax on their own sales and on sales made by other sellers over their platforms. For platforms below the foregoing threshold but whose annual sales exceed $10,000, the collection/reporting option described above still applies.¹¹⁸

11. National Conference of State Legislatures Model Legislation

The National Conference of State Legislatures has proposed model legislation, which is directed in large part at platforms, to expand sales and use tax collection requirements.¹¹⁹ In broad outline, the NCSL model resembles the Pennsylvania and Washington legislation described above,¹²⁰ but with less detail. A “marketplace provider” doing business in a state is required to collect and remit tax on sales it facilitates to customers in the state.¹²¹ A “marketplace provider” is any person who facilitates retail sales by a marketplace seller, by advertising goods and services for sale, collects receipts from customers, and transmits the receipts to the marketplace seller.¹²² A “referrer” is subject to tax reporting and registration requirements in states in which it receives more than $10,000 in fees for its services and to tax collection requirements, when its customers do not register to collect tax.¹²³ A “referrer” is a person who lists or advertises items for sale in any medium, receives a commission from the seller for the listing, transfers a purchaser to the seller, and does not collect the receipts from the purchaser.¹²⁴

III. Online Marketplace Platform Controversies Arising Under General Sales and Use Tax Provisions

A. Arizona

An Arizona DOR ruling addressed the circumstances under which it will consider an online marketplace provider to be responsible for collection and remittance of Arizona transaction privilege tax (TPT) on the sales that it facilitates.¹²⁵ In general, responsibility turns on whether the marketplace provider may be considered to have constructive possession of the good sold. Constructive possession, according to the department:

The ruling treats the online marketplace provider’s level of involvement in the fulfillment process as the key indicator of whether it has exercised constructive possession of the goods sold. Thus, “an online marketplace business with Arizona nexus that derives gross receipts from acting as agent of third-party merchants by providing customer service, processing payments and refunds and has control over the fulfillment process will be deemed to be the retailer for the purposes of the retail TPT.”¹²⁷ However, “if the online marketplace vendor does not itself conduct fulfillment or have control over or is able to direct when the goods are delivered, then . . . it is not responsible for the Arizona retail TPT and the third-party merchant is the retailer provided it has nexus with Arizona.”¹²⁸

B. Colorado

In a general information letter, the Colorado DOR considered the liability of a company operating an online marketplace for independent software and digital products vendors (ISVs).¹²⁹ Along with providing an online catalog, the marketplace provider processed orders and hosted and delivered electronically the software and digital products sold in the marketplace. The department confirmed that, as agent for the ISVs, the marketplace provider could be held responsible for collection and remittance of the tax and that amounts paid by either the ISVs or the marketplace provider would discharge the pertinent tax liablility. The taxing authority also advised that the online marketplace provider “may accept exemption certificates and sales tax licenses for the purpose of exempting a sale . . . to the same extent and in the same manner as an ISV may do so.”¹³⁰

C. Indiana

Under facts essentially identical to those at issue in the Colorado ruling discussed above,¹³¹ the Indiana DOR reached the same conclusion as that reached by the Colorado DOR in the Colorado case.¹³²

D. Louisiana

A Louisiana trial court ruled that Walmart.com was a “dealer” required to collect and remit sales tax on sales made through its online marketplace and that its obligation was not limited to sales of its own products.¹³³ The court found the terms of Walmart.com’s agreement with third-party marketplace retailers to be “[o]f particular significance,” and the court’s discussion of the agreement and its practical consequences merits extended quotation:

Walmart.com appealed the trial court decision to the Louisiana Fifth Circuit Court of Appeal. Oral argument was held on October 11, 2018, before a three-judge panel and the judges raised questions regarding which party was best positioned to collect tax on sales through Walmart.com’s platform.¹³⁵

E. South Carolina

The South Carolina DOR found that Amazon Services LLC, the owner of the Amazon website, is a person in the business of selling tangible personal property at retail and is subject to sales and use tax.¹³⁶ Amazon Services (the “Taxpayer”) did not dispute that property was sold on its website to purchasers in South Carolina. “Rather,” as the department observed, “the Taxpayer disputes who sells the tangible personal property on the Taxpayer’s Website.”¹³⁷ Amazon Services asserted that it “merely provided a nontaxable service to third parties”¹³⁸ who sold property on its website. The department, reading the South Carolina statute “as a whole,” concluded that “a person in the business of transferring tangible personal property to its user or consumer in South Carolina for a consideration, regardless of whether that person owns or physically possesses such property, is responsible for sales and use tax.”¹³⁹

Based on its reading of the statute and a detailed review of the facts regarding Amazon Services’s operations and its relationship to its affiliates, the department found that

Amazon Services contested the department’s determination, and the case is now pending before the South Carolina Administrative Law Court.¹⁴¹

F. Utah

The Utah State Tax Commission ruled that an online marketplace provider (Company) was not subject to a sales or use tax collection obligation because it was not making “sales” and because it did not have “possession or control” over the goods sold.¹⁴² Under the applicable statute, sale is defined to mean “any transfer of title, exchange, or barter . . . of tangible personal property.”¹⁴³ The tax commission noted that “the Company does not maintain any inventory and never takes title to the goods sold.”¹⁴⁴ Also, the “exchange” is between the consumer and the vendor using the marketplace; the marketplace provider receives the consumer’s money only “on behalf of” the vendor.¹⁴⁵ Further, “barter” is not implicated by these cash transactions.¹⁴⁶ Thus, the tax commission ruled that the marketplace provider was not a seller subject to a tax collection or remittance obligation. It also considered whether the marketplace provider was a taxable “commission merchant.”¹⁴⁷ Relying on a Black’s Law Dictionary definition that distinguished between “commission merchant” and “brokers,” the tax commission noted that:

IV. Conclusion

Perhaps the most fitting observation we can make at the end of this discussion of platform-related developments in the collection of tax on online sales is that by the time anyone reads these words, the discussion will already require updating. But that is an observation we could presumably make about virtually any discussion of developments in the post-Wayfair world of online sales. Accordingly, there is no reason either to be surprised or — at least for those whose knowledge of these ongoing developments puts food on their plates — dismayed. This “rapidly evolving universe” continues to evolve, and perhaps the best counsel we can offer is to stay tuned. There is more to come.