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When you are selling online goods or services in California, you have probably gotten excited when marketplace facilitator laws came into existence. The sales tax is now collected and remitted through platforms such as Amazon, Etsy, and eBay. It seems you are relieved, right? To a lot of small business owners, this has led to a very perilous and expensive fallacy: I do not need to bother with sales tax anymore.

This is the largest hidden tax risk for California-based online sellers nowadays. Although the complexity of the process was made simple by facilitator laws, they produced a complicated web of new compliance requirements that, not being followed, can result in appalling fines, back-tax payments, and nightmarish audits.

These are not only compliance issues, but understanding these little dangers that lurk in the dark will help to protect your hard-earned money and make sure that you can grow your business without being caught up in a tax bill.

It is simply a platform where a third-party seller is connected with a customer through a sale. They do the order taking and delivery, as well as the payment processing. The California law currently demands these facilitators to:

Check the hidden tax risks

The most dangerous is the assumption that the collection of taxes by the facilitator is perfect and that you are not involved in it. This is categorically false.

It can be that even when a facilitator collects the tax, the sale passes through your business. This is the case where all sales executed in a California district by a facilitator on your behalf may continue to establish either physically or economically a nexus on your behalf. You must still be registered with the CDTFA  and make returns.

Registering a business with the CDTFA generates a filing requirement. You have to have a filing even when you think that you do not owe any tax. Late filing attracts penalties, including when the liability to the taxes was zero.

Tax software is not free. Incorrectly categorized product categories, glitches when high volume sales take place (such as on Black Friday), or when the customer address data is incorrect, may result in under-collected or not collected tax. To the CDTFA, the seller, not the platform, often ends up being the ultimate person to make sure that the right tax is paid.

There are not many businesses that only sell through a single platform. You might sell on:

You need to carefully trace the sales that were facilitated (and for which the platform should have collected tax) and the ones that were direct sales on your own site, where you are 100 percent liable to calculate, collect, and remit California sales tax.

In every platform, tax collection reports are different (e.g., the Transaction View of Amazon, the Tax Reports of Shopify). It takes a special skill to reconcile these reports with your own accounting records and your CDTFA return. One misclassified transaction may cause a discrepancy that will put your business under audit.

Marketplace facilitators tend to be dependable in standard and taxable goods. But what about:

In the case you are selling on wholesale to a customer that offers you a valid California resale certificate, the sale will be tax-exempt. The facilitator platforms that are in place are not configured to address this complexity. Unless you do certain things to ensure that no tax is charged on such transactions, then you are charging your B2B client too much and causing a disaster on the accounting side.

When you are selling a combination of both taxable products and tax-free services, the platform can have problems in applying taxation regulations properly. As an example, a consultation service with a physical report is included. The facilitator may charge the whole amount at the wrong rate.

California has its own rules for the taxability of shipping charges. Are your rules properly implemented by your facilitator platform in your direct sales?

1. Do not necessarily think that your facilitator is gathering and reporting properly. Periodically, transaction spot-check, particularly of non-standard items or transactions with other businesses.
2. Although your facilitator may have gathered all the tax, you must probably make a filing of a return. On the return, you will report the amount of sales, then take a deduction for a marketplace facilitator. Not filing because you believe you have nothing to pay is a straight road to punishments.
3. The use of facilitators to sell can form a nexus in the other states. An effective audit by a tax professional can help you assess the places to file taxes nationwide before you get that shocking letter from the revenue department of another state.

The law of marketplace facilitators aimed to help the small sellers in making life easier, but it had the unintended consequence of adding another level of compliance difficulty. College tax has now become not just a matter of collecting tax, but it has taken over the role of managing and reporting the complex tax data.

With this insight and proactive precautions, you will be able to turn this regulatory issue into a business risk to a controlled aspect of your operation. Don’t keep your head in the sand and see your compliance lapses when you get a CDTFA notice–get your sales tax under control now.

No. Even when you claim a deduction on facilitator-collected tax, you are required to be registered with the CDTFA and make regular returns. Late filing attracts penalties, irrespective of the amount of the tax that will be paid.

Absolutely. Direct selling on your own e-commerce platform (e.g., Shopify, WooCommerce) is your responsibility. These transactions should be computed, gathered, and paid separately as California sales tax, not as part of your marketplace sales.

Although the facilitator is mainly responsible, the CDTFA may still claim against you, the seller, the uncollected tax, in particular, when it is clear that you knew about the mistake. It is imperative to keep track of your transactions.

Yes. This registration with the CDTFA gives rise to a filing requirement. To claim the deduction of a marketplace facilitator, you have to complete a filing to report the total sales you made, which shows that the tax was already paid.

You also have to give the resale certificate to the marketplace facilitator, and their system should not charge tax on that particular transaction. This usually has to be manually configured in your seller account.