Article written by:
Jeff Monsman
Senior Manager, State & Local Tax Services
Corwin Dickey
Senior, State & Local Tax Services
Amazon is the heavyweight name in the marketplace facilitator sales tax collection space, but many taxpayers may not realize that services such as Grubhub, DoorDash, and Uber Eats may be considered marketplace facilitators as well. Restaurants that utilize these services are creating convenience for their customers, while potentially creating a number of unintended sales tax collection issues for their business.
How did we get here?
Marketplace facilitator laws were created as a result of the establishment of economic nexus standards for sales tax and allowed for states to consolidate their collection efforts. States with marketplace facilitator legislation in place require sales tax collection through a single entity, instead of all the individual sellers on that entity’s platform. As an example, a state requires Amazon, as a marketplace facilitator, to collect and remit sales tax on behalf of its sellers on Amazon Marketplace.
With this backdrop, let’s explore some of the more important, and practical, considerations businesses (particularly restaurants) should be aware of when selling to customers through a marketplace facilitator.
Is the delivery service actually a marketplace facilitator?
The first consideration is whether a given delivery service is functioning as a marketplace facilitator in a given state. A good way to tell if a food delivery service (or any other marketplace facilitator) is properly collecting and remitting sales tax to the states is to Google “COMPANY-NAME marketplace facilitator”. Doing so for Amazon, eBay, DoorDash, and Uber Eats will provide a result that takes you to a page on the company’s website showing where and when they started collecting and remitting sales tax to a given state as a marketplace facilitator. Notably, Grubhub does not include a webpage like those mentioned above. While this initial search is a good starting point, restaurants should consult directly with their third-party delivery partners to ensure that the proper party is collecting and remitting all applicable sales taxes.
Are the sales of delivered food subject to sales tax?
Once it has been determined that a food delivery service is collecting and remitting sales tax as a marketplace facilitator, the next item to consider is the taxability of what the restaurant is selling. For restaurants new to delivery, taxability may not have been a concern before COVID-19. In many cases, sales of food for on-premises consumption are taxable, but the taxability of take-out/delivery food can depend on several conditions, some of which include the amount of food sold, cutlery supplied with the sale, and the temperature of the food sold. Additionally, the delivery service may, or may not, be collecting sales tax on the delivery services/fees. Regular reviews of taxability determinations are important to ensure continuing compliance, especially when new systems or services (like delivery partners) are added to a business model.
Is the tax rate collected by delivery services correct?
Beyond the responsibility and taxability issues raised above, the sales tax rate that the service is collecting must also be considered. Sales tax rates can vary wildly depending on how the transaction is being sourced, and sourcing rules also vary between states. Moreover, in certain situations, the applicable sales tax rate may vary based upon which party (the restaurant or the marketplace facilitator) is ultimately responsible for the remittance of sales tax. Depending on the nature and origination of the transaction, the restaurant may still be responsible to collect and remit sales tax despite utilizing a marketplace facilitator, and will still remain responsible for the collection and remittance of sales tax for all non-marketplace facilitated sales.
What other considerations exist for sales through a delivery service?
There are other potential difficulties in the form of whether or not sales through a delivery service are wholesale or retail transactions. In situations where the initial transaction is determined to be at wholesale, restaurants establish additional complexity that did not previously exist through the requirement to issue and collect exemption certificates. In addition, when multiple levels of transactions are created, additional tax types (i.e. gross receipts and income/franchise taxes) may similarly be enhanced for each party.
What does this all mean?
All of these considerations illustrate that restaurants choosing to use a delivery service are entering a new frontier in terms of sales/use tax compliance that did not previously exist. Before entering into a delivery partnership, it is important for restaurants and marketplace facilitators to understand the roles, responsibilities and risks associated with sales tax collection in order to avoid or limit future sales tax exposure.
Where do we go from here?
Sales tax is complicated and made more so by the addition of marketplace facilitator laws. Despite the complexity, there are several steps taxpayers can take to determine if they have an issue now, or in the near future.
- The first step is to talk to any delivery service partners and figure out how they are handling marketplace facilitator laws, and how to see that change in the data and reports they provide.
- Contact the state in question and confirm how they are administering sales taxes through marketplace facilitators. Many states have published guidance directly addressing common marketplace facilitator issues and they may even publish a list of any marketplace facilitators that have registered with the state.
- Check-in with your accounting team and CPA firm to make sure they are aware of the issues that may come up surrounding sales through marketplace facilitators. Not all taxpayers have the resources to keep up with the intricacies of sales tax laws, and seemingly small shifts in administration can have significant sales tax impacts. Having a trusted advisor can help to eliminate any sales tax surprises.
GBQ’s State & Local Tax Services team stands ready to assist you and your business. To discuss this information in more detail, contact Jeff Monsman or Corwin Dickey today.
