Online retailers experienced a seismic shift regarding their responsibility to collect and remit sales and use taxes as a result of the U.S. Supreme Court's ruling in Wayfair v. South Dakota (Wayfair) in 2018. While the case directly addresses sales and use tax collection requirements, it has since created ambiguity in how it should be applied to other types of state levies, such as gross receipts tax. A complicating factor is the basic differences between how sales and use taxes and the gross receipts tax are generally imposed. This is especially the case in the context of e-commerce where consistent state tax collection and remittance requirements applicable to marketplace sellers (individual vendors) and marketplace facilitators (platform providers) are just beginning to emerge.

This article explains how businesses can conduct online marketplace activities in a way that avoids or minimizes gross receipts tax assessments.

Sales or Use Tax Versus Gross Receipts Tax

A sales tax is a levy imposed on the purchaser by a state or local government at the point of sale of goods or services. Use taxes apply to purchases made by residents outside of their jurisdiction (e.g., a Maryland resident who purchases a book from an online vendor in Arkansas). Although sales and use tax is imposed on the purchaser, it is generally the retailer's responsibility to collect it.

Gross receipts tax is imposed on a company's gross sales without deduction for the firm's business expenses, such as compensation or costs of goods sold. Because the gross receipts tax is assessed on the privilege of doing business, virtually all businesses may be subject to the tax. The tax can also apply to business-to-business transactions such as those with a manufacturer, wholesaler, and retailer, resulting in tax pyramiding.

Several states currently impose gross receipts taxes at the state level (Delaware, Ohio, Oregon, Nevada, Washington and Tennessee). Several others, including Pennsylvania, South Carolina, Virginia, Washington and West Virginia permit localities to impose a gross receipts tax.

Background on Marketplace Facilitators

Since Wayfair, every state that imposes sales tax has enacted an economic nexus provision requiring online vendors to collect and remit sales or use tax on sales made in a state in which they lack a physical presence, such as employees or property. When individual vendors sell products through an online marketplace platform, state laws have evolved to shift the tax collection burden from the individual vendor to the marketplace facilitator. The definition of a marketplace facilitator varies from state to state, but in general a marketplace facilitator is one who (1) owns, operates, or otherwise controls a physical or electronic marketplace; and (2) directly or indirectly processes sales or payments for individual vendors or marketplace sellers.

Typically, marketplace facilitators retain a commission from each sale, and the bulk of the purchase price is passed on to the marketplace seller. For example, a manufacturer located in Ohio (Marketplace Seller A of coffee cups enters into an agreement with an online marketplace facilitator (Online Marketplace Platform Provider B as one of its sales channels. Marketplace Seller A lists its product on marketplace facilitator's website for $10. Vicki orders Marketplace Seller A's coffee cup on Online Marketplace Platform Provider B. The Marketplace Seller A ships the good directly to Vicki located in Minnesota.

States require marketplace facilitators to collect and remit retail sales or use tax by asserting that marketplace facilitators are deemed agents of marketplace sellers. A similar relationship to meet the agency exemption or exclusion for gross receipts tax purposes is not as clear. For sales or use tax purposes, 9% of tax rate ($0.90 of sales tax) is collected on $10 of selling price by Online Marketplace Platform Provider B. However, is Online Marketplace Platform Provider B required to report the full selling price of the coffee cup ($10) or 2% commission ($2) it receives for listing the coffee cup on its website for gross receipts tax?

Gross Receipts Tax on Marketplace Facilitators

With economic nexus extending to marketplace facilitators for gross receipts tax purposes, some states are attempting to require marketplace facilitators to report all transactions that occurred on their platform and pay gross receipts taxes based on these transactions. The issue that arises is whether marketplace facilitators should report gross receipts of all transactions when marketplace facilitators only receive a portion of the sales price for their service. See example of Agency exclusion from Ohio Commercial Activity Tax below.

Income or Revenue Recognition May Differ for Gross Receipts Tax Purposes

Gross receipts tax rules generally include all sales transactions which occur in a taxpayer's business, and there are many states and cities that impose gross receipts tax. It is common for a state gross receipts tax regime to allow an exclusion for agents. For example, under the Washington Business and Occupation (B&O) tax, amounts received as an advancement or reimbursement may be excluded when the taxpayer making payments to the vendor does not have primary or secondary liability, other than as an agent, to pay for goods or services. While these types of arrangements may not be recognized as gross receipts in accordance with federal tax or GAAP purposes, they may be treated as gross receipts subject to Washington's B&O tax.

Exclusion from Gross Receipts Tax ‒ Ohio Commercial Activity Tax Agency

The Ohio Commercial Activity Tax (CAT) is measured by gross receipts from business activities in Ohio. The Ohio Revised Code broadly defines gross receipts as thetotal amount realizedby a business without deductions for the business expenses. There are certain items that are specifically excluded from the definition of gross receipts. For example, an agent's commission, fee, or other remuneration is excluded, and theagent must only report the portion of thegross receipts attributedto theagency relationship.

Agent

To exclude the marketplace seller's portion, a taxpayer must first establish an agency relationship between the marketplace facilitator and the marketplace seller. According to Ohio Administrative Code Rule 5703-29-13, marketplace facilitators bear the burden of proving the existence of an agency relationship by showing a "consensual fiduciary relationship between two persons where the agent has the power to bind the principal by his actions, and the principal has the right to control the actions of the agent."

The Ohio Administrative Code states that absent the agency relationship being explicitly stated in the contract, the presumption is that no agency relationship exists. However, in H.R. Options, Inc. v. Zaino, the Ohio Supreme Court stated that the commissioner will look beyond the wording of the contract to the facts and circumstances of the situation to determine whether an agency relationship actually exists.

Consensual Fiduciary Relationship

Black's Law Dictionary defines agency as "a fiduciary relationship created by express or implied contract or by law, in which one party (the Agent) may act on behalf of another party (the Principal) and bind that other party by words or actions." This definition is consistent with the language used by the Ohio Supreme Court, stating "an agency relationship exists only when one party exercises the right of control over the actions of another, and those actions are directed toward the attainment of an objective which the former seeks." A fiduciary relationship can be explained as a relationship in which an individual places complete confidence, trust, and reliance on someone who has a fiduciary duty to act for the individual's benefit.

Absent a clear agency agreement, assertion of the existence of an agency relationship heavily relies on facts and circumstances. For example, both parties acting in their own best interest may become an issue in establishing the fiduciary role and/or principal-agent relationship. However, the test of an agent/principal relationship should not be based on whether the parties are "operating in their own interest," as this applies to all agencies. Rather, one should consider whether the agent agrees to "act on behalf" of another party. Certain interactions may give rise to a fiduciary relationship, regardless of the parties’ intent. If the agreement between the marketplace facilitator and the marketplace seller does not specifically include the words principals and agents, it may be more difficult to substantiate, and careful consideration of the concrete facts and circumstances is needed to determine if an agency relationship actually exists. Furthermore, in some states, the tax authorities have the discretion to determine whether the marketplace facilitator and marketplace seller have an agency relationship.

The Takeaway

Determining whether a marketplace facilitator is an agent for gross receipts tax purposes is less clear than it is for sales or use tax purposes. Online marketplace facilitators are constantly evolving with innovative technology and dynamic strategies, and states use broad language such as total amount realized and without any deduction to define gross receipts. To avoid unanticipated consequences, consult with a member of Andersen's SALT team to better understand how your online marketplace business arrangements could create exposure for gross receipts tax assessments in one or more of the jurisdictions in which you operate.