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The checkout page is the “holy grail” of online commerce. It’s where the online sales journey is finally and successfully completed, but it’s also the “graveyard” where over 70% of shopping carts are abandoned! The stakes are high, and businesses go to great lengths and expense to create seamless customer journeys that lead to successful transactions. Yet, the dramatic challenge of complex and diverse tax rules quickly evolving for taxation at the customer location—threaten to disrupt this delicate balance.

Understanding where your customer is located may seem straightforward but when selling digital services globally, this seemingly simple question becomes a complex puzzle. With over 100 jurisdictions outside the U.S. implementing their own nuanced rules to tax digital services, and 45 of the U.S. states extending their own sales tax rules, it’s clear: the challenge of customer location is no longer just a tax issue—it’s a business-critical one! 

The Evolution of Customer Location Rules

For physical goods, determining customer location is relatively simple—the dispatch address/location can be relied on and there is a worldwide general consensus  in most  countries that tax is due and owing upon delivery. But the explosion of digital services, which require no physical delivery, have forced a rewriting of the rules and regulations applying long-existing principles to the new ecommerce world. Tax jurisdictions across the globe now demand that businesses apply the tax rate of the customer’s location, not the seller’s. The EU led the charge with its 2015 VAT rule changes, which required businesses to identify the customer’s location using two non-conflicting pieces of evidence.

Examples of acceptable evidence under EU rules include: billing address, IP address or geolocation, bank details or mobile country codes (MCCs)

This EU blueprint has influenced tax policies worldwide, though with variations. For example, Singapore and Taiwan prioritize payment information because it is what they use for audit, while Russia permits reliance on a single piece of evidence. Certain countries also require an address such as the US where the tax is linked to the Zip code or Canada where the province is key. Despite these nuances, the core issue remains: businesses must accurately and consistently pinpoint the customer’s location, or face compliance challenges during audits.

The Clash Between Tax Compliance and the Customer Experience

While it is obviously mandatory to comply with the tax laws and regulations in every one of the jurisdictions in which you sell , businesses must also solve the dilemma of achieving compliance while minimizing friction for customers. Every additional step at checkout—like asking for ZIP codes or billing address—risks higher cart abandonment rates – remember the graveyard! Yet tax authorities require precise location data to apply the correct tax rate.

In the U.S., accurate tax determination as stated above often requires a street address or ZIP code+4, a challenge heightened by the awkward yet growing pattern of inclusion of digital services under existing, “pre-ecommerce”sales tax laws, regulations and rulings. Last May, the Streamlined Sales Tax Governing Board introduced recommended changes to simplify compliance, allowing sellers of digital goods to calculate taxes based on ZIP codes if buyers decline to provide full street addresses. States may assign the highest, lowest or a blended tax rate within a ZIP code to address local tax complexities. This simplification results from years of discussion and negotiation among business leaders and tax authorities from various state-members.  One should note that the seller should still require the full address- impacting its checkout – and receiving at least a ZIP code remains mandatory.

This struggle isn’t unique to the U.S. In Europe, jurisdictions like the Canary Islands (part of Spain but outside the EU VAT system) complicate matters further. IP addresses and mobile country codes often point to Spain, creating discrepancies in determining the customer’s true location that can be defined only with ZIP code. 

Potentially Creative Solutions for Location Determination

Given these challenges, businesses have developed innovative methods to confirm customer location without disrupting the shopping experience. Dropdown menus or pop-ups asking customers to self-confirm their location have become common. While these are less intrusive, they still require validation through other evidence to meet regulatory standards.

Payment methods have also become a critical piece of evidence in many countries. However, new payment systems like Alipay or iDEAL don’t always provide location-specific information, forcing businesses to make presumptions—China for Alipay, the Netherlands for iDEAL. As these systems expand globally, these assumptions will become less reliable.

The Subscription Model Dilemma

Subscription-based businesses face an additional challenge: determining how often to verify a customer’s location. Should the location data collected during initial sign-up be reused indefinitely without periodic re-verification? Imagine how an auditor might view such a process several years down the road.  What happens if the customer moves? Striking a balance between compliance and minimizing customer friction is key, especially when trying to retain dormant subscribers. This balance however, is significantly critical because if there is indeed a challenge on audit, it could potentially result in a multi-year assessment (plus penalties and interest) and it will be pragmatically impossible to go back to the customer to try and recreate your customer’s prior location history.    

Consistency Is Key

Perhaps the most critical lesson for online businesses is the need for consistency. As noted above, tax authorities scrutinize how businesses determine customer location, especially during audits. A single sale with conflicting location data or using different criteria for different customers and jurisdictions can raise red flags, exposing businesses to significant assessments and penalties. Moreover, businesses must navigate data privacy laws that may limit the collection of location-related information, creating further compliance tension.

The Road Ahead

Almost 10 years after the EU’s VAT rules revolutionized how businesses approach customer location, challenges remain. Tax rules applicable to e-commerce continue to evolve, driven by the inherent complexities (like location taxation) of the digital economy. For businesses, the task has grown from a  twofold exercise – to meet compliance obligations while preserving the customer journey – to now a threefold challenge – adding the questions around privacy and cybersecurity.

Tax audits are increasing as the “honeymoon” period of enforcing the new rules is unofficially over, and the cost of getting it wrong—both financially and reputationally—is high. The question for online businesses isn’t just “Where is my customer?” but also “How do I prove it without losing the sale?” and “complying with the various approaches” (Zip code, payment information or two non conflicting evidence).

In the world of global e-commerce, customer location is no longer just a line item on a tax form—it’s a core part of strategy, operations, and success.

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Disclaimer: The views, statements or opinions expressed in this article are solely those of the author and do not represent tax advice and are not to be designated to be the views, statements or opinions of any other person, group, association or company.

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