A subset of eCommerce, online marketplaces have experienced rapid growth in recent years because they create so many compelling benefits for all parties. Buyers enjoy more choice and often competitive prices. Sellers benefit from brand amplification and customer base access. The operators themselves create significant revenue from sellers and advertisers.
The eCommerce user penetration rate is over 60% in many European countries and the latest estimates predict that by 2027 revenues will be beyond one-trillion-dollars. Understandably, tax regulators across the world see that they need to drive policy and systems that capture tax revenue. Just as the marketplace ecosystem evolves so too is a landscape of regulation and marketplace facilitator rules in each country. Each jurisdiction has its own unique tax regulations and requirements, adding further layers of complexity for successful compliance. The risk of non-compliance increases, leading to potential penalties, fines, and reputational damage.
Household names of so-called ‘mega marketplaces’ like eBay, Amazon, and Etsy dominate the marketplace landscape. Smaller marketplaces like ManoMano and Reverb, often with a niche focus or catering to specific industries, are on the rise. Marketplace facilitator tax on Amazon will likely be dealt with by a specialist indirect tax team, but smaller platforms are unlikely to have dedicated indirect tax specialists. Instead, finance personnel or members of commercial or logistics teams become responsible for managing and achieving tax compliance.
Whether your business operates a marketplace or uses them to grow and expand sales in new territories, you need to stay on top of marketplace tax compliance. Businesses need to understand the implications of marketplace facilitator tax for your VAT registered business and the challenges that arise doing business across multiple tax jurisdictions.
Using Marketplaces to Accelerate Business Growth
Using a marketplace is often an effective sales channel offering businesses exciting growth opportunities. The scalability and efficiency of marketplaces enable entrepreneurs to expand their customer base at a rapid pace. However, a significant challenge to keep in mind is the intricate tax requirements associated with marketplace facilitator tax. Many small business owners, caught up in the swift growth of their enterprises, may lack the necessary knowledge of intricate VAT compliance. Their primary focus is on running a successful business, and tax complexities can be overwhelming. As your business begins cross-border commerce, expanding sales into new geographical territories via marketplaces, the tax landscape becomes more complex and challenging.
Marketplace operators face different but equally challenging tax complexity. According to recent research carried out by Vertex, 75% of marketplace operators state that manual indirect tax calculations are slowing down transactions and a similar number of calculation inaccuracies impact pricing and customer satisfaction. There is a constant stream of regulatory change around who is liable for tax, how to ascertain the tax jurisdiction and how to classify the product or services being sold, in order to calculate the tax and deal with relevant currency conversion. Not to mention reverse charge mechanisms and digital invoicing regulatory needs. One ‘basket’ of shopping can trigger tax liability for the marketplace operator, the seller and the consumer simultaneously.
Tax Technology to Support Marketplace Facilitator Tax
To address this challenge, a new approach has emerged – the rise of the tax technologists. Tax technologists are professionals who specialise in deploying tax technology for automation and help improve the overall efficiency of tax reporting processes, seeking to harness and optimise technology for businesses. They develop and implement solutions, like those from Vertex, that simplify complex multi-jurisdictional compliance processes, creating a more effective and efficient tax department.
Vertex for Marketplace, helps VAT registered businesses achieve marketplace facilitator tax compliance streamlining the end-to-end process for both marketplace operators and sellers doing business in Europe. It’s a modular solution that offers a range of capabilities that automate invoicing and marketplace tax compliance. It navigates and simplifies the intricacies of marketplace facilitator tax within different jurisdictions. Line-Item Liability Assignment (LILA) functionality, for example, provides real-time determination of who (or which legal entity and VAT registration) is liable for the tax for each line item in a transaction/basket and supports the marketplace facilitator tax assessment, ensuring businesses accurately determine and allocate tax liabilities within the marketplace ecosystem. By automating this process, VAT registered businesses reduce the risk of non-compliance and streamline their tax operations.
Tax technology solutions simplify and navigate the intricacies of various tax jurisdictions for your business, providing the tool needed to calculate and remit taxes accurately, reducing the administrative burden associated with cross-border transactions. By automating the tax compliance processes, businesses can focus on their core operations and enjoy a friction-free yet fully VAT compliant business experience.
Please remember that Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.