Tax laws

Market enabler tax laws have arrived, as has “build versus buy”

Now that market enabler tax laws are in place in the US, EU and a growing number of countries around the world, the question remains as to how these platforms can actually achieve tax compliance at scale. What new technologies and services can online marketplaces adopt to meet new consumer tax obligations?

While the policies themselves are unclear, the market options are. The business dilemma commonly referred to as “build versus buy” has arrived in the tax industry.

Under the new tax laws, governments are holding marketplaces accountable as a centralized responsibility for reporting, collecting, and disbursing tax revenue. The goal is not only to recoup billions of dollars in potential tax revenue, but also to streamline the monitoring and enforcement of tax policy.

Despite this attempt to simplify the process, the policies still have many loopholes and the tax obligations of an e-commerce platform remain unclear.

For starters, there is ambiguity as to which sites count as market facilitators. For example, in the United States, Etsy counts, but Shopify Inc. does not.electronic interfaceand “reputable supplier” are even less clear.

There are also caveats that complicate who is responsible for what in a given transaction. In some US states, such as Idaho, local taxes are not included in market facilitator legislation, leaving merchants responsible for charging and collecting a small fraction of sales tax. In other places, individual contracts between the platform and the seller may legally transfer tax obligations to the seller.

The variation and potential for confusion continues throughout the reporting and filing stages of the process, even within the Simplified sales tax initiative to standardize US tax laws.

Once the tax obligations are finally defined, there is still the huge logistical feat of fulfilling them. Given all the legal loopholes and technical requirements, marketplaces have two courses of action to achieve global tax compliance: build an in-house tax engine or hire third-party tax software – likely an application programming interface, or API – which effectively outsources compliance to another technology company.

Building is expensive. “The cost here is in maintaining a mature and experienced legal team in-house, or paying for outside expertise, who can provide up-to-date advice to product and technical teams,” says Andy Barker, vice-president. Executive President of Products at Mirakl, a company that provides marketplace software to e-commerce businesses.

“There is also the issue of creating documented, secure and comprehensive APIs for tax and invoicing, which requires experienced developers, product managers and tax experts to constantly coordinate on the latest requirements” , adds Barker.

Behemoths 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 the company does just that. Amazon describes its Global Tax Calculation Services team as “a program comprised of analysts, tax professionals, and software engineers dedicated to providing end-to-end global indirect tax calculation solutions.”

Such an operation is far from feasible for small platforms, which have fewer resources and less access to capital. The good news is that smaller platforms don’t really 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 manage the three main consumption taxes in the world: VAT, GST and US sales tax. These tools combine the legal expertise with the technical infrastructure needed to comply with multiple foreign tax rules at a granular and transactional scale.

“Third-party software programs allow market facilitators to place the heavy lifting outside of their overall business development program,” says Tim Cofrin, tax director at Aprio, a CPA-led business advisory firm.

This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Annie Musgrove is a tax researcher at Quaderno, where she writes about global tax changes affecting online businesses.

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