Marketplace providers face double trouble in Texas

Marketplace providers are obligated in US states to collect sales tax on transactions completed on the provider’s marketplace. Marketplace sales to Texas customers present an additional problem. The commission retained by the provider may be subject to tax as data processing services.

In recent years, US states have enacted “marketplace facilitator” or “marketplace provider” provisions. These laws require marketplace providers to collect sales tax on transactions concluded on the provider’s electronic marketplace, even though the provider may not be the true seller.

The intent of these laws is to make tax collection easier for the revenue agency by placing the collection obligation on a single taxpayer instead of the multiple sellers whose goods are offered for sale on the marketplace. Providers are generally paid a commission for transactions completed on their marketplaces.

Texas extends its sales tax to data processing services and may treat the commission as being earned by the provider for furnishing data processing services to the seller. The state has not acted upon proposed legislation that would exempt the commissions of marketplace providers from Texas sales tax. As a result, a transaction may be subject to sales tax on the proceeds of sale and then the portion of those proceeds that are retained by the provider as a commission, could again be subject to tax.

Key takeaway

Given the foregoing, providers should carefully analyse the collective marketplace services they provide to sellers who use the marketplace to display their taxable items. If any such services are not taxable under Texas law, the provider should consider separately stating taxable charges from non-taxable charges on invoices to marketplace sellers, in order to minimize tax liability.