The Facebook marketplace is a vital space where persons and businesses can easily and conveniently sell a wide array of products. Suffice to say, the news that Facebook would collect sales taxes at a rate of 8% was not met with much enthusiasm. But why does Facebook Marketplace charge taxes in the first place?
Here are 7 reasons why Facebook Marketplace adds charges a sales tax:
- Changes in Regulatory Requirements
- Tax Legislation simplifies the tax collection process
- Allows states to collect taxes from fewer entities
- Increases tax compliance
- Facilitates sales audits
- Facebook is responsible for sales tax reporting
- Minimizes tax liability
Let’s explore in detail each of the reasons outlined above.
1. Changes in Regulatory Requirements
The primary reason why Facebook Marketplace introduced a sales tax was to meet regulatory requirements. As clearly outlined on the social media platform help page, in introducing the additional tax, Facebook was merely acting in compliance with changing state laws, as I will explain below.
Facebook, just like any other online platform, is governed by a set of laws and policies that determine how it conducts its business. In most cases, these laws are introduced as safeguards. Think, for instance, of the Youtube Policy that prohibits buying subscribers.
Accordingly, state tax developments over the recent past compel Facebook to collect sales taxes. This law is limited to only those states where Facebook’s activities meet the criteria of a marketplace facilitator.
As a marketplace facilitator, Facebook is required by state laws to collect and remit sales taxes for users on the platform. Conversely, this also means sellers on this platform will not be required to remit their sales tax, as Facebook will do this for them.
2. Tax Legislation Simplifies the Tax Collection Process
The Marketplace Facilitator sales tax is anchored on convenience. As aptly summarized by Jennifer Dunn from TaxJar, the legislation requiring marketplace facilitators such as Facebook to collect taxes on behalf of third parties is etched on simplifying the collection process.
By making it possible to collect taxes from large corporations such as Amazon, Facebook, and other large sellers, the states can quickly and more conveniently collect taxes from sellers operating from within their jurisdictions.
These regulatory changes are a natural consequence of the increased traction of buying and selling online, where many sellers are making a pretty penny.
This brings us to the next—and main—reason: the ability to collect taxes from fewer entities.
3. Allows States To Collect Taxes From Fewer Entities
To understand why Facebook Marketplace introduced the sales tax, it is essential first to know about the law associated with this change and its purpose.
The market facilitator sales tax can be traced back to the Supreme Court ruling in the Dakota v. Wayfair, Inc. case. The law would compel businesses that do not have a physical presence in a specific state to collect and remit sales taxes.
This is provided these businesses had more than 200,000 transactions or more than 100,000 dollars in in-state sales. This is understandable, especially considering that most large online retailers don’t have physical addresses in states from which they enjoy generous sales revenues.
This law essentially makes it possible for state authorities to collect taxes from fewer entities. In this regard, instead of collecting taxes from thousands of persons selling on Facebook Marketplace, the states only have to collect taxes from Facebook.
4. Increases Tax Compliance
By shifting the tax obligations from the sellers and onto the marketplace, states have increased the level of tax compliance. As explained by the tax experts from the Tax Foundation, the market facilitator laws essentially make it possible for the marketplace facilitator to collect taxes on behalf of the sellers.
The result of this approach is that these states have not only increased their degree of compliance with tax laws, but have also increased the amount of sales tax collected within these states.
As previously discussed, by collecting taxes from fewer entities, states are better able to optimize tax compliance and minimize leakages. Facebook is therefore forced to adopt new approaches for collecting the sales tax to be within the tax compliance guidelines.
This fool-proof solution is to simply add this sales tax for each sale. Given these aggressive efforts by the taxman, it may be a good idea to learn how to save money.
5. Facilitates Sales Audits
Tied to the need to increase compliance is the added advantage of more comprehensive sales audits. A review of the marketplace facilitator sales tax collection model shows that this legislation will also enable state authorities to audit market facilitators.
This way, the state authorities may conduct audits on the marketplace facilitator for sales made on the platform, enhancing compliance. On the same breadth, this also allows Facebook to have its ducks in a row should an audit be imminent.
The automatic inclusion of the sales tax limits the need to ask the sellers to remit it themselves, which can be problematic. In fact, this is the very conundrum states are running away from with this piece of legislation.
6. Facebook Is Responsible for Sales Tax Reporting
If you said Facebook is merely toeing the line as demanded by the marketplace facilitator legislation, you would be right.
As explained by the California Department of Tax and Fee Administration, the Marketplace Facilitator Act requires platforms that fall within this category to collect and pay sales tax and report it.
This means that the onus no longer falls on the individual sellers to report their taxes, but instead falls on the Facebook marketplace. Facebook Marketplace includes the sales tax to facilitate the tax reporting process.
7. Minimizes Tax Liability
Last but not least, Facebook Marketplace charges a sales tax to limit its liability. As discussed above, the Marketplace Facilitator Act not only places the responsibility on Facebook to collect taxes, but also to report them.
Additionally, this legislation places the platform at an increased risk of unwanted liability, should an audit reveal a mismatch between the sales subject to the in-state value of goods sold and the tax reported.
Because Facebook has to limit its liability and reduce the likelihood of being forced to cough up fees and fines on behalf of the sellers, the company simply includes the sales tax automatically.