Sales Tax Nexus and Marketplace Facilitator Responsibilities for an Online Retailer
GreenLeaf Organics LLC (GreenLeaf) is an online retailer of organic skincare products. It is headquartered in Arizona with no physical presence in California. In 2023, GreenLeaf had $600,000 in sales to California customers through its own website. Additionally, GreenLeaf sold $400,000 of products through an online marketplace (MarketplaceX) to California customers. GreenLeaf also has an affiliate relationship with a California blogger who earns commissions by linking to GreenLeaf's website; those affiliate sales totaled $50,000 in 2023. GreenLeaf's products are shipped from Arizona. GreenLeaf did not collect California sales tax on any sales, claiming it has no physical presence and its sales are below the $500,000 threshold. The California Department of Tax and Fee Administration (CDTFA) conducted an audit and assessed tax on all California sales. GreenLeaf argues that MarketplaceX is responsible for tax on marketplace sales, and that affiliate sales should not count toward the threshold.
1. Determine whether GreenLeaf has an obligation to register and collect California sales tax for 2023, considering the marketplace sales and affiliate relationships.
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Under California law (R&TC §6203), a retailer engaged in business in California must collect sales tax. Effective April 1, 2019, a remote seller is considered engaged in business in California if, in the preceding or current calendar year, it has total combined sales of tangible personal property for delivery in California exceeding $500,000. All sales, including those made through a marketplace, are included in the threshold. For 2023, GreenLeaf's own website sales were $600,000, which alone exceed the $500,000 threshold. Therefore, GreenLeaf is engaged in business in California and must register and collect tax on its own website sales. The marketplace sales ($400,000) are also included in the threshold calculation, but the marketplace facilitator (MarketplaceX) is responsible for collecting and remitting tax on those sales. GreenLeaf should not collect tax on marketplace sales if MarketplaceX is registered and collecting. The affiliate sales ($50,000) are also included in the threshold, but since GreenLeaf already exceeds the threshold, the affiliate question is moot for 2023. However, if GreenLeaf were below the threshold, affiliate sales might create nexus under the affiliate nexus rules (R&TC §6203(c)(4)), but those rules were largely superseded by the $500,000 threshold. GreenLeaf's argument that it has no physical presence is irrelevant because economic nexus applies. GreenLeaf must collect tax on its $600,000 website sales and possibly on the $50,000 affiliate sales if those are made through its website. The audit assessment on all sales is partially correct: GreenLeaf is liable for tax on its own website sales, but not on marketplace sales if MarketplaceX collected the tax. GreenLeaf should provide documentation of marketplace sales to CDTFA to avoid double taxation.
2. What are MarketplaceX's obligations as a marketplace facilitator, and how should the tax be allocated between GreenLeaf and MarketplaceX to avoid double taxation?
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MarketplaceX is a marketplace facilitator under California law (R&TC §6041 et seq.). A marketplace facilitator is required to register with CDTFA, collect and remit sales tax on all sales facilitated through its marketplace, and report those sales. MarketplaceX must collect tax on the $400,000 of GreenLeaf's sales made through its platform. MarketplaceX is the retailer for those sales and is solely responsible for the tax. GreenLeaf should not collect tax on those sales and should not report them as its own sales, but it must keep records. To avoid double taxation, GreenLeaf should exclude marketplace sales from its own taxable sales when filing its return. If MarketplaceX failed to collect tax, CDTFA may assess MarketplaceX, not GreenLeaf, for those sales. However, if GreenLeaf has reason to believe MarketplaceX is not collecting tax, GreenLeaf may still have liability. GreenLeaf should obtain a certificate from MarketplaceX or verify that MarketplaceX is registered. In the audit, GreenLeaf should provide CDTFA with a schedule of marketplace sales and evidence that MarketplaceX collected tax. If MarketplaceX did not collect, CDTFA may pursue MarketplaceX. GreenLeaf is liable for tax on its own website sales ($600,000) and affiliate sales ($50,000) if those are not marketplace-facilitated. The affiliate sales are made through GreenLeaf's website, so GreenLeaf is the retailer and must collect tax. Therefore, GreenLeaf's total taxable sales are $650,000, not $1,050,000. The audit assessment should be adjusted accordingly.