Tax Compliance for Marketplaces
As the digital economy has grown exponentially in the past decade, tax laws have been racing to keep up. The response to this challenge has been fairly straightforward – placing significant tax compliance, reporting and remittance burdens on digital marketplaces instead of the individual sellers. Marketplaces are now responsible for tax collection.
- End-to-end indirect tax management for digital marketplaces (like Amazon, Uber, Airbnb and other e-commerce platforms) has become far more difficult due to the widespread adoption of marketplace facilitator rules globally.
- New obligations on non-resident e-commerce businesses also mean that marketplaces will need to calculate VAT in more places than ever before, and performing tax calculations in hundreds of jurisdictions around the world is a gargantuan task in the absence of appropriate tax software.
- Performing tax ID validations in real-time for thousands of suppliers or customers in dozens of countries, most of which have separate tax number validation databases, is a huge challenge for most marketplaces (as well as traditional SAAS companies).
- Marketplaces must issue locally compliant invoices, as non-compliant invoices can result in increased customer support costs, manual work, and customer dissatisfaction.
- The marketplace facilitator laws also apply to marketplaces operating in the US, and verifying suppliers' TIN (tax ID) / EIN (employee ID) is a vital step for withholding tax purposes.
The context around the new tax obligations in the e-commerce space
Before the rise of the digital economy, tax authorities were fairly equipped to manage indirect tax collection from a relatively stable number of “normal” businesses. The digital economy has allowed anyone to open up their own business, whether that means selling goods or taking advantage of new jobs created by the gig economy, like becoming a rideshare driver. The traditional tools available to tax authorities were wholly inadequate to manage this huge wave of small entrepreneurs.
To address this, more and more countries have created marketplace facilitator rules (or deemed reseller rules). These rules make the marketplace the buyer and (re)seller for all transactions taking place on its platform.
In other words, from a contractual perspective, the underlying seller may sell directly to the underlying customer. However, a legal fiction is created whereby the marketplace is seen, from an indirect tax and invoicing perspective, as making the purchase from the underlying seller and making an onward sale to the buyer. The logic is simple - it is easier to monitor the tax reporting of one marketplace than thousands of individual sellers.
In practice, requiring marketplaces to act as the buyer and seller for transactions on their platform increases the administrative burden on these marketplaces immensely. As the burden increases both in quantity and complexity, the tools (not just the ERP’s) marketplaces use to stay compliant must rise to the occasion.
How do marketplaces determine the correct tax treatment?
The spread of marketplace facilitator rules has made the marketplace a party to the underlying transaction occurring via their platform. Marketplaces will therefore need to update their tax determination software to calculate the correct tax treatment in most places they do business.
New obligations on non-resident e-commerce businesses also mean that marketplaces will need to compute VAT in more places than ever before.
Performing tax calculations in dozens (or hundreds) of jurisdictions around the world is tough. Figuring out what tax rate to use on a wide variety of different products can be just as difficult. Finally, the effort needed to prepare the tax returns and to remit the taxes should not be underestimated. Keeping up with these rules is nearly impossible without significant tax and IT resources internally. Tax automation is key to meeting these challenges.
Managing different currencies is also a challenge that many marketplaces face. Tax must be normally declared and paid to the tax authorities in local currency, but that may not be the currency of the transaction. There are often specific rules in place regarding which sources to use for currency conversion, which vary widely from country to country. Relying on a tax solution that assists with currency conversion will alleviate some of the strain.
Fonoa offers a powerful tax engine that calculates indirect tax on all types of services in over 140 countries, available via an easy-to-use API. The tax rates and rules are maintained by a dedicated team, which means no maintenance for your internal teams. And we offer a simple currency conversion feature using the sources required in each individual country’s legislation.
How can marketplaces validate tax numbers?
As the deemed supplier of sales occurring on their platforms, most marketplaces facilitate and engage in cross border transactions. Marketplaces will need to verify the customer tax number to understand if they must charge indirect tax.
In countries with VAT / GST (e.g. most countries besides the US), marketplaces will also need to verify the seller tax number to ensure that they are not being wrongly charged tax. Deducting VAT / GST charged by a supplier that has not provided a valid tax number can lead to a rejection of the VAT / GST deduction in many cases.
Performing these validations in real-time for thousands of suppliers or customers in dozens of countries, most of which have separate tax number validation databases, is a huge challenge for most marketplaces.
Fonoa offers a global tax ID lookup and validation solution allowing you to instantly validate tax ID numbers from around the globe. With our solution, you can check tax numbers one-by-one or in a batch of up to 50,000 numbers, access your validation history and respond to audit requests through our easy-to-use interface. We cover over 100 countries, most of which are not covered by any legacy tax compliance software providers (e.g. Avalara, Taxjar, or Vertex).
How do marketplaces issue compliant invoices?
As the deemed seller, marketplaces will be required to issue invoices to buyers on their platform.
Sending something that generally resembles an invoice is not sufficient - marketplaces need to make sure they get this right. For example, customers often ask for locally compliant invoices for accounting and compliance purposes. Compliant invoices become even more important in B2B transactions when VAT / GST is charged, in order to ensure the customer’s tax deduction right.
When invoicing goes wrong - whether because of missing information, wrong formatting, or it is simply not issued at all - customers complain. This increases customer support costs, manual work, and customer dissatisfaction. Often you will need the time of costly internal (or external) tax experts to resolve the complaint.
Fonoa’s invoicing solution automatically generates locally-compliant invoices for all relevant transactions. We also provide significant flexibility in terms of formatting and including special invoice mentions, depending on your preference. As with our other solutions, the connection between our system and yours is done via an easy-to-use API that can be up and running in days.
Does this affect US sales tax or only VAT / GST?
As of 1 January 2023, all US states have passed marketplace facilitator rules for US sales tax, requiring marketplaces to charge sales tax on behalf of the underlying sellers.
US sales tax does not have the same concept of validation of customer and supplier tax numbers as VAT, largely because there is no concept of input tax deduction. However, verifying the TIN / EIN number of suppliers is a vital step for withholding tax purposes. Tax number validation is still very relevant, just in a different context.
Fonoa is the only provider on the market that allows for a single API connection that covers both US sales tax and VAT / GST in the rest of the world, allowing us to streamline the onboarding process. We also provide a TIN / EIN number checking functionality as part of our tax number validation solution.
How Fonoa can help
Fonoa offers a single platform to manage each of these challenges faced by marketplaces. Our top notch customer support means we have the fastest implementation time on the market, and our worldwide coverage means you can start using our solutions right away wherever you do business.