Marketplaces are a growing phenomenon in ecommerce at the moment but in 2 regions a similar story seems to be happening. “In 2007, only 10% of digital sales went to the 3rd party merchants listed on a marketplace. Steadily, and perhaps stealthily, the figure climbed to 35% in 2016, according to Euromonitor International. Retailers around the world are now reckoning with this new normal in digital commerce.” Marketplace tax collection seems to be coming a political topic and a potential generator of significant tax revenues for the US and UK governments.
The Late 2000’s
Amazon was seen as the big marketplace that had one advantage – it did not collect sales tax in a majority of US states and thus they were able to offer customers the lowest pricing in comparison to retailers. This little issue led to Amazon either not selling to customers in certain states or cutting revenue generation via their affiliate programme for bloggers or publications in certain states. The general consensus at the time was that if Amazon was to collect sales tax it would lose their pricing advantage and thus become irrelevant.
Amazon has been clear since the beginning about their operation – they take no responsibility for sellers not collecting sales tax nor for third parties selling restricted brands or items on the marketplace. This has been their refrain for as long as I can remember.
A change in economics
Lets be clear about a certain things – Amazon, Google and Facebook make billions of Dollars, Pounds or Euros per quarter. Yet these technology behemoths have acted legally and used accountants, company structures to ensure that they pay the least amount of tax in certain regions and countries.
In Europe, regulators believe high royalty fees paid by Amazon’s European HQ – bills, that is, for use of web technology and the brand – have allowed too much taxable income to be spirited away. As a consequence, the value of the group’s European activities, its buying and warehousing operations, is not properly appreciated.
On May 1 2015, Amazon said that it had started reporting revenue from its operations in Britain, Germany, Italy and Spain. By altering how it reports its revenue, the online retailer may become liable for larger tax charges in certain nations, though it may still be able to reduce its tax burden through other complex accounting practices.
Secondly, in all cases Countries and States are all under economic pressure through currency structures (The Euro), Bankruptcy (California), Double Irish tax arrangements and are all looking at ways in generating revenues to ensure that they can continue providing services to their constituents.
What is the primary issues
There are 2 different cases that are relevant for this discussion and for all ecommerce merchants that sell on marketplaces.
Marketplaces such as Amazon have not collected sales tax from merchants for selling items in certain locations. In the US – this is being driven by Amazon shipping products to different fulfillment centres in different locations to ensure speedy delivery to customers all over the US. The merchant has no idea that his items are in different locations and thus are unwittingly at risk of tax fees.
To get sales tax right, there are three issues to tackle.
- Where does a seller have tax nexus?
- Is the sales tax being collected properly?
- Is the sales tax being properly remitted to the appropriate states?
Tax nexus exists in the states where a business has a presence. Ecommerce sellers typically need to consider where they have physical offices and call centers — although many states include other factors, such as affiliates in that state and the location of Fulfillment by Amazon warehouses and whether those warehouses constitute nexus for Fulfillment By Amazon sellers. (If you are unsure which states you have a nexus, consult with a tax attorney.
How does this impact the marketplaces?
Amazon is going to be the biggest affect party as these tax related issues will be harming their largest marketplace sellers. Keep in mind that Amazon has now reached a point in which 50% of their sales are from third parties.
In 2016, individual states became much more aggressive with sellers regarding FBA-triggered sales tax nexus, including auditing and penalizing these sellers for years of not addressing liability. FBA sellers should therefore consult with a tax attorney, and make the necessary adjustments to collect and remit sales taxes. The liability will only grow, in a time when sellers need to be focusing on the ever-changing competitive landscape of Amazon, not auditors and lawyers.
The UK seems to be taking an aggressive stance on this matter. HMRC’s failure to collect VAT from online retailers outside the EU lost taxpayers up to £1.5bn last year, according to Whitehall’s spending watchdog.
The National Audit Office also found that warehouses run by firms such as Amazon were being targeted by organised criminals in the UK and China to handle undervalued or misclassified goods. New legal powers introduced by HMRC in September make online marketplaces potentially jointly liable for non-payment of VAT when they have been informed of an issue with a seller. An HMRC spokeswoman said: “The UK has led the way in holding online marketplaces jointly liable for VAT evaded overseas, and new reforms will secure £875m for the UK taxpayer.
In summary – if you are a marketplace seller that sells on Amazon, eBay and any marketplace outside your home state, region it is your responsibility to ensure that your tax is in good order for your sold merchandise. Speak to your tax attorney to ensure that your competitors cant influence your business adversely.
Please note: This post is for informational purposes only. Be advised that sales tax rules and laws are subject to change at any time and are country specific.
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