Tax management in e-commerce - statistics & facts
Nothing is certain except death and taxes. Benjamin Franklin’s famous quote holds true even in the e-commerce sector, as tax compliance is a legal obligation for online sellers. In addition to that, cross-border enterprises purchasing and selling goods from abroad are essentially online importers and exporters. As such, they must abide by trade regulations – sales tax obligations included.
Either outsourcing to providers of remittance-as-a-service or managing obligations internally, online sellers may need to invest more in tax compliance processes and tools, as well as e-invoicing systems in order to comply to changing regulations in the U.S. and Europe.
The digital economy has changed, and U.S. regulations with it
In the United States, e-commerce businesses must collect sale taxes in the state they established locations, employees, or inventory. In addition to that, in 2018, the Supreme Court decision ‘South Dakota v. Wayfair’ introduced the economic nexus – remote sellers must register for sales taxes in states where their order volume and revenue are significant. To make the rules even more complicated, the thresholds triggering the economic nexus vary from state to state. Five years after, e-commerce merchants still struggled to navigate the complex U.S. compliance system, although big marketplaces serve as valuable facilitators in most cases. Big platforms like Amazon or eBay calculate, charge, and collect applicable taxes on behalf of third-party sellers, reducing the cost associated with managing tax requirements. To navigate such a system, most merchants upgraded their compliance tools and invested in software and automation technologies.Harmonizing the EU VAT jungle
Unlike the United States, the European Union charges different VAT rates depending on the country and the type of product or service sold. Besides being prone to fraud in the past, the European system made things complicated for European enterprises selling products in more than one country. With the introduction of One Stop Shop (OSS), European sellers are allowed to declare and remit their VAT in their headquarters’ country, regardless of other EU countries they have customers in. The ‘VAT in the digital age’ reform simplified and digitalized tax compliance for non-European sellers and will align with U.S. rules for big marketplaces. From 2025, international marketplace platforms will be legally responsible for their EU-sellers’ tax obligations. By 2028, European institutions have the ambitious plan to harmonize the VAT reporting system, by making e-invoicing mandatory for B2B transactions – digital ones included.How is tax tech doing?
Tax software can automate and streamline several operations related to tax compliance - a feature often included in cross-border technologies for online sellers and SaaS providers. Being service providers for digital businesses, startups entering the market and established players are affected by fluctuations in both e-commerce and fintech worlds. Although being acquired by Stripe in 2021, TaxJar was not spared by the layoffs wave in 2022. Likewise, the tax software company Avalara announced multiple layoffs despite the acquisition by Vista Equity Partners, one of the leading private equity companies in the United States.Either outsourcing to providers of remittance-as-a-service or managing obligations internally, online sellers may need to invest more in tax compliance processes and tools, as well as e-invoicing systems in order to comply to changing regulations in the U.S. and Europe.
