What are the must-haves in a tax engine for marketplaces?

As a marketplace you’ve come to the conclusion you need to invest in a tax engine. You’re finding it increasingly difficult to keep up with the ever-changing indirect tax regulations and stay on top of your liabilities. And you’ve realised it’s impossible to manage thousands of tax calculations manually while delivering a first-rate customer experience.            

But what are the four functions you need your tax engine to deliver throughout the entire process?      

Calculating and determining the right amount of tax

The main purpose of a tax engine is to record all your transactions in real time. By sending the data for each transaction through an API, it produces a response in milliseconds so you know exactly who is responsible for paying the VAT, what you’re liable for as a marketplace, what the seller liable for and what the end customer is liable for. No more confusion over the rules for particular products in different jurisdictions or territories. No more deliberation over whether a product should be zero-rated, reduced or full rate. 
   
The tax engine will work out the Line-Item Liability Assignment (LILA) for every item automatically, even if there are multiple items in the basket from different sellers. It takes into account where the buyer and sellers are located, where the seller is registered, whether the buyer is a business and the value of the consignment.  

Filing, remittance, and payment

Unfortunately, if the wrong party pays, it doesn’t absolve the responsible party. So if the marketplace pays instead of the seller, it’s just a free gift to the tax authority. And if the tax authority finds there are transactions where the VAT has not been paid, they will chase payment, risking audits and hefty financial penalties.

Using tax filing software to automate and improve efficiency in your filing process or engaging with a filing outsourcing partner, who can also provide remittance services reduces the opportunity for error and penalties. 

Delivering compliant invoices

An invoice is the driver of any VAT system and will be what the tax authorities look at first to check compliance. An integrated tax engine invoicing solution  will raise a separate invoice automatically for each seller even if there are multiple invoices per shopping basket. The challenge is that the seller could be based anywhere in the world. Even within the EU’s single market your solution needs to handle different sets of invoicing rules for each country.

Another challenge for marketplaces is the self-billed invoice. This is when a marketplace raises a VAT invoice to themselves on behalf of the underlying seller - as well as the invoice to the end purchaser. Both need to be created in sync at checkout. Tax technology can help you simplify your processes and save you work.  

Audit and reporting 

For auditing purposes you need to be able to show a complete and accurate transaction history for the previous ten years. Your tax solution should produce a complete list of transactions completed on the marketplace. It should also send a transaction history to each seller with the VAT highlighted that they must pay. This means there is an easy mechanism for resending invoices and validating activity. Clear and concise reporting dashboards will show real-time reports and equip your teams with the information they need, no matter how many different tax authorities they’re dealing with.   

At Vertex, we have over 40 years’ experience in tax technology and payment automation, specific to e-commerce and marketplaces. We want you to be able to do frictionless commerce, knowing you’re meeting your obligations with accuracy and consistency. So make sure the tax engine you’re considering is up to the job and download our latest guide, “Global Research – taxing times for the marketplace and seller relationship”.