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.
InsightSECURE Act and repeal of Cadillac Tax mean change for retirement, IRA, and health plansDana FriedNew legislative changes affect certain employers and providers of retirement, IRA, and health care benefits.
InsightTax changes could impact private equity in 2020As 2020 begins, here are three critical tax issues expected to impact private equity, along with suggestions for how firms and their portfolio companies should approach them to avoid potential pitfalls.
InsightTexas adopts economic nexus rule for its franchise taxCorey L. Rosenthal, Coral BernierTexas has set a $500,000 threshold for “foreign taxable entities” to be subject to its franchise tax. Here’s how to determine whether you qualify.
InsightBe ready to file New York’s Biennial StatementCorey Rosenthal, Arvinder KaurCorporations and LLCs registered with New York’s Department of State must file a Biennial Statement every two years. Here’s what to know about the simple process.
InsightInternational tax adds extra complexity for PE funds considering holding companiesEytan BursteinDuring acquisition structuring, PE funds must decide not only whether to form a holding company, but also where to form one. Consider these five international tax factors.