The Compliance Challenge: Tackling Sales Tax on DTC Marketplaces

Key Takeaways for Ecommerce Brands:

1. ‍Ecommerce marketplaces like Amazon, Walmart, and Etsy are essential for brands seeking scale and profitability. However, selling on these platforms introduces complexities in sales tax compliance.
2. Since the 2018 South Dakota v. Wayfair decision, states no longer require physical presence to enforce sales tax. Brands must navigate economic nexus thresholds, which vary by state, adding another layer of complexity to multichannel retailing.
3. While marketplaces handle the collection and remittance of sales tax, sellers with nexus in a state are still responsible for registering, filing, and reporting these taxes. Leveraging tax experts and accounting tools is critical for ensuring compliance and minimizing risk.

’Tis the season to be jolly, but the 2024 holiday period is not shaping up as a boon for retailers in the U.S., at least according to Moody's. The credit rating agency predicts this season's holiday sales will grow “a fairly anemic” 1%-3% in the U.S., as high-cost essentials – particularly food – are expected to limit Americans' spending.

Early holiday spending is already down. Per data from market research firm Earnest Analytics, consumer spending in the first two weeks of November decreased 1.4% compared to 2023. Some businesses, however, see their revenues grow in the U.S. this holiday season. The top three, based on Earnest’s consumer spending data, are all marketplaces: 

• TikTok Shop sales grew 213.2% YoY between November 1-13

• Temu grew 18.1% YoY during this period.

• Shein saw sales rise by 16% YoY

From Single-Channel to Marketplace Dominance

Third-party marketplaces have been key players in the ecommerce space from the get-go, but they reached a new level of dominance in recent years. As the appeal of selling exclusively via one direct-to-consumer channel significantly diminished, establishing a presence on marketplaces like Walmart, Etsy, and Amazon became essential for most brands. 

Amazon's marketplace, for example, is the largest online retailer in the U.S., with a gross merchandise volume (GMV) of $700 billion in 2023. Today, independent brands account for 61% of sales on Amazon's marketplace. If these sales were compared to a country’s gross domestic product (GDP), the Amazon marketplace would be the 37th-largest economy globally, behind Denmark and ahead of Malaysia.

The role of marketplaces in the global economy is one of the topics covered in Activate's latest Technology & Media Outlook report. Drawing on large-scale consumer insights and economic analysis, the management consulting firm examines the major forces shaping the years ahead in various industries such as B2B and enterprise software, gaming, sports betting, and ecommerce. Key findings include:

• 62% of total global online GMV is generated by 10 companies – 8 of which are ecommerce marketplaces. 

• Third-party sellers generate nearly 85% of online sales for the top 10 ecommerce players.

• In the U.S., a growing number of major companies  – e.g., Kroger and Macy's  – are launching ecommerce marketplaces to enhance their customer value proposition.

• Today’s consumers are multichannel shoppers, using a range of online channels for shopping inspiration and research.

• To scale, brands will need to pursue a multichannel strategy, as less than 20% of online shoppers are purchasing from D2C channels.

Understanding Tax Obligations in Online Retail

While selling on multiple marketplaces is a great way to maximize business profitability, it also presents certain challenges. One of the biggest challenges of multichannel and omnichannel retailing is online sales taxes. At a basic level, sales tax is a state-level tax on goods and services. As an ecommerce seller, you would generally have to charge sales tax if you:

• Sell to a customer in a state that charges ecommerce sales tax.

• Your product is taxable in that state.

• You have a sales tax nexus in that state.

In tax parlance, nexus is a connection between a business and a tax-collecting jurisdiction. There are two main types of nexus:

1. Physical nexus – which is established if you have any sort of physical presence in the state. For example, if you live, have employees, a warehouse, or inventory in a specific state, a physical nexus can be determined.

2. Economic nexus – which occurs when you meet certain thresholds of economic activity in a state. For instance, in several states, if your sales exceed $100,000 or 200 units, it can trigger economic nexus.

For more, see our complete guide on ecommerce sales tax.

Navigating Nexus: The New Rules of Ecommerce Taxation

Before 2018, states were prevented from imposing online sales taxes if a physical nexus was not established, even if businesses met their economic activity thresholds. Then came South Dakota v. Wayfair, Inc., a landmark decision where the Supreme Court overturned the physical presence requirement for sales tax nexus outlined in previous cases. 

Following South Dakota v. Wayfair, Inc., economic nexus emerged as the only determining factor for levying ecommerce sales tax. In the six years since the Wayfair ruling, all 45 states that impose sales taxes have passed legislation that requires marketplaces to collect and remit sales taxes on behalf of third-party sellers. 

Putting the onus on marketplaces means that brands who sell on Amazon or Walmart are not obligated to collect or pay sales tax on their sales. However, if these brands have nexus in a state, they must register and file a sales tax return there. For example, if you have a nexus in Texas, Amazon will collect the sales tax and remit it to the authorities. It is your responsibility, though, to register for a sales tax permit and report these taxes to the state.

As consumers increasingly embrace online shopping and multichannel and omnichannel retailing dominate sales, the complexities of sales tax will only grow. Since each state has different criteria, a sales tax expert should be consulted when determining nexus. And to make tax season easier, brands would be well advised to use an accounting software – like Finaloop – that can help them navigate marketplaces while remaining compliant with tax requirements.