New York State Announces Discretionary Authority to Impose Sales Tax Collection Obligations Upon Marketplace Facilitators
On March 7, 2019, the New York State Department of Taxation and Finance (“Department”) issued an Advisory Opinion (TSB-A-19(1)S) addressing the imposition of sales tax collection obligations upon marketplace facilitators. In a departure from prior policy, the Advisory Opinion concluded that the Department has, under existing law, discretionary authority to impose collection liability upon marketplace facilitators under appropriate circumstances.
In the wake of the U.S. Supreme Court’s decision in South Dakota v. Wayfair in June 2018, many states have enacted new legislation requiring online marketplaces, rather than third-party sellers, to comply with state sales tax rules. Traditionally, sales tax is imposed upon the customer, but collected by the seller (or “vendor” as defined by New York Tax Law). Marketplace liability rules impose tax collection liabilities upon the marketplace itself, independent from the sellers operating within it. By way of a brick-and-mortar illustration, it’s the equivalent of imposing tax collection responsibilities upon the mall as opposed to the individual retail stores within the mall.
New York has proposed marketplace legislation in the past, but to date it has not been enacted. With this Advisory Opinion, the Department seems to have stepped in to fill the void.
The taxpayer who sought the Advisory Opinion (“Petitioner”) develops and markets various software, SaaS, and digital products for sale to customers. In addition, Petitioner also operates an online marketplace through which it facilitates sales of other independent software vendors. These independent vendors use Petitioner’s marketplace to sell software, apps, games, and digital products to their own customers for electronic download over the internet. The independent vendors enter into service agreements with Petitioner, whereby Petitioner agrees to host and facilitate the marketplace sales in exchange for a service fee. Under the arrangement, Petitioner processes customer payments, calculates the New York sales tax due on each transaction, and remits the tax directly to the Department.
The software and digital products bought and sold in Petitioner’s marketplace were conceded to be taxable as prewritten (canned) software. Rather, Petitioner queried whether it, as the marketplace, would be liable to collect tax. In response, New York concluded that it has discretionary authority within the Tax Law to treat certain intermediaries performing key acts in facilitating taxable sales as co-vendors subject to New York’s tax collection requirement. Of significance, the Advisory Opinion assumes Petitioner has nexus with New York.
Under New York law, a “vendor” is required to collect tax. The definition of “vendor” includes the following provision: “when in the opinion of the commissioner it is necessary for the efficient administration of this article to treat any salesman, representative, peddler, or canvasser as the agent of the vendor, distributor, supervisor, or employer . . . for whom he solicits business, the commissioner may, in his discretion, treat such agent as the vendor jointly responsible with his principal, distributor, supervisor, or employer for the collection and payment over of the tax.”
According to the Advisory Opinion, “[t]his provision permits the Department to treat as vendors intermediaries that perform key acts in facilitating taxable sales by vendors.” The Department considered the following activities as significant: Petitioner’s marketplace brings buyers and sellers together; Petitioner’s website provides information about the independent vendors’ products; Petitioner’s website facilitates sales allowing sales to be offered and accepted; and Petitioner collects the purchase price. As such, the Advisory Opinion concludes the Department would be entitled to treat Petitioner as a co-vendor with regard to all taxable sales it facilitates on behalf of independent vendors that themselves qualify as vendors.
The Advisory Opinion reasons that this outcome reduces administrative burdens and improves the efficiency of sales tax administration.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
InsightUnderstanding the SBA disaster relief loan program for COVID-19Businesses that have suffered losses related to the COVID-19 pandemic can apply for Small Business Administration (SBA) loans of up to $2 million. Here’s what to know.
InsightCARES coronavirus relief act: What you and your business need to knowThe Senate’s Coronavirus Aid, Relief, and Economic Security (CARES) Act has tax, healthcare, unemployment, and other provisions. Here’s what you need to know.
InsightDepartment of Labor issues model notice for coronavirus emergency leave requirementsThe Department of Labor’s notice must be shared with all employees to inform them of expanded leave rights under the COVID-19 response act.
InsightNew York state offers interest abatement for certain sales and use taxpayers affected by COVID-19Certain taxpayers unable to file and pay by the March 20, 2020, deadline because of the coronavirus outbreak can apply for abatement of interest.
InsightIllinois provides short-term sales tax relief for certain ‘eating and drinking establishments’ affected by COVID-19The state will waive penalty and interest on late sales tax payments for certain qualified eating and drinking establishment operators.