Marketplace facilitators like eBay and Etsy continue to grapple with shifting regulatory definitions that impact tax compliance. As individual states each refine their qualifications for what constitutes a marketplace, even niche platforms like consignment shops and specialized online retailers may soon be included in the definition.
With states trending toward lowering transaction thresholds for sales tax collection, smaller businesses are particularly vulnerable to falling out of compliance and, as a result, come under scrutiny from auditors during reporting season. These shifting requirements are often implemented without legislative oversight, underscoring the need for technology solutions that help businesses monitor and adapt to evolving rules.
Marketplace Definitions are Changing
Regulations that once applied only to massive e-commerce platforms are now being interpreted more broadly to include any business that facilitates sales on behalf of a third party, regardless of size. This includes platforms that process payments, list third-party products, handle customer service or shipping, or connect buyers and sellers in a way that facilitates a transaction (think companies like Poshmark or Amazon).
Niche and specialized platforms such as peer-to-peer selling platforms, online art marketplaces and even some service-based digital platforms are being reclassified as marketplace facilitators. These redefinitions often occur through administrative rule changes or department guidance, rather than clear legislative processes, making them difficult for smaller businesses to track in real time.
Ultimately, these shifting definitions are catching many smaller businesses off guard. Staying compliant now requires not only a thorough understanding of what a business does, but also how that activity is interpreted under each state’s evolving tax rules.
The Tax Compliance Ripple Effect
To fully understand the landscape, one must understand marketplace facilitator laws. Sellers who conduct business through an online marketplace such as Amazon or Facebook Marketplace are subject to a set of sales tax regulations that focus on marketplace sales called marketplace facilitator laws. Marketplace facilitator laws require the platform that facilitates the sale to collect and remit sales tax on behalf of the marketplace seller, shifting the obligation from the seller to the marketplace platform.
The catch here is that sellers are still responsible for collecting and remitting sales made outside of a marketplace platform, including on an e-commerce site, trade show or a brick-and-mortar location. By understanding the scope of marketplace facilitator laws, sellers can identify which marketplaces will collect tax and which smaller marketplaces, like consignment shops, are not subject to marketplace facilitator laws.
Because the definition of what counts as a marketplace is constantly changing and varies state-to-state, these sudden regulatory shifts create downstream effects for businesses. Businesses that previously never considered themselves marketplaces must now collect and remit sales tax in multiple jurisdictions or risk penalties, audits and reputational harm.
The uncertainty and variability from state to state only add to the confusion. For example, one state may require any platform that collects payment to register as a marketplace facilitator, while another may not. Some states exempt platforms based on industry or size, while others do not.
Lower Thresholds, Higher Risk
To add another layer of complexity, economic nexus laws continue to expand, pulling more small businesses into the tax compliance fold as states lower sales thresholds and revise what counts toward them. This often occurs without clear guidance or warning. Even businesses with no physical presence in a state can be required to register, collect and file sales tax simply by exceeding a certain number of sales. As a result, companies are now facing complex, multi-state filing obligations that can quickly become overwhelming without the proper technology in place.
These lowered thresholds disproportionately impact smaller businesses as they often lack the in-house tax expertise to identify shifts in thresholds and other tax obligations that may have been implemented without clearly outlined rules. Larger businesses are more likely to be able to handle complex, multi-state compliance and have dedicated compliance teams in place. Subsequently, these smaller businesses are more likely to fall behind, miss filings or unknowingly violate new regulations, making them easy targets for audits and penalties despite having far fewer resources or revenue.
As tax rules shift rapidly across states, automation and other adaptive technologies have become essential for staying compliant. Modern tax software can track evolving regulations in real time, calculate the correct rates and streamline filing across multiple jurisdictions. These tools reduce human error, save time and help businesses avoid costly penalties by flagging risks before they become issues, turning tax compliance from a reactive scramble into a proactive, manageable process.
Adapt, Consult and Comply for Taxes
Staying compliant in today’s evolving tax landscape has gone from being a chore to a nearly unattainable nightmare. As states broaden their definitions and lower thresholds, even the smallest businesses can quickly find themselves out of step.
To stay ahead, companies should invest in reliable and intelligent tax technology, consult with compliance experts and actively monitor regulatory changes. Taking these proactive steps now can prevent costly surprises later.
