Marketplace facilitator laws have transformed how sales tax is collected and remitted in online transactions. Platforms like Amazon are often required to collect and remit sales tax on behalf of their sellers, but this doesn’t always absolve involved parties of their sales tax obligations. The lines can blur quickly for drop shippers, third-party sellers, and marketplace facilitators.

Consider the following hypothetical:

Adam is a drop shipper, and Bob is a seller on Amazon.

Bob sells a widget on Amazon. Once the sale is confirmed, Bob visits Adam's website and orders the widget to be shipped directly to the Amazon purchaser's address. Because Bob is based overseas and sells a multitude of widgets per day across the United States, he is not registered to collect sales tax in the U.S., nor does Adam collect a reseller certificate from him.

To protect himself in the event of an audit, Adam requires Bob to upload a confirmation page of the Amazon order. This page ties the purchaser's address on Amazon to the shipping address Adam uses to fulfill the order.

But is Adam truly protected during an audit? This article will explore the ins and outs of marketplace facilitator laws, drop shipping laws and responsibilities, as well as offer our recommendation for navigating these sometimes-muddy waters.

Overview of Marketplace Facilitator Laws and Sales Tax Responsibilities

Marketplace facilitator laws assign the primary responsibility for collecting and remitting sales tax to platforms like Amazon. While this alleviates some compliance burdens for sellers, it may not absolve them of responsibility. Below is a survey of marketplace facilitator laws across five key states:

New York

A marketplace provider is a person who, under an agreement, facilitates sales of tangible personal property by a marketplace seller or sellers. A person “facilitates a sale of tangible personal property” when:

The person provides the forum in which, or utilizing which, the sale takes place or the offer of sale is accepted, including an internet website, catalog, shop, store, booth, or similar forum, and
The person, or an affiliate, collects the receipts paid by a customer to a marketplace seller for the sale of tangible personal property or contracts with a third party to collect the receipts.

N.Y. Tax Law § 1101 (e)1.

Persons are affiliated if one person has an ownership interest of more than five percent, whether direct or indirect, in another or where an ownership interest of more than five percent, whether direct or indirect, is held in each of such persons by another person or by a group of other persons that are affiliated persons with respect to each other. TSB-M-19(2.1)S.

According to TSB-M-19(2.1)S, marketplace providers must collect and remit sales tax on all taxable sales of tangible personal property facilitated for marketplace sellers. This law has been in effect for sales made on or after June 1, 2019, and it applies to any marketplace provider who facilitates over $500,000 in gross receipts from sales of tangible personal property delivered into New York and makes or facilitates more than 100 sales delivered into the state over the previous four sales tax quarters.

Marketplace providers must register for sales tax purposes, collect and remit tax on all applicable sales, and issue Form ST-150, the Marketplace Provider Certificate of Collection, to marketplace sellers.

Alternatively, a marketplace provider may include language in its publicly available agreements with sellers to confirm that it is registered and will collect and remit sales tax on all taxable sales. Marketplace providers are relieved of liability for errors in collecting tax if they can show that such errors were due to incorrect or insufficient information provided by the seller.

Similarly, marketplace sellers are relieved from collecting sales tax on transactions facilitated by a registered marketplace provider as long as they receive and retain Form ST-150 or rely on a compliant agreement. However, sellers remain responsible for collecting and remitting tax on sales through other channels, such as their websites.

California

Under Revenue and Taxation Code sections 6041-6041.6, a marketplace facilitator is defined as an operator of a marketplace—whether physical or online—that contracts with marketplace sellers to facilitate the sale of goods through the marketplace, provided the statutory criteria are met.

To qualify as a marketplace facilitator, the platform must perform at least one key activity, such as transmitting communications between buyers and sellers, owning the infrastructure or technology that connects them, or processing payments. The facilitator must also engage in at least one service related to the seller’s goods, including fulfillment, listing, or branding the sales as its own.

California's Marketplace Facilitator Act places significant responsibilities on marketplace facilitators. Effective October 1, 2019, the Act requires marketplace facilitators to collect, report, and remit sales tax on retail sales of tangible personal property facilitated through their platforms for delivery to California customers. This law was later expanded to include collecting certain fees beginning January 1, 2022.

Marketplace facilitators must register with the California Department of Tax and Fee Administration (CDTFA) for a seller’s permit if they meet the physical presence threshold in California or achieve an economic nexus. Ca. Rev. and Tax. Code § 6042. Economic nexus is met if a facilitator’s total combined sales for delivery in California—direct or facilitated—exceed $500,000 in the current or previous calendar year.

Texas

In Texas, A marketplace provider is an entity that owns or operates a marketplace and processes sales or payments for marketplace sellers. Texas Tax Code § 151.0242 requires marketplace facilitators to collect and remit sales tax on behalf of their sellers for transactions conducted through their platform. The law also explicitly states

that the seller is not liable for taxes the facilitator fails to remit, provided the seller has obtained written confirmation from the facilitator.

Pennsylvania

Pennsylvania defines a marketplace facilitator as someone who contracts with marketplace sellers to list or advertise the sellers’ goods and services for sale through a marketplace. The facilitator directly or indirectly collects the payment from the purchaser and transmits it to the marketplace seller.

Effective July 1, 2019, Pennsylvania law requires marketplace facilitators with over $100,000 in annual gross sales in the state to collect and remit sales tax on behalf of their sellers. To mitigate potential liabilities, sellers should ensure that facilitators are registered and compliant with these requirements.

Washington

In Washington, A marketplace facilitator is a business that does the following three activities:

1. Contracts with sellers to facilitate the sale of a marketplace seller’s product through a marketplace for consideration.

2. Engages, directly or indirectly, in transmitting or otherwise communicating the offer or acceptance between the buyer and seller. This does not include merely advertising.

3. Does any of the following activities, directly or indirectly, with respect to the seller's products:

Payment processing services.
Fulfillment or storage services.
Listing products for sale.
Setting prices.
Branding sales are those of the marketplace facilitator.
Taking orders.
Providing customer service.
Accepting or assisting with returns or exchanges.

RCW 82.08.010(15)

According to RCW 82.08.0531, beginning October 1, 2018, marketplace facilitators must collect and remit retail sales tax on all taxable retail sales made or facilitated through their platforms, regardless of the seller's tax collection obligation. Sellers are encouraged to maintain records of the facilitator's compliance to protect themselves during audits.

Sales Tax Obligations for Drop Shippers

Drop shipping introduces unique challenges when determining sales tax obligations, particularly in multi-party transactions. Involved parties should understand each other's roles and the required documentation to comply with sales tax requirements and avoid legal liability for careless mistakes.

In a typical drop shipping scenario, the customer places an order with the seller. The seller then typically purchases the goods from the drop shipper, who delivers the goods directly to the customer. Although the drop shipper delivers the goods, a question arises regarding whether the taxable transaction is between the drop shipper and the seller or the seller and the customer. Typically, the determination of which transaction constitutes the taxable transaction depends on whether or not the seller or drop shipper has nexus with the ship to state, sourced state. The determination and applicability of nexus is discussed in the next section.

Nexus Conflicts Between Sellers and Shippers

A significant challenge in drop shipping arises when the seller does not have nexus in the ship-to state, but the shipper (supplier) does. Here, the shipper may be required to collect and remit sales tax on the sale to the seller unless the seller can provide valid exemption documentation acceptable in the ship-to state.

The nexus status of the seller, the shipper, and the customer’s state determines who is responsible for sales tax collection:

If the seller has nexus in the ship-to state, the seller must collect and remit sales tax to that state.
If the seller does not have nexus but the shipper does, the shipper may be required to collect sales tax on the sale to the seller unless the seller provides valid resale certificates or exemption documentation.
If neither the seller nor the shipper has nexus, the customer is responsible for remitting use tax to the state where the goods are delivered.

The second scenario is widespread and problematic. Here, the shipper (supplier) must either:

Collect sales tax on the drop ship transaction; or
Accept valid exemption documentation, such as a resale certificate, from the seller to exempt the transaction.

Even if a shipper does not believe they have nexus in a ship-to-state, the shipper should obtain resale documentation from the seller. This precaution protects the shipper if it is later determined that nexus existed.

Nexus and Registration Rules

States can only require out-of-state sellers to register for sales tax if nexus has been established. Nexus may arise through physical presence, such as property or employees in the state, or economic thresholds, such as exceeding specific sales volume or transaction counts. If nexus exists, the seller must collect and remit sales tax in the customer’s state.

Documentation Requirements

For the transaction between the seller and the shipper to remain tax-exempt, the seller must provide the shipper with resale documentation deemed acceptable in the customer’s state. This may include:

Streamlined Sales Tax (SST) Certificate: This certificate is accepted by full member states (states that have been determined by the Streamlined Sales Tax Governing Board to have changed their sales tax laws so that they meet all of the requirements set forth in the SSUTA), and the seller can use their home state number.
Multistate Tax Commission (MTC) Certificate: A widely accepted multi-state option.
State-Specific Resale Certificate: Issued for the customer’s state, including the seller’s home state registration number.

In jurisdictions like DC, Hawaii, and Maryland, alternative documentation such as MTC or SST certificates is not accepted. If the seller is not registered in these states, the shipper must charge sales tax on the transaction, even if the seller lacks nexus.

Let’s take New York as an example. According to Tax Bulletin ST-190 (TB-ST-190), drop shipment transactions in New York involve two distinct sales: the sale from the supplier to the retailer and the resale to the customer.

A registered retailer must use Form ST-120, Resale Certificate, to exempt the initial transaction and collect sales tax on the resale. Unregistered out-of-state retailers can also use Form ST-120 under limited circumstances, provided they meet criteria such as being registered in another jurisdiction or operating from a location not requiring registration. Fulfillment activities in New York, if conducted by an unaffiliated third party, do not alone establish a nexus for the retailer, avoiding the need for registration in many cases.

In California, the Marketplace Facilitator Act includes provisions to address the tax obligations of drop shippers. When a drop shipper delivers goods directly to a California customer on behalf of an unregistered seller, the drop shipper is considered the retailer for sales tax purposes.

Marketplace sellers who rely exclusively on facilitators can provide resale certificates to suppliers when purchasing inventory for resale, including the marketplace facilitator’s registration information, to avoid unnecessary tax liability.

Four-Party Transactions

In a more complex scenario, a retailer acts as an intermediary between the customer and the seller. The retailer places the order with the seller, and the seller places the order with the shipper, who delivers the goods to the customer. Payment flows backward, from the customer to the retailer, then to the seller, and finally to the shipper.

In these cases, some states accept flow-through documentation, where:

The retailer provides the seller a resale certificate for the customer’s state.
The seller provides the shipper their home state resale certificate and the retailer’s customer-state certificate.
If the customer is tax-exempt, their exemption certificate must accompany the seller’s home state certificate.

Practical Advice for Drop Shippers in Amazon-Facilitated Transactions

In an Amazon sale involving a seller and a drop shipper, the seller—operating through Amazon as a marketplace facilitator—typically enjoys clean protection from sales tax liability. As the marketplace facilitator, Amazon is responsible for collecting and remitting sales tax for sales made on its platform. However, the drop shipper, who fulfills orders and ships the goods, faces unique compliance challenges.

For a drop shipper, the ideal practice is to collect a valid resale certificate from the seller for the state where the goods are shipped. This certificate provides the necessary exemption documentation to shield the drop shipper from having to collect and remit sales tax. Unfortunately, this approach can be impractical if the seller cannot be located or is not registered in the state where the goods are being shipped.

At a minimum, drop shippers should require the seller to upload an invoice or similar documentation clearly showing Amazon collected and remitted the sales tax for the transaction. This step creates a record that ties the sale to Amazon’s compliance as the marketplace facilitator, providing the drop shipper with an additional layer of protection in the event of an audit. While this may not be legally sufficient in the event of an audit, it may serve as a practical answer to a difficult challenge.

Contact a Tax Professional for Assistance

Sales tax obligations for drop shippers can be complex due to varying state requirements. Failing to comply with tax laws or maintaining insufficient documentation can incur costly penalties and liabilities.

A knowledgeable sales tax professional can help you determine the correct approach to compliance and protect your business from unnecessary risks. Don’t leave your e-commerce business exposed—contact a tax professional today to safeguard your operations.

Understanding Sales Tax Implications for Drop Shippers and Amazon Sellers