Factual Background
But before discussing the impact of this new policy, let’s first review the specific facts of the advisory opinion. The entity that petitioned for the opinion operates an online marketplace on which independent software vendors (“ISVs”) offer for sale, among other things, software, games, and apps (“software products”) for customers to download electronically, using their personal computers, tablets, game consoles, phones, and other devices. In other words, the entity that requested the opinion operates the infrastructure or marketplace through which other vendors sell their software products to their customers over the internet. The marketplace provider: (1) hosts and supplies the software products to customers on each ISV's behalf, (2) processes the customer's payments, and (3) remits the proceeds to each ISV, less the marketplace provider’s service fee. The marketplace provider also calculates the appropriate amount of sales tax due on each transaction and remits the sales tax directly to the Tax Department. The marketplace provider does not sublicense the software product to the customer. The license agreement is directly between the ISV and the customer. The ISV, as the licensor, determines the price at which the software products are sold to end customers.
Legal Analysis
It is important to note that the Tax Department makes a significant assumption here. The advisory opinion states, “it is assumed that [the marketplace provider] has sufficient nexus to New York to permit the State to require it to collect sales tax.” But more on this later. Right now, let’s take a look at the analysis the Tax Department applies to this set of facts. The marketplace provider recognized that the software sold on its platform is taxable under New York law (i.e., it is prewritten computer software which qualifies as taxable tangible personal property for sales tax purposes). So the question wasn’t whether the product was subject to tax, as is the case in most advisory opinions. Rather, the question here was whether the marketplace provider, by virtue of its involvement in the transaction, could be required to collect the applicable tax.
To answer this question in the affirmative, the Tax Department dusted off a broad, but little-used and rather obscure section of statute. Tax Law § 1101(b)(8)(ii)(A) defines the term “vendor.” A “vendor” in NYS sales tax parlance is basically a person who is required to collect tax. But this definition also includes the following language:
"when in the opinion of the commissioner it is necessary for the efficient administration of this article to treat any salesman, representative, peddler or canvasser as the agent of the vendor, distributor, supervisor or employer . . . for whom he solicits business, the commissioner may, in his discretion, treat such agent as the vendor jointly responsible with his principal, distributor, supervisor or employer for the collection and payment over of the tax."
The Tax Department, citing supporting case law regarding boat broker/dealers, concludes that “[t]his provision permits the Department to treat as vendors intermediaries that perform key acts in facilitating taxable sales by vendors.” Finally, the Tax Department states that due to the marketplace provider’s involvement in the transaction (providing information about the ISVs’ products, bringing buyers and sellers together by hosting the website where sales can be made and accepted, and collecting the purchase price), the Commissioner is entitled to treat the marketplace provider as a co-vendor with regard to all taxable sales it facilitates on its marketplace on behalf of ISVs. The opinion then notes two additional points to support its conclusion:
- this approach relieves the ISV vendors that make sales only in the marketplace of the need to register to collect tax and file returns (assuming the marketplace provider properly collects and remits the tax); and
- treating the marketplace provider as a vendor improves the efficiency of sales tax administration (this is based on the fact that the marketplace provider is in a better position than the underlying ISV vendor to collect the sales tax since the marketplace provider is collecting the purchase price from the customers).
This conclusion naturally raises several related questions that the advisory opinion goes on to answer. For example, the advisory opinion confirms that the marketplace provider will be protected from liability by accepting resale and other exemption certificates from purchasers provided that it timely accepts the certificates in good faith. This protection would also extend to the ISVs, provided they too could accept the certificates in good faith. Finally, the opinion concludes that the marketplace provider could request refunds of any excess sales tax it has inadvertently collected and remitted, provided it first refunds such amounts to the customers.
Commentary
As we mentioned in the introduction, this advisory opinion announces a significant shift in Tax Department enforcement policy. Indeed, the advisory opinion itself acknowledges this shift. In footnote 1, just after announcing that marketplace vendors can be held liable for sales made on the platform, the opinion states, “This conclusion is inconsistent with the outcome in TSB-A-99(49)S. That Advisory Opinion no longer reflects the Department’s policy and should no longer be followed.” This overt acknowledgement that a change in policy has occurred should prevent any overzealous auditors from attempting to assert sales tax liabilities on marketplace providers prior to the issuance of this advisory opinion. But going forward, marketplace providers had better “turn on the tax” if they have not done so already. And while this advisory opinion deals exclusively with sales of digital software over the internet, the underlying statutory basis and rationale can be applied to other situations. Thus, more traditional marketplaces that sell tangible goods and ship them to customers in New York should also start collecting tax on taxable transactions facilitated through the marketplace (though we acknowledge that this seems a bit inconsistent, at least in spirit, with other advisory opinions previously issued, such as TSB-A-15(43)S).
It is important to note that the advisory opinion is based on a significant assumption: that the marketplace provider has sufficient nexus with the state. But what if this isn’t the case? What if the marketplace provider has no physical connection to New York State? Would the Tax Department conclude that a marketplace has substantial nexus with the state if vendors used the platform to sell more than $300,000 to New York customers and conducted more than 100 transactions in the state? See our detailed review of New York’s economic nexus provisions here. This seems likely, but we’ll have to wait and see.
Finally, it probably won’t surprise anyone that New York has decided to impose a collection obligation on marketplace providers. Legislation imposing collection obligations on marketplaces is pending in almost half the states. In fact, New York happens to be one of those states. Part G of the budget bill that is currently being negotiated between the Governor and the Legislature contains legislation that would codify this marketplace collection obligation. This begs the question, with this legislation pending and scheduled to be issued within a month or so, why did the Tax Department feel it necessary to make such a sweeping change in enforcement policy now? Similarly, can such a dramatic change be accomplished by administrative fiat (i.e., a change in policy) rather than through the legislative process? The Tax Department seems to think that it has the statutory basis to do so. But this seems a bit inconsistent with the fact that marketplace legislation was first proposed in 2018-19 Executive Budget, but was not enacted. Perhaps the Tax Department is concerned that a similar fate awaits the current proposed legislation. Finally, as a practical matter, if the current legislation is passed, the immediate enforcement of the Tax Department’s new policy would be inconsistent with the law. Recent amendments to the legislation would impose an effective date of June 1, 2019 rather than the original effective date of September 1, 2019. Thus, the advisory opinion seems to allow for immediate enforcement of this new policy, while the law would not take effect until June 1, 2019.
Conclusion
One way or another, a marketplace provider sales tax collection obligations are coming to New York, and the Tax Department thinks they’re already here. Consequently, it would probably be better for such marketplace providers to “turn on the tax” sooner rather than later.
