Marketplace facilitators to collect Tennessee sales tax for third-party sellers

Marketplace facilitators are required to collect and remit Tennessee sales tax on behalf of third-party sellers starting October 1, 2020.

Senate Bill 2182, signed into law April 1, 2020, makes a marketplace facilitator liable for the tax due on sales it facilitates for a marketplace seller — regardless of whether the seller would be required to collect Tennessee sales or use taxes had the sale not been facilitated by the marketplace.

However, a marketplace facilitator is not liable for sales tax on third-party sales if the facilitator:

• Made or facilitated no more than $500,000 in total sales in Tennessee during the previous 12-month period (i.e., doesn’t have economic nexus); or
• Satisfactorily demonstrates that substantially all marketplace sellers for whom it facilitates sales are registered dealers.

If a waiver of the requirement is granted, marketplace sellers are responsible for collecting and remitting applicable sales tax.

Additionally, if a marketplace seller has more than $1 billion in annual gross sales in the United States (including gross sales of any related entities, or in the case of franchised entities, combined sales of all franchisees of a single franchisor), the marketplace facilitator and seller may contractually agree that the marketplace seller will collect and remit all applicable taxes. In this case, the marketplace seller must:

• Provide evidence to the marketplace facilitator that it’s registered in Tennessee; and
• Notify the commissioner that it will collect and remit all applicable taxes on its sales through the facilitator, and that it’s liable for failure to collect or remit the applicable taxes.

SB 2182 specifies that the following are not marketplace facilitators for the purposes of sales tax collection:

• Delivery network companies (i.e., a business maintaining an internet website or mobile application to facilitate delivery services for the sale of local products, such as groceries or restaurant meals; delivery services do not include any delivery requiring over 50 miles of travel from the local merchant to the customer)
• Derivatives clearing organizations
• Persons providing advertising services only
• Persons providing payment processing services only

A delivery network company that otherwise meets the definition of a marketplace facilitator may opt to be a marketplace facilitator and be liable for the tax due on the sales it facilitates.

The sales tax rate for tangible personal property is based on the destination of the sale, or the location where the consumer takes possession. Different sourcing rules may apply to taxable services.

A marketplace facilitator must report direct and third-party sales separately.

At this time, it’s unclear whether a remote seller should include sales made through a marketplace facilitator when calculating if it has economic nexus (i.e., a requirement to collect and remit sales tax based on its sales into Tennessee). The Tennessee Department of Revenue will provide further guidance closer to the October 1, 2020, effective date.

To learn whether your business has economic nexus with Tennessee or another state, take our free sales tax risk assessment.