How Sales Tax Complexities Shape eCommerce, Sellers’ Business Decisions

Successful eCommerce requires more than sellers providing in-demand products and finding digital marketplaces to connect them with interested customers. Merchants must handle the sales tax compliance obligations of each locale from which they receive money if they want to sell online. Keeping up with these laws can cause headaches, too, largely because they can change frequently and differ across countries, states, provinces and cities.

The complexities of sales tax compliance affect business decisions by both sellers and marketplaces, according to Ted Hettich, chief sales officer at U.K.-headquartered online shopping marketplace Fruugo. The company currently connects approximately 1,000 retailers to customers in 46 countries. In a recent interview with PYMNTS, Hettich detailed the ways platforms can help ease merchants’ compliance burdens.

“One of the biggest struggles that retailers have with selling internationally is dealing with different sales tax [policies], and knowing which situations apply for each of the different tax rates in each of the different countries,” he explained.

Deciphering obligations

Retailers entering the online space are met with a bewildering number of sales tax policies from different countries and jurisdictions. They must then sort through and analyze these regulations to determine what they would owe should they sell in certain markets — a complicated process. Product types are taxed at disparate rates in different countries, for example, and tax exemption thresholds also vary. The stress of deciphering the amounts due can be as burdensome — if not more so — than the collection and remittance of taxes themselves.

Platforms can step in to calculate these obligations on behalf of their merchant users, however. According to Hettich, marketplaces need to understand four key points — customers’ locations, retailers’ locations, retailers’ tax registrations and products’ tax classifications — to determine their taxes. A child’s jacket from a German retailer would invoke a 19 percent tax if sold to a domestic consumer, for example, but would incur no tax if sold to a U.K. customer, so long as the seller had exceeded the latter’s tax threshold. The same applies if sold to one in the U.S., he said.

Online vendors provide digital marketplaces with product data feeds — product information saved in Excel, .txt or .xml files — that marketplaces can use to display items on their sites. They can then deploy systems that pull details from these feeds to help calculate relevant sales tax levels, Hettich said. These platforms either handle tax calculations by developing in-house technology or by partnering with local third-party specialists in each country that help navigate the disparate laws and rates. Fruugo is in discussions with American automated sales tax solutions provider Avalara to have the company support its sales tax compliance calculations prior to a potential expansion into the U.S., for example.

For its part, Fruugo calculates taxes, charges each shopper the relevant amount then passes the responsibility of remitting the correct sales tax to the merchants. This approach may soon change as new tax collection policies are unveiled in select markets, however. The company also works to help retailers register with local tax authorities — such as HM Revenue and Customs (HMRC) in the U.K. for value-added tax (VAT) — when necessary.

Even with such assistance, merchants may still find themselves lost and wishing for access to more detailed guidance. It is important to make multilingual customer care staff available in multiple time zones so they can walk retailers through questions and provide advice, Hettich said. Retailers also often appreciate online resources that allow them to learn on their own.

Strategizing around tax

The struggles involved in managing intricate tax policies are affecting merchants’ and marketplaces’ decisions about where and what to sell. Fruugo serves both small retailers and larger enterprises and finds that some sellers consider sales tax exemption thresholds very carefully before determining which markets to enter. Platforms can help them test different markets’ profitability by enabling them to toggle where their products will be presented, Hettich said.

“We do have some retailers who are conscious of the thresholds and, consequently, want to restrict customers’ abilities to purchase certain items in certain countries, and we allow that,” he explained. “They can pick and choose where they want to sell.”

Fruugo has also made operational choices based on tax law complexity, and does not support alcohol- or nicotine-related goods.

“There are different taxes on those items in almost every single country, and it’s difficult for us to manage that,” Hettich said. “There are regulations with each of those products, too, so we’ve tended not to sell them.”

Fruugo currently supports U.S.-based merchants looking to sell abroad, with vendors prepared to incur their destination countries’ sales taxes. It does not yet support sales in the U.S. that would surpass any thresholds for being exempted from economic nexus taxes, which would require the marketplace to sort through policies and calculation variants that can change based on many factors, including customers’ states and ZIP codes.

“All these different nexus laws coming into play in each state have kept us from doing that [expansion],” Hettich said.

U.S. states have been permitted to issue economic nexus laws, which since 2018 have required merchants selling online to in-state consumers to pay sales taxes — regardless of whether they have physical presences. These laws’ specifics vary by state, and not all have chosen to implement them, which creates added complexity. Many states’ economic nexus policies include tax obligation exemptions for merchants whose local sales revenues or transaction numbers are below certain thresholds. Fruugo intends to fully support sales into the U.S., but the frictions and costs of overcoming them have made the move a lower-priority initiative.

Sales tax compliance is an ever-moving target, with new policies frequently rolling out in the U.S. and worldwide. Australia’s July 2018 implementation of a goods and services tax for overseas online sellers and France’s July 2019 tax on digital earnings have startled retailers and caused many to seek ways to quickly get up to date, Hettich noted.

“Merchants are conscious of these new laws coming into play,” he said. “Typically what happens is that the largest players — often Amazon — make inroads in new territories, then governments react and then retailers come to us to ask for help.”

There are many struggles to managing sales tax regulations and understanding their business impacts, but merchants nonetheless stand to gain a lot from selling online, both internationally and domestically. It would thus be in their best interests to find methods — such as marketplace allies — to help navigate this shifting landscape.