September 13, 2023

Inventory Held by Third Party Marketplace Facilities and its Impact on Nexus

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by Jessica Kyt and Gunner Huggins

The outcome of the 2018 Supreme Court decision in South Dakota V. Wayfair brought the discussion of nexus and nexus creating activities to the forefront for all businesses that operate under a remote business structure. By introducing the “economic presence” standard, the ability of state and local governments to impose tax obligations on business entities drastically increased while creating a more complex tax atmosphere.

In step with the rise of economic nexus laws, states are now passing what are known as “Marketplace Facilitator Laws,” that generally shift the burden of sales and use tax obligations to the marketplace facilitator. While states define a marketplace facilitator differently, they are most commonly known as a business that does the following three activities:

  1. Contracts with sellers to facilitate the sale of a marketplace seller’s product through a marketplace for consideration.
  2. Engages, directly or indirectly, in transmitting or otherwise communicating the offer or acceptance between the buyer and seller.
  3. Does any of the following activities directly or indirectly, with respect to the seller’s products: payment processing services, fulfillment, or storage services, listing products for sale, setting prices, providing customer service, and accepting or assisting with returns or exchanges.

While marketplace tax laws have provided taxpayers with some relief on the sales tax front, they do not entirely remove the challenges a remote seller may face. Most notable, inventory stored in a marketplace facilitator’s warehouse can result in a physical presence within the state, even when a taxpayer is not aware their goods are being held there. As pre-Wayfair legislation indicates, a physical presence establishes nexus and therefore can carry certain tax obligations with it.

 This can create two large issues for taxpayers:

  1. Taxpayers may still be required to collect and remit sales taxes on direct sales.
  2. Taxpayers may be required to file an income tax return in states where they would otherwise be eligible for P.L. 86-272 protections.

According to a recent survey conducted by Avalara, as of 2022, only about 50% of U.S. retailers are aware of marketplace facilitator laws and only about 40% believe they are complying with those laws. Because nexus laws vary by state, there may never be a consensus about third party marketplace facilitator inventory, and this lack of consistency and uniformity in nexus laws between states will likely increase confusion and decrease compliance amongst businesses. If you are concerned these laws and business practices may affect you and would like to better understand your nexus footprint and overall tax obligations, we recommend you reach out to an Elliott Davis State and Local Tax Consultant. Contact our team to get started.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.

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