Becoming a Merchant of Record marketplace: Why and Why Not

Many online marketplaces wonder if they should become a Merchant of Record (MoR), in order to better serve their customers and stay competitive in the ecommerce market. The goal is to provide a comprehensive service for sellers, such as content creators, by handling all facets of payments and regulations. It’s an attractive idea.

But from our experience, we believe the right way to think about becoming an MoR is: Just because you can, doesn’t mean you should.

That’s because becoming a Merchant of Record marketplace comes with a lot of responsibility and risk, both of which are unnecessary.

Marketplaces can still provide their sellers with the streamlined infrastructure for payments, tax compliance, and even data privacy without taking on the legal responsibility for all sales.

In this article, we’ll cover:

• What is a Merchant of Record?
• Merchant of Record marketplace
• Legal responsibilities of an MoR
• PCI-DSS compliance for MoR marketplace
• Sales tax compliance for MoR marketplace
• Benefits of becoming an MoR
• Benefits of NOT becoming an MoR
• Alternatives to becoming an MoR marketplace

What is a Merchant of Record?

A Merchant of Record (MoR) is the term to describe a legal entity that handles all payments and is listed as the seller in a transaction. An MoR takes on liabilities related to every transaction to an end customer, managing all due tax payments, PCI compliance, as well as refunds and chargebacks.

An individual seller can be their own Merchant of Record, transferring ownership of the good or service to the end buyer once payment is received.

Or a marketplace can function as the Merchant of Record, first purchasing the goods or services from the seller. Once the marketplace owns the product, it then sells the product again to the end buyer. There are two transactions in this scenario, and for the final consumer transaction, the marketplace is the MoR. Essentially, the MOR marketplace is a reseller.

Merchant of Record Marketplace

In an MoR marketplace scenario, the platform acts as a middleman between the buyer and the seller, handling transactions end-to-end in its own name. This includes managing customer service, processing returns, and taking a commission from each sale. This setup contrasts with a typical MoR model where customers deal directly with the vendor’s website.

Take Amazon, for instance. The ecommerce giant serves as an MoR for its sellers. Buyers purchase items through Amazon's platform, see Amazon's name on their bank statements, and receive packages with Amazon branding.

That said, it’s possible to be a successful marketplace without being the merchant of record. Let’s compare two examples in the travel accommodation sector. Airbnb is the MoR for its renters, handling everything from payments to compliance. Meanwhile, Booking.com functions as a marketplace only. It facilitates reservations but leaves property managers as the merchants of record on every transaction.

Legal responsibilities of a Merchant of Record

As we said above, an MoR takes on the legal and financial liabilities for every sale – and there are a lot of liabilities.

Here’s a brief overview of an MoR’s legal responsibilities:

• Managing payment reconciliation, handling refunds and chargebacks
• Calculating, filing, and remitting sales taxes, including VAT and GST
• Opening bank accounts around the world to accept local currencies
• Complying with PCI-DSS standards and data regulations like GDPR
• Establishing local businesses for merchant accounts, tax registrations, payments, etc.
• Exchanging currencies of foreign payments
• Integrating and maintaining B2B payment systems or payment services
• Managing all fees for credit and debit card transactions
• Implementing fraud controls and monitoring suspicious orders

There is a ton of risk laden in each of these points. Global leaders like Amazon and Airbnb have the resources to absorb and mitigate all of this risk.

But for most marketplaces, the combination of these legal responsibilities creates undue complexity in their business operations – sucking up a lot of time and money. Let’s take a look at how complex two of these areas can be: PCI-DSS compliance and sales tax compliance.

PCI-DSS compliance for Merchant of Record marketplace

PCI-DSS compliance is a critical responsibility for any Merchant of Record. PCI-DSS stands for the Payment Card Industry Data Security Standard, which is a global law regulating all companies that handle credit card information. It was established to protect cardholder data and address a variety of threats, including:

• Malware
• Phishing
• Remote access control and authentication
• Weak passwords
• Legacy software
• Card skimming

As an MoR, you must satisfy the 12 core requirements of PCI-DSS, which are categorized into six major areas:

1. Building and maintaining a secure network
2. Protecting cardholder data
3. Maintaining a vulnerability management program
4. Implementing strong access control measures
5. Regularly monitoring and testing networks
6. Maintaining an information security policy.

Not only that, but you will need to pass an annual PCI audit, conducted by a licensed professional known as a Qualified Security Assessor. While these extensive examinations are only once a year for most businesses (termed Level 1 businesses), they’re more frequent for businesses with over 6 million annual transactions.

Plus, the PCI-DSS is routinely updated to keep up with evolving cyber threats. The latest version is PCI DSS v4.0, released in March 2022, and full compliance is required by March 2025. With that in mind, compliance requires continual updates to your security measures to match the latest standard.

Sales tax compliance for Merchant of Record marketplace

Handling sales tax compliance is another top responsibility for Merchants of Record. This involves accurately calculating, filing, and remitting sales taxes, including VAT (Value Added Tax) and GST (Goods and Services Tax), across multiple jurisdictions.

Complexity arises from the varying tax rates, compliance rules, and reporting requirements in different regions or countries. This complexity can be a major hassle, both in how tedious it is to satisfy every tiny element of tax compliance as well as how difficult it is, technologically, to perform all the functions necessary.

As MoR, your marketplace must:

• Register for sales tax, VAT or GST in countries as soon as you’re liable
• Determine the correct tax code for individual products, in cooperation with each seller
• Validate customer locations and tax IDs for each sale, on the spot
• Charge the correct tax on each transaction, according to B2B reverse charge rules
• File tax returns on time in numerous countries, and remit payments on time, too.

So, staying compliant demands a thorough understanding of global tax regulations, continual updates to tax rates, and meticulous record-keeping for each transaction. Missteps in this area can lead to costly penalties and audits.

Achieving that level of tax compliance requires a big investment on the technology side of your business. Tax rate databases, a mechanism for accurate tax calculations at checkout, verifying buyers’ locations and IDs – you essentially have to build your own tax engine.

Building your own tax engine is completely unnecessary in today’s world of advanced SaaS and powerful APIs. No one has to reinvent the wheel in-house when third-party solutions already exist. For example, we built Quaderno Connect, a suite of tax APIs, specifically for marketplaces to serve their sellers. We’ll cover such alternatives more in-depth at the end of this article.

Benefits of becoming a merchant of record

There are two main ways that becoming a Merchant of Record could benefit your marketplace: increased revenue potential and expanded value proposition. However, in our experience, you could also reap these benefits by following other business models and operations. Let us explain.

1. Increased revenue potential

MoR marketplaces generate additional revenue through transaction fees, commissions on sales, subscription upgrades and other monetization tactics. They can leverage their infrastructure and services to attract sellers and buyers, driving increased transaction volumes and revenue opportunities.

But most online platforms, marketplaces, and even payment processors use these same monetization tactics to increase their revenue without becoming an MoR. It’s a standard strategy across ecommerce. So becoming the Merchant of Record is not a necessary step to increasing the revenue potential of your platform.

2. Expanded value proposition

MoR marketplaces offer services like payment processing, compliance oversight, risk management, and operational support. These benefits set them apart from competitors and appeal to sellers wanting an effortless selling process, increasing the stickiness of the marketplace platform.

But it’s also possible to offer these services to your sellers without becoming an MoR. Through seamless APIs and business partnerships, you can plug-and-play third-party services like tax compliance into your marketplace. Your sellers won’t know the difference.

Benefits of NOT becoming a merchant of record

We’ve already covered the risks of becoming a Merchant of Record marketplace. The long list of liabilities leaves a lot of room for unwanted legal trouble or tedious, time-consuming management issues.

So – in addition to avoiding such risks – what are the benefits of NOT becoming a Merchant of Record?

1. Stay agile in your business
2. Save time by minimizing and outsourcing compliance
3. Save money on operational costs
4. Focus on core competencies
5. Build business partnerships
6. Protect your brand

1. Stay agile in your business processes

By not taking on the role of an MoR, you can maintain a more flexible and lean business model. This allows you to adapt more swiftly to market changes and customer demands. Without the burden of complex transaction responsibilities and legal obligations, your team can focus on core marketplace functions and innovate without the constraints that come with maintaining these extensive processes.

2. Save time by minimizing and outsourcing compliance

Compliance with various regulatory and payment standards can be overwhelming and resource-intensive. By avoiding the MoR role, you can delegate these compliance tasks to specialized third-party providers. This not only frees up valuable time for your team but also ensures that the complexities of tax filing and payment security are managed by experts, reducing the potential for errors.

3. Save money on operational costs

Acting as an MoR can significantly increase your company’s operational costs, from building out infrastructure needs for handling payments to managing ongoing compliance issues. Even putting together an experienced customer service team takes time, training, and a full pipeline of new hires in case of turnover. These costs can outweigh the revenue benefits, particularly for smaller marketplaces. Outsourcing, even though you are subscribing to or contracting external tools, is the cheaper option.

4. Focus on core competencies

Avoiding the complexities of being a Merchant of Record enables you to concentrate on your core business strengths. Rather than diverting resources to manage financial and regulatory responsibilities, you can invest time and effort into enhancing your marketplace offerings, improving seller experience, and developing marketing strategies. This focus can drive business growth and enhance your competitive advantage.

5. Build business partnerships

Not becoming an MoR opens the door to forming strategic alliances with other service providers. By collaborating with established payment processors and compliance experts, you can enhance your service offerings without the need to build these capabilities in-house. This network of partnerships enables you to deliver a seamless experience to your sellers and customers, broadening your reach and strengthening your market position.

6. Protect your brand

By steering clear of the Merchant of Record role, you remain in control of your brand's reputation. Serving as an MoR means assuming responsibility for the products sold, to some extent. For example, if a content creator on your marketplace sells a product with copyright infringements or inaccurate medical advice, these quality issues could bring about complex legal entanglements or at least public relations crises. Even with legal safeguards in place, the potential for negative publicity and customer distrust remains high.

Alternatives to becoming a Merchant of Record marketplace

There are ways to provide full, streamlined services to your online sellers without turning your marketplace into an MoR. Let’s take a closer look at a couple alternatives.

Marketplace facilitator

Your marketplace might already be liable for sales tax, VAT, and GST in some places. In recent years, marketplace facilitator tax laws have emerged, requiring the platform to collect and remit sales taxes on behalf of sellers, simplifying compliance for individual sellers (and oversight for the government). There are marketplace facilitator laws across the US, and some similar policies in other countries around the world.

As a facilitator, you connect buyers and sellers. You manage tax on the sales without assuming full legal responsibility for the transactions. To comply with marketplace facilitator laws, you can use a comprehensive tax engine like Quaderno Connect, which integrates directly with your platform.

APIs

Another option is to seek out individual APIs that provide the functionality you want to add to your marketplace. APIs offer seamless integration of third-party services like payment processing, data security, and tax compliance. Because every integration is configured by your team, you can customize the API to your specific needs. For example, you could use the Quaderno API to perform accurate tax calculations, but opt out of using the API’s automatic tax-compliant invoices.

The API route lets you outsource complex functions to specialized providers, so you enjoy the best of both worlds: your sellers get high-quality services while you maintain focus and control over your core operations.

What's next?

If you’re unsure of which business model to choose for your marketplace and you’d like to speak to an expert, book a call with one of our product specialists. We’ll answer your questions about tax compliance, APIs, and how Quaderno could help.