Marketplace Tax Collection: What Sellers Need to Know

For sellers on platforms like Amazon, Etsy, or eBay, the landscape of sales tax has changed. The burden on individual sellers to manage sales tax has largely shifted to the marketplace platforms themselves. This change simplifies tax compliance for many, but it also introduces new rules that sellers must understand. A clear understanding of how these laws function and what obligations remain for your business is necessary.

The Role of Marketplace Facilitator Laws

The current sales tax environment for online sellers is based on state-level regulations known as marketplace facilitator laws. These laws emerged after the 2018 Supreme Court decision, South Dakota v. Wayfair, Inc. This ruling overturned the requirement that a business must have a physical presence in a state to collect sales tax. Instead, the court affirmed the concept of “economic nexus,” a connection created by conducting a certain amount of business in a state.

Economic nexus is established when a seller’s sales into a state exceed a specific threshold, which is often $100,000 in gross revenue in a calendar year. Once this threshold is met, the seller has an obligation to register, collect, and remit sales tax in that state. To simplify this for small sellers, states enacted marketplace facilitator laws. These laws shift the legal responsibility for tax on platform sales from the individual seller to the marketplace facilitator, such as Amazon or Etsy.

Marketplace Responsibilities for Tax Collection

Under marketplace facilitator laws, active in nearly every state with a sales tax, the platform assumes the duties for sales tax on its transactions. For every sale on its platform, the facilitator must calculate the sales tax due. This calculation includes the combination of state, county, city, and other local tax rates applicable to the buyer’s shipping address.

The marketplace is also responsible for collecting the calculated sales tax from the customer. After collection, the platform must remit these funds to the appropriate state and local taxing authorities. This process involves filing periodic tax returns with each jurisdiction.

For sales tax purposes on these transactions, the marketplace is considered the seller of record. This responsibility significantly reduces the direct sales tax compliance burden for sellers on those specific transactions. Both the marketplace facilitator and the individual seller can be subject to audit by state taxing authorities.

Remaining Seller Obligations

Even with marketplace facilitators handling tax on their platform sales, a seller’s obligations do not completely disappear. Sellers must track their gross sales revenue into every state across all their selling channels. This is because in most states, the total sales figure—including sales taxed by a facilitator—is used to determine if a seller has economic nexus. A few states allow sellers to exclude sales made through a registered marketplace when making this calculation.

Sellers may also have obligations regarding tax-exempt sales. While marketplaces often manage these transactions, responsibilities can still fall on the seller depending on state and platform policies.

Marketplace facilitator laws are limited to sales and use tax. The seller remains responsible for all income tax obligations, including tracking revenue and paying federal, state, and any local income taxes. Additionally, other local taxes, such as business and occupation (B&O) taxes, are not covered by these laws and remain the seller’s responsibility.

Managing Tax for Multi-Channel Commerce

Sales tax compliance increases for sellers who operate across multiple channels, such as a marketplace and their own e-commerce store. The rules of economic nexus apply to the seller’s total economic activity within a state, combining sales from all sources. This aggregation can create a direct tax obligation where one might not seem to exist.

Consider a seller who makes $70,000 in annual sales to a state through a marketplace and an additional $40,000 through their own website. The state’s economic nexus threshold is $100,000. While the marketplace handles tax on the $70,000 of its sales, the seller’s total sales into that state are $110,000. This combined figure exceeds the nexus threshold.

Because the seller has established economic nexus, they are responsible for the sales tax on transactions made through their own website. This requires the seller to register for a sales tax permit in that state. They must then calculate, collect, and remit the sales tax on the $40,000 of direct sales.

Sales Tax Registration and Filing Process

If a business sells exclusively on marketplace platforms that collect tax in all relevant states, some jurisdictions may not require the seller to register for a permit. However, if a seller has activity on another channel, like their own website, or has a physical presence, registration becomes necessary once nexus thresholds are met.

When filing a sales tax return where a portion of sales is handled by a facilitator, the first step is to report total gross sales. This figure, reported on the state tax form, should include sales from all channels, both direct and marketplace-facilitated.

Next, the filer takes a deduction for sales that were taxed and remitted by a marketplace facilitator. State tax forms have a designated line item for this, often labeled “Sales facilitated by a marketplace.” After this deduction, the remaining amount represents the seller’s direct, taxable sales, and tax is calculated only on this amount.