E-commerce

Navigating tax in an e-world

Oliver Froehlich considers the impact of indirect tax in an online retail environment with a global supply and customer base.

Oliver Froehlich European e-commerce manager, Vertex

Author bio

Oliver Froehlich is European e-commerce manager at Vertex, where he leads the e-commerce and marketplace channel. Managing indirect tax in an online retail environment when there are multiple selling channels, and a global supply and customer base, is incredibly complex. In the United States alone, there are over 11,000 standard sales tax jurisdictions. Throw into the mix that online marketplaces are complicated by nature, with new sellers, products and customers being added all the time, and you’re faced with a quagmire of tax legislation that even the most switched-on tax department would struggle to keep pace with. So what are the tax implications of transacting in an ‘e’ world, and how can you ensure accuracy and compliance?

The digital landscape The pandemic has accelerated the shift to e-commerce, with the UK online retail market growing by over 40% in 2020, adding £25.1 billion to the market. This growth trajectory is expected to continue, with e-commerce predicted to overtake town centre shopping by 2025. And there are further changes to come. Online marketplaces, for example, are expected to grow by 15% annually and match direct e-commerce spending by 2025. And it’s only a matter of time before people shopping in the metaverse via their avatars becomes commonplace.

Tax implications in an ‘e’ world Change is fast-paced, bringing with it an ever-evolving tax landscape that’s adding considerable layers of complexity, particularly when online retailers begin to sell globally. And special attention must be paid when a business runs an online marketplace, which is essentially an online department store selling a range of products and brands. Obligations on e-commerce businesses and marketplace providers to account for VAT, goods and services tax (GST) or sales tax on physical goods have increased globally since 2015. For instance, the 2018 ruling in South Dakota v Wayfair Inc dragged many non-US online retailers into the US sales tax net for the first time, as it stipulated that taxes had to be paid based on the location of the consumer rather than the physical location of the retailer. Therefore, non-American retailers selling online to US based consumers, were now subject to US taxes. Requirements for tax to be paid based on customer location have now become standard in many countries, meaning that e-retailers need to be acutely aware of where their customers are located and the tax implications. Furthermore, 70 countries, including the UK, have introduced a digital services tax (DST). Therefore, operating in one or more of these countries requires payment of the appropriate taxes if the retailer is providing a ‘digital service’.

The UK government, which introduced its digital service tax in April 2020, has imposed

© Getty images/iStockphoto

a 2% tax on the gross revenues of large multinationals operating search engines, social media platforms and online marketplaces with revenues from UK users exceeding £25 million. But of course, when providing a digital service to overseas customers, the business or marketplace owner needs to be clear where each customer is located, as they could be liable to pay a digital services tax in the customer’s country. Online marketplaces are intrinsically fluid and fast-moving, with new products, sellers and customers being added all the time, as well as new markets being entered into. Tax must be considered across multiple touchpoints. For instance, product classification on marketplaces creates risk, with marketplace owners often giving the sellers the freedom to choose how they categorise their products. This classification then determines the tax code.

So what happens if the seller lists their products in an incorrect category? Will this be picked up and rectified? And what about when customers cancel subscriptions and move to one-off purchases instead? If this change hasn’t been identified and accounted for, it would be a customer status violation. In addition, for tax to be filed correctly, all necessary tax provinces must be provided on the checkout form, each country’s invoice obligations must be fulfilled, and the marketplace owner needs to ensure tax is filed in the correct currency. It’s a minefield, and the expectation is that online sales channels will keep growing and the taxing of e-commerce businesses will get more rather than less complex. In fact, the UK is currently exploring the possibility of an online sales tax as a means to rebalance the taxation of the retail sector. This could have far-reaching consequences for both British and overseas online retailers.

Navigating tax with tech As the tax landscape undergoes rapid change to reflect a fast moving e-commerce market, tax obligations are becoming harder and harder to fulfil. It’s becoming impossible for one tax team and one in-house IT team to solve all the challenges they are faced with. This makes it important for online retailers to create partnerships with e-commerce tax specialists sooner rather than later. As part of this, businesses must source tax technology experts to create a solid base of automation. Indirect tax technologies or ‘tax engines’ are critical for electronically determining global tax liabilities and reporting obligations, and for analytics and compliance automation. Such technologies remove the guess work and errors from tax determination, making tax a precise, seamless and frictionless part of online transactions. And as tax and IT teams aren’t continually battling with understanding and addressing tax legislation within new markets and jurisdictions, this reduces administration and supports growth without the tax risk.

A final thought Tax and accounting teams based within e-commerce businesses often spend hours every month aggregating data in spreadsheets for international tax reporting, and the more countries they sell in, the more spreadsheets they need to fill in. This is not only incredibly time-consuming and prone to error, but it can’t possibly support a fast-growing online retailer or marketplace provider with ever-changing tax liabilities. The bottom line is that manually managing tax in an ‘e’ world is completely unviable. And as e-commerce continues to grow, online retailers must invest in tax technologies to enable automated compliance, invoicing and reporting, while delivering a frictionless digital shopping experience. ●