Tennessee is the most recent, and one of the last, state to adopt a new tax collection law to third-party
marketplace facilitators. On April 1, 2020, Gov. Bill Lee signed Senate Bill 2182, which takes effect on October 1, 2020.
Since the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc., most states have now moved to extend their local sales tax collection requirements to third-party marketplace facilitators.
SB 2182 defines a “marketplace facilitator” as any business that meets both of the following requirements:
- The business provides, for compensation, a “physical or electronic marketplace” to facilitate the sale of goods or services subject to Tennessee sales tax; and
- The business “directly or indirectly” collects payments from consumers on behalf of sellers who use the marketplace.
This definition excludes firms that only provide payment processing services. So for instance, if a seller receives payment from a customer through PayPal, that does not make PayPal a marketplace facilitator under SB 2182. But if the seller used eBay and PayPal in tandem to conduct the sale and process the customer’s payment, then eBay/PayPal would be responsible for collecting any Tennessee sales tax due.
Even if a business qualifies as a marketplace facilitator, the obligation to collect sales tax does not kick in unless the total sales made or “facilitated” involving Tennessee customers exceeds $500,000 during the previous 12-month period. The marketplace facilitator also does not have to collect sales tax in either of the following scenarios:
- An individual seller with “gross sales” exceeding $1 billion per year signs a separate agreement with the marketplace facilitator in which the seller agrees to collect and remit sales tax; or
- “Substantially” all of the sellers who use the marketplace facilitator’s platform are “registered dealers” required to collect and remit sales tax to Tennessee, which allows the state’s Department of Revenue to issue a waiver to the facilitator.
A marketplace facilitator will also not be held liable for any sales tax due if a seller provides “incorrect or inaccurate information,” so long as the facilitator “made a reasonable effort” to obtain the correct information. SB 2182 also forbids consumers from filing a class action lawsuit against a marketplace facilitator “relating to the over-collection of sale or use taxes.” Furthermore, if a marketplace facilitator fails to collect sales tax for any reason, consumers may still have to pay any applicable use tax on their purchases.
Will SB 2182 Help Make Up the Sales Tax Losses from COVID-19?
Krista Lee Carsner, the executive director of the Tennessee General Assembly’s Fiscal Review Committee, wrote in a revised March 2 fiscal note that requiring marketplace facilitators to start collecting sales tax would increase state revenues by approximately $84.8 million during the current fiscal year, and more than $113.1 million in subsequent years. Carsner said these estimates were based on a 2017 study from the U.S. Government Accountability Office, which found that approximately 38 percent of “collectible revenues” comes from online sales, with 46 percent involving a marketplace facilitator.
It’s worth noting Carsner’s note came just before the onset of the COVID-19 pandemic, which has already forced state and local officials throughout the country to revise their estimates of sales tax revenues, at least in the short term. For example, WBIR-TV in Knoxville, Tennessee, recently reported that city officials prepared their current budget assuming sales tax revenues of $174 million. But as COVID-19 has forced the temporary closure of many businesses, Knoxville officials now believe they could face a sales tax shortfall of as much as $18.2 million.
And while you might think collecting sales taxes from online marketplace facilitators would help make up this shortfall, keep in mind that SB 2182 will not take effect until October–so any new revenues may come too late to help state and local governments during their current fiscal year.
Since the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc., most states have now moved to extend their local sales tax collection requirements to third-party marketplace facilitators. This definition excludes firms that only provide payment processing services. So for instance, if a seller receives payment from a customer through PayPal, that does not make PayPal a marketplace facilitator under SB 2182. But if the seller used eBay and PayPal in tandem to conduct the sale and process the customer’s payment, then eBay/PayPal would be responsible for collecting any Tennessee sales tax due. Even if a business qualifies as a marketplace facilitator, the obligation to collect sales tax does not kick in unless the total sales made or “facilitated” involving Tennessee customers exceeds $500,000 during the previous 12-month period. The marketplace facilitator also does not have to collect sales tax in either of the following scenarios: A marketplace facilitator will also not be held liable for any sales tax due if a seller provides “incorrect or inaccurate information,” so long as the facilitator “made a reasonable effort” to obtain the correct information. SB 2182 also forbids consumers from filing a class action lawsuit against a marketplace facilitator “relating to the over-collection of sale or use taxes.” Furthermore, if a marketplace facilitator fails to collect sales tax for any reason, consumers may still have to pay any applicable use tax on their purchases. Krista Lee Carsner, the executive director of the Tennessee General Assembly’s Fiscal Review Committee, wrote in a revised March 2 fiscal note that requiring marketplace facilitators to start collecting sales tax would increase state revenues by approximately $84.8 million during the current fiscal year, and more than $113.1 million in subsequent years. Carsner said these estimates were based on a 2017 study from the U.S. Government Accountability Office, which found that approximately 38 percent of “collectible revenues” comes from online sales, with 46 percent involving a marketplace facilitator It’s worth noting Carsner’s note came just before the onset of the COVID-19 pandemic, which has already forced state and local officials throughout the country to revise their estimates of sales tax revenues, at least in the short term. For example, WBIR-TV in Knoxville, Tennessee, recently reported that city officials prepared their current budget assuming sales tax revenues of $174 million. But as COVID-19 has forced the temporary closure of many businesses, Knoxville officials now believe they could face a sales tax shortfall of as much as $18.2 million. And while you might think collecting sales taxes from online marketplace facilitators would help make up this shortfall, keep in mind that SB 2182 will not take effect until October–so any new revenues may come too late to help state and local governments during their current fiscal year.
