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Almost by stealth, and in just a few years, the role of marketplaces in the collection and remittance of taxes has changed immeasurably. We are not just discussing the world of VAT anymore; we are almost at the point where marketplaces are replacing tax authorities, especially when it comes to tax collection or indeed educating sellers of their tax responsibilities. This is not a role the marketplaces demanded but one which has been placed upon them by a series of global legislative changes.
The focus of the articles on marketplace obligations is around the role of the ‘deemed supplier for VAT purposes’ even though the design of global laws, and good governance principles, are forcing marketplaces to do much more.
The relationship between an online marketplace and its sellers is often overlooked in these discussions. This is even though the obligations involved are more complex and diverse than obligations specifically covering the marketplace’s liability, regarding correct assignment of tax, to the final customer. It should also be kept in mind that the seller is the true customer of the marketplace.
What marketplaces need to do for their sellers
Let us delve a little deeper into what marketplaces need to do for their sellers.
Education of sellers
The task for marketplaces is to educate their sellers on their obligations in terms of VAT but also in terms of income tax. They need to provide clarity to their seller when the liability for VAT is shifted to the marketplace and when the liability remains with the seller. There is also the need to provide more education on potential income tax obligations for sellers. Finally, they need to educate the seller on why it is key to provide accurate information (personal information, product information…) and the implication of not doing so.
This education path will lead to a more robust onboarding process with more data demanded before a seller is able to sell on the marketplace.
Education of marketplace sellers can take many forms, including:
- More robust onboarding process where marketplaces indicate the reasons why they request such information,
- Webinars and other pieces of informative content explaining new obligations and information that needs to be collected when onboarding,
- Expanded platform FAQs,
- Annual message with a summary of seller data/transactions and a reminder of their obligations.
Those educational needs are coming from self-governance but also from global laws.
Examples of laws that mandate education
Here are some examples of laws that effectively mandate the education of marketplace sellers:
- The EU’s DAC7, Directive on Administration Cooperation in taxation
- The French government requires that marketplaces provide their sellers with weblinks to the French tax authority
- The UK’s reporting rules for platforms are effective since January 1, 2024, with the first reports due in January 2025. The news created some headlines in the UK and HMRC state that “customer experience for these sellers is expected to improve as they will receive a copy of the information that has been submitted to a tax authority.”
Data and report access
Marketplaces must allow sellers access to their sales data in real-time and provide an annual summary of transactions. This is effectively what is demanded in the design of the DAC7 regulations, but it is also a common seller request of having the possibility to easily access their transactions, invoices, etc.
Tax credit: New Zealand legislative design
The obligations for marketplaces around the gig economy are extending. One of the pioneers of such pieces of legislation is New Zealand. They introduced a new obligation on marketplaces to provide a tax credit to the non-GST registered service provider to keep with the principle of GST neutrality. The marketplaces will have to indicate clearly the revenue from the tax credit (not taxable income) from the revenue of the service (taxable income).
Here is a section from New Zealand’s Inland Revenue Department (IRD) on this element of their new rules targeting the gig economy:
“From 1 April 2024, a new flat-rate credit scheme will apply for sellers who are not GST-registered.
Marketplace operators will collect GST at the standard 15% rate on listed services that are performed, provided or received in New Zealand. They will then pass on 8.5% to sellers who are not GST-registered. The remaining 6.5% is returned to [New Zealand’s Inland Revenue Department].
The 8.5% passed on to unregistered sellers recognises the GST on their costs from supplying listed services.”
Withholding taxes
Online marketplaces are also liable for withholding taxes that are in place in some jurisdictions. Those withholding taxes are an advance on the seller income tax due from their sales:
- Italy: Italy withholding tax obligations made headlines recently when a large multinational digital business agreed to pay EUR576 million in backdated taxes.
- India: a 1% tax (TDS (Tax Deducted at Source) to be deducted from gross amount on sales from Indian sellers facilitated through online marketplaces. It should be noted that the TDS is due no matter the location of the marketplace.
- Mexico: non-resident online marketplaces must withhold income tax from their Mexican-based sellers and remit these taxes to the Mexican tax authorities.
Such additional obligations to withhold income tax on behalf of sellers are going to expand – marketplaces should have a close look at their obligations in the country where their sellers are based.
Corporate taxes
These should be distinguished from the DSTs that apply on marketplace revenue or advertising services that have flourished while OECD Pillar 1 and 2 principles are globally adopted. In the case of Taiwan’s 3% tax or India’s 2% equalisation levy, the tax is levied on the total amount sold to the end customer. It means that such a corporate tax equivalent is levied by the marketplace on behalf of the seller.
Extended Producer Responsibility (EPR) obligations
In certain countries like France, Germany, Austria, and Spain, marketplaces must ensure that their merchants comply with Extended Producer Responsibility (EPR) obligations, primarily for packaging, electronics, and batteries.
As a result, marketplaces are required to collect and validate EPR registration numbers for merchants offering products in these jurisdictions for each of the product categories in scope.
In France, for example, the products subject to the EPR obligation have been extended to cover around 14 product categories, and all of them are falling in with different Producer Responsibility Organizations with which the merchants must register.
If a merchant is found to be non-compliant, various measures are being considered by the EU Member States. These measures may include requesting marketplaces to block sales from non-compliant merchants, or having the marketplace take on the merchant’s EPR responsibilities.
Still no consistency, making self-regulation even more important
One does not have to look too far to understand the consequences of not adhering to these responsibilities that marketplaces have towards their sellers and the need to anticipate the impact of new regulations.
In the pre-Wayfair world in the U.S. small sellers that utilised Amazon’s Fulfillment by Amazon (FBA) service did not realise that when they had stock in another state, they were on the hook for the sales tax in these states due to Nexus rules. Recent court cases and various other sources have highlighted that Amazon did little to educate their sellers on their potential tax exposure.
Marketplaces and platforms have differing obligations depending on their type (e.g., gig economy, and the sale of physical vs. digital goods), the product/service sold, or the volume of sales. The absence of consistency in the application of rules that affect marketplaces may be frustrating. Marketplaces need to know each new regulation intimately to understand if they are in scope and calculate their level of risk when attempting to comply.
Such inconsistencies are an opportunity for self-regulation for platforms and marketplaces where they adopt best practices. Such an approach may also take the form of a market differentiator and attract even more sellers to their platforms.
Image by: William from Pixabay
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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.
