In some states, online marketplace facilitators are required to collect and remit sales tax on your behalf when you make sales on their platforms. If your company uses marketplace facilitators, avoid overpaying on your tax returns by creating locations in AvaTax Update for the marketplaces you sell on and setting up custom marketplace rules to identify and track transactions from those sources.
What is an online marketplace facilitator?
A marketplace facilitator is an online service that sells your products and services and accepts money from customers on your behalf. Websites like Amazon, Etsy, and eBay are the best known examples. Keep an eye on updates from any online marketplaces your business uses, to make sure you're keeping compliant with new laws and policies.
Create marketplace location codes
Create a location code for each marketplace facilitator that your business uses, and assign these location codes to transactions originating from those marketplaces your business uses, in order to identify and report these transactions correctly. Remember that not all states require online marketplaces to collect and remit tax on your behalf, so make sure to check the laws in the jurisdictions where you do business before setting up your locations in AvaTax Update.
To set up a marketplace facilitator as a location:
- In AvaTax Update, go to Settings > Manage your locations and click Add a location
- Enter details for this location. Use the name of the marketplace as the Location code (example: "Amazon"), and select "Marketplace" from the Type dropdown.
- In the Category dropdown, select whether the seller or the marketplace remits tax on sales associated with this marketplace. Check the marketplace's help documentation or call their support line to figure out which option to choose here.
- Enter your primary business address in the address information fields
- Choose an Effective date for when you want this location to be available for use on transactions
- When you've set up everything the way you need it, click Save this location
Create custom rules to assign location codes to marketplace transactions
Create advanced tax rules in your company settings to modify your transactions as they come into AvaTax Update, assigning marketplace transactions the location code or codes that you've made for them. These advanced rules let you completely automate your marketplace transactions, so they can be easily sorted out of your returns when it comes time to file.
If you use a data extractor to bring your marketplace sales into AvaTax Update, you don't need to set up any advanced rules for that marketplace. The extractor takes care of that for you.
To set up a marketplace rule:
- In AvaTax Update, go to Settings > Manage advanced company settings > Manage advanced transaction rules, and then click Add an advanced rule
- Create a rule for each marketplace. Enter information for your new rule. Give it a name to help you remember why you made this rule, and a set of dates for when you want the rule to be applied. In the Rule type dropdown, select Marketplace.
- In the WHEN section, set the criteria you're using to identify transactions coming from the online marketplace. Look over your past transactions for unique identifiers that set your marketplace transactions apart from your other transactions--specific item codes or reference numbers that are included only on sale invoices from Amazon, for example. Make sure that the rule criteria you set up are applicable only to transactions from this one marketplace, to ensure that the rule isn't applied to other transactions that just happen to match the rule criteria.
Click here to see an animated example.
- In the THEN section, select the location code for the marketplace location that you want to assign to these transactions
- If you have more than one marketplace that you need to set up rules for, click Add rule set and repeat steps 4-6 for your next marketplace. When you've a rule set for each of your marketplaces, click Save advanced tax rule.
Click here to see an animated example
- Send a test transaction through AvaTax Update to make sure that your rule is being applied properly. New rules are applied to all transactions that come into AvaTax Update, or transactions that you edit and save. They don't apply retroactively to transactions already in AvaTax Update. If your rule isn't being applied correctly, check your criteria and test again.
Make absolutely sure that the rules you set up are targeting only your marketplace transactions. Rules that are too broad may lead to incorrect reporting tax reporting on your returns.
Filing returns for marketplace sales
If you file tax returns on your own, check if the jurisdictions you're filing in want you to include transactions from marketplaces or not. Sometimes you have to include those transactions even if you aren't remitting tax for them, while in other jurisdictions transactions where the marketplace has already collected and remitted the tax need to be excluded from the return form entirely. Either way, you can find information about your marketplace transactions on the Tax Summary by Marketplace Location report.
If you use Returns, transactions associated with online marketplaces are handled automatically once you've set up your account to keep track of them.