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The rise of e-commerce tax laws in 2021 and beyond

The rise of e-commerce tax laws in 2021 and beyond

As e-commerce booms, new tax laws loom over merchants and marketplaces alike. How can platforms stay competitive in a fast-shifting, more regulated market?

E-commerce has been steadily growing over the last decade, but the Covid-19 pandemic fueled a massive acceleration in digital transformation. Between online shopping and remote work, people are using more digital platforms, products, and services than ever. In the US alone, e-commerce spending jumped 44% in 2020.

Not just in retail, the e-commerce boom is affecting all sectors: logistics services are in overdrive and industrial real estate is seeing a spike in growth as warehouses and distribution centers are in high demand.

A rising tide lifts all boats, as they say — and the taxman wants in on it.

In the race to catch up and capture some of this revenue, governments are introducing tax laws that rope in remote sellers (foreign businesses serving local customers) and, in some cases, the e-commerce platforms themselves.

Just as many legacy businesses are scrambling to adapt to the new digital reality, online platforms need to adapt to the new tax reality.
**To stay competitive, marketplaces and platforms need to offer the full package to their merchants, one that helps manage consumption tax through the point of sale and beyond.
In this article, we’ll outline the problems facing online marketplaces and trace how new tax rules are following the trends in global e-commerce.

Finally we’ll propose how business owners and marketplaces can work together to navigate the evolving tax maze and ride the boom without going bust.

The state of e-commerce

Marketplaces and platforms are managing more merchant accounts and processing higher transaction volumes than ever. The surge impacts everything from inbound shopping traffic and site performance, to payment issues, to supply chain optimization. This puts a strain on internal teams and resources.

Not only that, but they need to watch out for competitors. It’s unclear whether consumer forces will push toward a few main players or further multiply into niche shopping arenas, specific marketplaces for online courses, software, beauty products, home decor, etc.

The bottom line is that, right now, competition is fierce. Platforms see competitors popping up, and also see their users — and their own sites — getting slapped with new e-commerce tax laws.

If they’re smart, platforms are watching the tax trends, understanding new vendor needs, and building their product accordingly.

On that note, let’s look at the tax trends.

The rise of e-commerce tax laws

Cross-border commerce just isn’t what it used to be, with imports and customs, duties and fees.

Here are the main ways governments around the world are innovating their tax policy to match new trade patterns in e-commerce and digital products. 

1. New laws on cross-border sales of low-value goods

These laws are designed to catch foreign suppliers that sell physical goods (sometimes considered imports) via online marketplaces or through other e-commerce means. “Low value” simply means the total price is below a certain threshold, so these laws apply to common consumer goods rather than luxury purchases.

The following countries already have rules about the cross-border sale of low-value goods: Norway, Australia, New Zealand, and the UK. The EU is rolling out its own rules on July 1, 2021. More countries will mirror these laws in the coming years.

2. Tax on digital goods and/or remote sellers

Some overlapping tax rules are designed to capture both digital goods and remote sellers.

According to our research, 66 countries and most of the 50 US states require foreign businesses to charge tax on digital products. These numbers are always rising.

Here are some memorable events that punctuate this trend: 

  • Back in 2015, the EU instated the VAT OSS system, which applied tax to the sale of digital products across all member states. Many other countries now have explicit rules for digital products that apply to remote sellers.

  • A few years later, the worlds of e-commerce and digital tax rules collided with the US Supreme Court’s famous (or infamous?) Wayfair decision, which made it legal for states to hold remote sellers liable for sales tax.

    That brought on the new US economic nexus rule, which applies to remote businesses that pass a certain sales volume, no matter what products they sell.

3. Marketplace facilitator laws

Platforms and marketplaces are often expected to report the tax volume accruing on their site’s transactions. But their responsibility and liability for consumption tax is growing.

The recent rise in “marketplace facilitator laws” (so-called in the US) means that platforms are on the hook for calculating, collecting, and remitting tax themselves. These laws began in the US in 2017, specifically to target Amazon.

In 2019 the Organisation for Economic Cooperation and Development (OECD) released an official report called “The Role of Digital Platforms in the Collection of VAT/GST on Online Sales,” which offers:

“practical guidance to tax authorities on the design and implementation of a variety of solutions for enlisting the platforms economy, including e-commerce marketplaces and other digital platforms, in the effective and efficient collection of VAT/GST on digital sales.”

The OECD has 37 member countries, including some of the biggest economies in the world, who are all encouraged to roll out similar laws.

Indeed, in the latest development out of the EU, some marketplaces will be responsible for VAT collection as of July 2021.

This is only the beginning of a global trend.

What marketplaces and platforms can do

Marketplaces and platforms need an easily integrated tax management solution.

Because sellers will demand it

All the above trends mean more online businesses must comply with consumption tax rules.

  • They must keep track of which products are taxable where,
  • Then monitor their sales in every jurisdiction to know when they pass a tax registration threshold.
  • Once they do, they must follow all the steps of registration and compliance (from calculation and collection to filing returns) in each country.

That’s a whole lot of stress for merchants, but it presents a huge opportunity for the platforms that serve them.

Platforms can take that work off their plate by facilitating tax compliance and reporting within its service. As a result, the site serves its customers better, enhances the stickiness of its platform, and stands out from competitors.

Ignoring the tax pain point will likely lead to higher rates of customer support requests, customer dissatisfaction, and ultimately, churn. Not only that, the platform could face problems with national tax authorities.

Because marketplaces need infrastructure for their own tax compliance and reporting.

In the surge of e-commerce activity, platforms hardly have the time or resources to build such infrastructure themselves. And yet we see that tax compliance will only become a bigger liability and legal headache.

The solution is Quaderno Connect, a set of API tools that operate as a modular tax engine, offering five mission-critical functions:

1. Customer Verification: Confirm tax IDs at point of sale

2. Tax Calculation: Apply the correct tax at point of sale based on product type and location evidence. 

3. Billing: Send localized invoices/receipts that are tax compliant worldwide, and offer end consumers a self-accessed payment history

4. Tracking: Monitor global tax registration thresholds, and alert sellers when they’re liable in a new jurisdiction

5. Reporting: Convert raw tax data into a reporting dashboard inside your app

Platforms can pick any combination of the above services, or take all five. Quaderno manages and optimizes tax compliance for users behind the scenes. 

How Quaderno Connect works

As a powerful and flexible API, Quaderno Connect fits seamlessly into a platform and is nearly invisible to merchants and end consumers.

The integration pulls specific information from users’ accounts, such as buyer location and transaction amount, in order to perform tax calculations and all other functions.

Read more about our e-commerce tax software solution to simplify your tax processes and stay compliant, so you can focus on the work you love.

Note: At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or the tax authorities.