Now that marketplace facilitator tax laws are in place throughout the U.S., the EU, and an increasing number of countries around the world, the question remains how these platforms can actually achieve tax compliance at scale. What new technologies and services can online marketplaces adopt in order to meet the new consumption tax obligations?
While the policies themselves are not clear cut, the marketplaces’ options are. The business dilemma commonly known as “build vs. buy” has arrived in the tax sector.
Within the new tax laws, governments are holding marketplaces liable as a centralized responsibility for reporting, collecting, and remitting tax revenue. The aim is not only to recoup billions of dollars in potential tax revenue but also to streamline tax policy oversight and enforcement.
Despite this attempt to simplify the process, the policies so far still have plenty of holes, and an e-commerce platform’s tax obligations remain unclear.
To start, there’s ambiguity as to which sites count as marketplace facilitators. For example, in the U.S., Etsy counts, but Shopify Inc. does not.The European Commission’s terms of “electronic interface” and “deemed supplier” are even less clear.
There are also caveats that complicate who’s liable for what in any given transaction. In some U.S. states, such as Idaho, local taxes are not included in marketplace facilitator legislation, leaving merchants on the hook for charging and collecting a small fraction of the sales tax. In other places, individual contracts between platform and seller can legally transfer tax obligations back to the seller.
Variation and the potential for confusion continue through the reporting and filing steps of the process, even within the Streamlined Sales Tax initiative, which is designed to make U.S. tax legislation more uniform.
Once tax obligations are finally outlined, there’s still the huge logistical feat of fulfilling them. Given all the legal loopholes and the technical requirements, marketplaces have two courses of action to reach global tax compliance: building an in-house tax engine or hiring a third-party tax software—likely an application programming interfaces, or API—that effectively outsources compliance to another tech company.
Building is expensive. “Here, the cost is in maintaining a mature and experienced legal team internally, or paying for external expertise, that can provide up-to-date guidance to product and tech teams,” says Andy Barker, the EVP of Product at Mirakl, a company that provides marketplace software to e-commerce companies.
“There’s also the matter of building documented, secure, and fully featured APIs for taxes and billing, which requires experienced developers, product managers, and tax experts to constantly coordinate on the latest requirements,” Barker adds.
Juggernauts such as Amazon.com Inc. have the resources to build their own in-house tax engine and hire an elaborate team to maintain it—and that’s exactly what the company is doing. Amazon describes its Global Tax Calculation Services team as “a program comprised of analysts, tax professionals and software engineers that are responsible for providing end-to-end global indirect tax calculation solutions.”
Such an operation is nowhere near feasible for smaller platforms, which have fewer resources and less access to capital. The good news is that smaller platforms don’t actually need to build a solution in-house, given the sophistication of third-party tax APIs already available. APIs are pre-coded capabilities that can be “plugged in” and added to a website’s functions.
There are software-as-a-service solutions on the market whose APIs handle all three of the main consumption taxes in the world: VAT, GST, and U.S. sales tax. These tools combine legal expertise with the technical infrastructure needed to comply with multiple foreign tax rules on a granular, transactional scale.
“Third-party software programs allow marketplace facilitators to place the heavy lifting outside of their overall business development program,” says Tim Cofrin, the tax director at Aprio, a CPA-led business advisory firm.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Annie Musgrove is a tax researcher at Quaderno, where she writes about global tax changes that affect online businesses.
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