Navigating e-commerce tax to enable global business growth

Tax Automation for E-Commerce Retailers

E-commerce businesses across Europe and beyond find themselves navigating a complex network of e-commerce tax laws that continually shift and redefine the rules of engagement.

What are the challenges with e-commerce tax rules?

As e-commerce growth continues to surge and online marketplaces continue to flourish, traditional tax rules and structures struggle to keep up with the dynamic and borderless nature of e-commerce transactions. Online platforms have become an integral part of global trade; facilitating transactions across borders and redefining the traditional concept of a taxable presence.

Conventional tax rules, originally designed for brick-and-mortar transactions, are no longer fit for purpose because e-commerce transcends geographical boundaries. This poses a challenge for tax authorities trying to determine where economic activities occur and where tax obligations should be fulfilled.

For several years now, tax authorities have been re-evaluating and adapting their policies in response to e-commerce. Tax policies, rules and regulations are being changed to better capture e-commerce tax revenue and close the value-added tax (VAT) gap – and it’s working. The EU VAT gap is narrowing. According to the 2023 VAT Gap report released by the European Commission, approximately €61 billion in VAT was lost by member states in 2021 – down from €99 billion in 2020.

For businesses, while they can reach consumers worldwide, the ever-evolving tax treatment of imports and exports within the European Union (EU) and beyond is extremely complex. This, coupled with the seismic change caused by Brexit, means that staying ahead of current and proposed government changes, e-commerce VAT rules, tax rates and compliance requirements, presents significant challenges for businesses today. The sheer volume and speed of e-commerce transactions has created a need for tax authorities to keep pace with rapid financial flow and prevent VAT revenue leakage.

Tax on e-commerce - FAQ jargon buster

Navigating the world of e-commerce taxation can sometimes feel like deciphering a secret code. Our jargon buster breaks down key terms, from the basics to the latest tax schemes – helping you navigate e-commerce tax complexities with ease.

What do we mean by e-commerce?

The is buying and selling goods or services over the internet. This includes online transactions between businesses, consumers or both.

What is meant by distance selling?

This is a type of e-commerce where goods are sold to customers in a different location than the seller's physical presence. It often involves transactions across borders or between tax regions within a country.

What is a digital service?

This refers to an intangible service or product delivered electronically over the internet – such as online subscriptions, software downloads or streaming services.

What are e-commerce taxes?

These include VAT, sales tax and digital taxes. The specific taxes that apply can depend on several factors including the location of the buyer and seller, the type of goods or services, the value of the transaction and the applicable tax regulations in those regions.

What is the One-Stop Shop (OSS)?

Introduced in July 2021, OSS is a simplified system for handling VAT on cross-border sales of goods and services within the EU. It was designed to streamline VAT compliance for businesses engaged in e-commerce across EU member states, covering both business-to-consumer (B2C) and business-to-business (B2B) transactions.

What is the Import One-Stop Shop (IOSS)?

The IOSS applies to cross-border sales of low-value goods. It streamlines import processes for consignments with a customs value of less than €150. E-commerce sellers can register for the scheme in one EU member state and use a single electronic portal for filing and paying VAT. This reduces custom clearance times and administrative burdens.

What is the EU VAT in the Digital Age (ViDA) proposal?

ViDA covers three areas: VAT reporting obligations and e-invoicing, VAT treatment of the platform economy and a single EU VAT registration. The proposal calls for the harmonization of e-invoicing across the EU. The terms of regulation are still to be agreed with the hope that regulations will take effect from 2028. Listen to our webinar to find out more about Vertex’s approach to ViDA.

What are some scenarios of e-commerce tax?

One element of the challenge is that there are many scenarios that could apply. Tax rules and rates change depending on your business location, the location of the buyer, the storage location of the products and the value of the transaction. It can be difficult to work out the right way forward. Here are some scenario examples:

Cross-border sale of goods

An Italian e-commerce company sells fashion accessories to customers in Belgium and the Netherlands. The company stores its inventory in a fulfilment center in Germany for quicker delivery to customers in various EU countries.

Distance selling regulations will apply and thresholds that trigger VAT obligations in Belgium and the Netherlands will have to be considered. Understanding the e-commerce VAT rules and implications for these cross-border online sales is crucial, potentially requiring VAT registration in multiple EU countries.

Digital services across borders

A digital marketing agency based in France providing online advertising services remotely to clients in Germany and Spain. The French agency will have to apply the EU's rules on the taxation of digital services, ensuring compliance with VAT regulations in Germany and Spain. The OSS could be a useful mechanism for simplifying VAT reporting across these borders.

One-Stop Shop (OSS)

A Danish home accessories retailer decides to expand its market to customers in the Netherlands. Faced with the complexity of managing e-commerce VAT for cross-border physical goods, OSS could be helpful. The Danish retailer only needs to register in its home country, centralizing VAT reporting for e-commerce sales made in the Netherlands and avoiding the need for separate registrations.

Marketplace facilitation – Import One-Stop Shop (IOSS)

A UK online marketplace might facilitate transactions between sellers in Sweden and buyers in Italy. The platform connects buyers and sellers, handling payment processing and logistics. The online marketplace will have to assess whether it's eligible to use the simplified IOSS for low-value consignments.

Navigating e-commerce tax is a challenge for all businesses

Whether you’re launching a new e-commerce business or are a well-established corporation compelled to recalibrate for the digital age, getting tax right should be a priority on the to-do list.

Embarking on the exciting journey of building a new e-commerce platform should not mean relegating tax considerations to an afterthought. Instead, integrate tax planning into the very fabric of your business blueprint. Even if the regulatory reporting requirements seem distant on the horizon, proactively plan from the outset. Waiting until your business gains momentum before addressing tax concerns can prove not only costly, but also immensely time-consuming to unravel and rectify.

Larger enterprises accustomed to traditional business models can be thrust into the dynamic environment of e-commerce and may need to evaluate the new shape of the business. This could mean a supply chain strategy rethink. Tax on e-commerce policies differ significantly from the traditional brick-and-mortar.

E-commerce can scale rapidly, and swift growth can become a challenge if tax considerations are not anticipated and planned for at the outset. Critical details can be overlooked and mixed up and looking back at such oversights entails unnecessary and often significant costs and an increased risk profile for the established business.

Regardless of your business's size, industry sector or product offerings, proactive planning and constant monitoring of your business operations is the key. The e-commerce model means meeting a new set of challenges and questions to be answered: Where are you selling from and where do your customers reside? What tax registrations should you have?

The contractual agreements with logistics suppliers and warehouse arrangements can reshape your tax in e-commerce tax compliance tasks. The location of your warehouses could also be a critical factor in applying the latest tax on e-commerce rules and regulations. Each transaction is unique and has the potential to alter your tax position. Tracking the movement of goods becomes not just a logistical concern but a strategic imperative in the face of complex e-commerce VAT regulations.

Europe vs. U.S.

While sharing similarities with Europe in terms of e-commerce taxation, the U.S.A. operates under a different set of rules. It's crucial to note that understanding one region does not automatically equate to success in another. When your business expands across state and local jurisdictions, you’ll need to adhere to the layers of e-commerce tax law governing each territory. Assuming familiarity can be a costly oversight.

Europe presents a certain simplicity in its approach to e-commerce taxation. However, even though the European Union provides a framework, individual countries maintain distinctive tax policies, leading to variations in how the same goods or services are taxed. E-commerce tax rules and tax rate harmonization is lacking, and local cultural policies influence the categorization of goods. There is no one-size-fits-all solution.

Understanding one jurisdiction does not automatically ensure accurate calculation of e-commerce tax elsewhere. The pace of change further complicates matters, with alterations occurring every few months, demanding a continuous commitment to staying informed.

Expanding into new territories requires a holistic approach. It’s about more than tax rates, businesses must consider local buying habits, payment timelines and the regulatory attitudes toward new entrants. A support system, including e-commerce tax technology and tax experts well-versed in the specificities of each jurisdiction, becomes indispensable for seamless global operations.

Forge partnerships with tax technology experts to seamlessly integrate e-commerce tax automation

Tax for e-commerce is a multifaceted challenge, and successful compliance demands the agility to navigate the shifting landscape. Whether you're venturing into e-commerce for the first time or adding e-commerce to an established business, finding the right tax technology partner is akin to securing an insurance policy and essential for safeguarding against the risks and complexities.

This approach will help you steer clear of the pitfalls and ensure your business adopts best practice as the foundation to making it all work. While the rules for tax on e-commerce have the potential to cause your business headaches, you can instead lean into the challenge with the right tax technology partner.

Contact Vertex today and let us help you plan for the uncertainties and stay on top taxation regulations in the e-commerce space.

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