The shift in tax collection responsibility to marketplace facilitators raises questions on how to accurately source sales made through the marketplaces. Depending on the state sourcing rules, a marketplace facilitator may need to know whether sourcing is determined based on the presence/location of the marketplace seller in the state or the presence/location of the marketplace facilitator. This may impact whether sales tax or use tax is required to be collected and the applicable tax rate.
As part of the marketplace facilitator provisions enacted in the states, some states have provided special sourcing provisions or guidance for sales made exclusively through marketplaces. For example, in Ohio, the marketplace facilitator provisions provide for specific sourcing for marketplace facilitators stating that they must collect tax based on a tiered set of rules that first require the marketplace facilitator to source to:
the location known to the marketplace facilitator where the consumer or the donee designated by the consumer receives the tangible personal property or service, including the location indicated by instructions for delivery to the consumer or the consumer’s done…” (Ohio R.C. 5741.05)
In Arizona, the Department of Revenue issued an FAQ clarifying the sourcing rules for marketplaces. The FAQ indicated that the sourcing rules for marketplaces depend on whether the marketplace facilitator is located in or outside of Arizona. For marketplace facilitators located in Arizona, sales are sourced based on the tax rates and code of the marketplace facilitator’s location in Arizona, if the order information is received in Arizona and the tax rates and codes of the customer’s address, if the order is received outside of Arizona. If the marketplace facilitator is located outside of Arizona, then sales are sourced to the shipping address of the customer. If there is no shipping address then the sales is sourced to the customer’s billing address.
Why this is important: If sales tax is not properly sourced using the states origin or destination-based sourcing rules, marketplace facilitators may be subject to additional tax, interest and penalties. Additionally, if the marketplace has under or over collected sales tax, there is a risk of consumer complaints, class action lawsuits and other state actions.
What to prepare for: Marketplace facilitators should review each of the state sourcing rules and marketplace collection laws to understand how sales made through the marketplace should be sourced.