Replace “VAT” with “sales tax,” and “France” with “California” or “New York” and it becomes clear why this is familiar territory for American tax professionals.
While France is trailblazing with marketplace tax laws in the European Union (EU), 30 American states (including the District of Columbia) have already adopted a similar sales tax collection requirement for marketplaces.
Moreover, they’re doing it for similar reasons: to increase sales tax revenue by reducing the number of untaxed transactions and to facilitate sales tax compliance for small and midsize companies.
As you may know, U.S. has only been authorized to impose a sales tax collection obligation on remote sellers since June 21, 2018, when the Supreme Court issued the seminal decision on South Dakota v. Wayfair, Inc. Whereas prior to the Wayfair decision, physical presence in a state was the sole requisite for sales tax collection, post Wayfair, states can also base a sales tax collection obligation on economic activity in a state (economic nexus).
Marketplaces have been looped in as the tax collector in a growing number of states because many marketplace sales were going untaxed even after states adopted economic nexus. All states with economic nexus allow an exception for small sellers (defined differently from state to state), and many individual marketplace sellers qualify for that exception in many states. That can add up to a lot of untaxed transactions.
On Amazon alone, more than 50 percent of sales are by third-party sellers. By naming the marketplace the seller and making it responsible for collecting and remitting sales tax on all sales made through the marketplace, states can capture that revenue.
A Broader EU Wave of Taxation
France will be the first member of the EU to require marketplace facilitators like Amazon and eBay to collect and remit Valued Added Tax (VAT) directly to the tax authorities on sales by non-EU third-party merchants. France’s anti-VAT fraud measures are imposed one year ahead of EU reforms that would recognize online marketplaces as the legal seller for tax purposes in such transactions. The French are looking to implement this change effective January 1, 2020.
France’s marketplace liabilities follow watered-down versions from the UK and Germany, all aiming to tackle large-scale VAT evasion, particularly from Chinese sellers.
According to the European Commission, the collection requirement for marketplaces is part of a broader plan to boost VAT revenue from online sales and reduce VAT fraud related to ecommerce, which is approaching $8 billion in lost tax revenue annually (not including B2B transactions). The forthcoming changes should also put EU businesses “on equal footing with non-EU businesses,” and reduce cross-border VAT compliance costs, making it easier for “consumers and businesses to buy and sell goods cross-border online.”
If this language sounds familiar to American readers, it’s because it should!
What This Means for EU Marketplaces
The forthcoming changes in France and the EU represent an enormous shift for affected online marketplaces. Fallout from South Dakota v. Wayfair, Inc. pales in comparison.
Certain marketplaces operating in France as of January 2020 will be responsible for collecting the VAT due on sales made through their platforms when:
The seller is based outside of the EU
The sale is to consumers within the EU
The marketplace VAT collection obligation will apply to all goods sold through the marketplace when the seller uses fulfilment centers located in the EU (or in France’s case, in France). When goods aren’t stored in a fulfillment center located in the EU (or in France, specifically), marketplaces will be responsible for collecting VAT only on goods with a value of no more than €150 ($168).
France will also require marketplaces to separate any VAT due on sales by non-EU third-party merchants and remit it directly to the French tax authorities (a split payment requirement). However, marketplaces won’t be liable for import taxes.
Non-EU marketplace sellers will be responsible for the transporting of goods into the EU, as well as the collection and remittance of applicable import taxes and import VAT. They’ll be able to recover import VAT through the new One-Stop-Shop (OSS) single EU VAT return, due out January 1, 2021. At this point, it’s unclear how France will handle this given its January 2020 start.
Under the EU plan slated to be up and running in 2021, marketplace sellers moving goods for sale across an EU border on behalf of non-EU merchants are required to become the “deemed supplier” for tax purposes. This involves the marketplace acquiring the goods from the seller. The facilitator will make the taxable (VAT-rated) domestic sale to the consumer and is responsible for VAT collections.
Gail Cole is a Senior Writer at Avalara. She’s on a mission to uncover unusual tax facts and make complex laws and legislation more digestible for accounting and business professionals — or anyone interested in learning about tax compliance.