Update 7.12.2017: “Sales on online marketplaces crossed $1 trillion in 2016,” according to an Internet Retailer research report. With this kind of money changing hands, online sellers should expect more states to impose taxes on marketplace providers. Washington has already done so.
Minnesota has enacted the nation’s first tax on marketplace providers and expanded the definition of what it means to do business in the state.
HF 1 requires a company to collect sales and use tax if it has an employee in Minnesota, and expounds an in-state affiliate creates a tax obligation for every company in the controlled group. The measure also declares that selling through a marketplace creates nexus — a tax obligation — for marketplace sellers. Finally, it requires a marketplace provider with a place of business in the state to collect and remit sales and use taxes on behalf of its sellers.
The new requirements will only affect marketplace providers with a physical presence in Minnesota — like Amazon. The country’s largest online seller opened a sorting center in Shakopee in 2015 and a nearby fulfillment center in 2016. Together, they enable Amazon to provide same-day and one-day delivery to the Twin Cities area.
Approximately 50 percent of items sold on Amazon are from “sellers, small businesses and entrepreneurs.” Although Amazon has been collecting and remitting Minnesota sales tax since October 1, 2014, it has only been doing so on sales of its own products; it hasn’t been required to collect tax on sales by its third-party sellers. Currently, if a seller has nexus with Minnesota through its own ties to the state (e.g., goods stored in an Amazon warehouse), the individual seller is liable for any sales and use tax owed — not Amazon.
Once HF 1 takes effect, marketplace providers with nexus in Minnesota must collect and remit tax for all retailers selling in the state through the marketplace, unless the retailer qualifies for the small seller exception. The marketplace isn’t responsible for collecting and remitting tax for sellers making less than $10,000 annually if their only connection to the state is through the marketplace.
Marketplace sellers to share liability
However, small sellers that already collect in the state (because they already have nexus there) don’t qualify for the small seller exception. Marketplace providers would have to collect tax on their sales unless the retailer provides them with a copy of their Minnesota registration (before the marketplace provider facilitates a sale), or the commissioner reveals (upon inquiry) that the retailer is registered to collect Minnesota sales and use tax. Barring these, a marketplace provider is liable for the tax and subject to audit on the retail sales it facilitates.
A marketplace provider is not liable for failure to file, collect, and remit sales and use taxes on a retailer’s sales if the retailer gave a marketplace provider “incorrect or insufficient information.” However, if the marketplace provider and retailer are affiliated entities, the provider would be held liable for errors or inaccuracies.
Because HF 1 also expands the conditions under which two entities are affiliated, this provision is likely to expose more businesses to audit risk. An entity is an affiliate of the retailer if the entity:
- Has the same or a similar business name as the retailer and makes taxable sales in Minnesota of goods or services similar to those sold by the retailer
- Maintains an office, distribution facility, salesroom, warehouse, storage place, or other similar place of business to facilitate the delivery of the retailer’s taxable sales in the state
- Maintains a place of business in Minnesota and uses trademarks, service marks, or trade names similar to those used by the retailer, with the retailer’s actual or implied consent
- Delivers, installs, assembles, maintains, or repairs taxable goods sold by the retailer
- Facilitates the delivery of taxable goods or execution of taxable services sold by the retailer
- Shares management, business systems or practices, or employees with the retailer, or engages in intercompany transactions with the retailer related to activities that establish or maintain the retailer’s market in Minnesota
The new remote sales tax policy established under HF 1 is set to take effect at the earlier of July 1, 2019, or when the Supreme Court of the United States modifies its decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Congressional action, such as the enactment of the Marketplace Fairness Act of 2017 or the Remote Transaction Parity Act of 2017, could also impact the effective date: “If a federal law is enacted authorizing a state to impose a requirement to collect and remit sales tax on retailers without a physical presence in the state, the commissioner must enforce the [relevant] provisions of [HF 1] to the extent allowed under federal law.”
Learn more about nexus and state efforts to broaden it at the Avalara Resource Center.