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Social commerce is rapidly transforming the retail landscape, with predictions of it becoming a trillion-dollar industry by 2028. This surge is already evident—according to a recent MGH survey, over half of consumers now turn to social media for gift inspiration. As social platforms become central to the shopping journey, complex questions about tax liability emerge, particularly concerning Value Added Tax (VAT), Goods and Services Tax (GST), and sales tax collection.
Defining Social Commerce: A Fluid Concept
Social commerce merges e-commerce with social media, allowing consumers to browse and purchase products without leaving their preferred platforms. Statista defines it as:
“Social commerce refers to the integration of e-commerce and social media, a dynamic pairing that has reshaped how retailers engage with consumers worldwide. As the demand for convenient online shopping continues to soar, companies are increasingly leveraging the potential of these networks. Through social media, shoppers can seamlessly browse and purchase products without leaving their preferred platform, enabling a swift and direct path to purchase.”
However, definitions vary. Some consider social commerce as transactions completed entirely within social networks, while others include purchases influenced or initiated through social platforms but completed elsewhere. This difference is more than mere ambiguity as it potentially impacts tax liability, as the role of social networks in the sales chain can range from “mere advertising” to “facilitating” entire transactions – distinguishing metrics in what could trigger potential tax liability and/or compliance obligations
Multiple Players, Blurred Lines
The involvement of multiple parties—social networks,marketplaces, sellers, intermediaries, and consumers—complicates the determination of who is liable for VAT/GST/sales tax. The crux lies in the definition of a “platform” for tax purposes, which is often broad and encompasses entities that authorize charges, deliveries, or set terms and conditions.
If a purchase is made directly on a social network, that platform may potentially become liable for tax collection. Conversely, if the social network merely sources or advertises the product, it might qualify for exemptions applicable to pure listing services. Yet, these platforms must remain vigilant to avoid inadvertently falling within the scope of tax obligations or information-sharing requirements.The Organisation for Economic Co-operation and Development (OECD) anticipated these challenges in its 2019 report on the role of digital platforms in the collection of VAT/GST on online sales, suggesting that tax authorities could consider applying hierarchy rules when multiple digital platforms are involved. This approach aims to clarify which entity should bear the tax liability in complex supply chains.
Global Perspectives on Tax Liability
Australia: Australia relies on contractual agreements to determine tax liability. In the absence of a contract, the default liability falls on the entity that authorizes the payment. This clarity is beneficial as it adapts to new commerce models.
New Zealand and Singapore: Both countries have “deemed supplier” rules, allowing entities to opt into tax liability through contractual agreements. This flexibility accommodates evolving business practices in social commerce.
Europe: The European Union’s explanatory notes for the 2021 VAT e-commerce rules state that only one electronic interface—the one where the order is placed and the sale concluded—is deemed the supplier. Other intermediaries typically engage in business-to-business transactions with the deemed supplier or the underlying seller.
United Kingdom: HM Revenue & Customs (HMRC) considers the “platform operator” liable—the entity that contracts with the seller—even if it differs from the platform facilitating the transaction. Platforms can agree among themselves who will collect and report the required information.
India: The platform contracting with the seller is deemed liable. Recent guidance addresses scenarios involving multiple platforms, emphasizing the importance of clear contractual relationships.
Chile: Chile’s new legislation introduces additional complexity by stipulating that if two platforms play a role in a transaction, only the platform that authorizes the payment is liable for the tax obligations related to the underlying transaction. This approach places significant emphasis on the role of payment authorization in determining tax liability, potentially simplifying compliance for platforms but also necessitating careful contractual arrangements.
United States and Canada: These jurisdictions have yet to provide comprehensive guidance on tax liability involving multiple platforms. However, individual states like Massachusetts in the U.S. have begun to address these complexities.
The Rise of Social Commerce in Asia
Asia, particularly China, is at the forefront of social commerce growth and has anticipated those issues. Platforms like Alibaba have proactively engaged with tax authorities to refine definitions and obligations. In a 2021 submission to the Australian government, Alibaba suggested broadening the definition of an Electronic Distribution Platform (EDP) to encompass emerging social commerce scenarios.
Challenges Ahead: The Need for Clarity and Action
As social commerce continues to expand, the ambiguity surrounding tax liability poses risks for platforms, sellers, and tax authorities alike. Without clear regulations, platforms may face unexpected tax obligations, potential penalties, and disputes. Courts might default to pursuing the entity with the deepest pockets or impose joint liability, which could stifle innovation and growth.
Platforms must proactively seek clarity, either through contractual agreements or by advocating for legislative guidance. Tax authorities, in turn, need to update regulations to reflect the evolving digital landscape, ensuring fair and efficient tax collection without hindering the growth of social commerce.
Conclusion: Adapting Systems for Future Tax Liability
The exponential growth of social commerce underscores the urgent need to reassess and adapt existing systems to manage potential tax liabilities effectively. Platforms must invest in robust technological infrastructures that can handle the complexities of tax collection, especially when multiple parties are involved in a transaction. Access to accurate and comprehensive information is crucial for correct tax determination—data such as customer location, transaction value, and the nature of goods or services sold are essential components that influence tax obligations.
The ability to capture and process this information not only ensures compliance but also impacts which entity should be deemed liable for tax collection. If a platform lacks access to the necessary data to accurately calculate taxes, it may not be the most suitable entity to hold liable. Therefore, clear guidelines and collaborative efforts between platforms, sellers, and tax authorities are essential to determine the most appropriate party responsible for tax obligations.
By proactively adapting their systems and processes, platforms can mitigate risks associated with tax liabilities, avoid legal disputes, and contribute to a more transparent and efficient tax ecosystem. This preparedness is not just beneficial but necessary in a landscape where social commerce is set to become a dominant force in global retail. Embracing these changes will enable platforms to support innovation and growth while ensuring that tax obligations are met fairly and accurately.
This article has been inspired by Le Café de l’E-Commerce community
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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