Millions of new businesses; billions in missing taxes

Millions of new businesses; billions in missing taxes

In his monthly column, Avalara's Richard Asquith looks at what international tax authorities are doing to ensure compliance and mop up missing taxes

Millions of new businesses; billions in missing taxes

Frustrated tax authorities in the UK, Europe and the US are struggling to recover billions in missing VAT and sales tax from millions of e-commerce sellers. At best it is a lack of understanding of the obligation to register in other states. But a ballooning proportion is down to tax evasion.

So the tax agencies are making a new collections friend – global online marketplaces. And they won’t stop there in getting others to mop-up missing taxes; next up are payment providers.

Online sellers operating under the tax radar

Online marketplaces can make anyone an entrepreneur – no need for lots of stocks or a shop. And these new businesses can ‘go global’ just by clicking the consent forms of the marketplaces’ T&C’s. However, these foreign and out-of-state traders escape the traditional tax net of tax agencies. The result is an estimated £1.5billion missing e-commerce VAT in the UK, and a €5billion VAT gap in the EU. In the US, where the Supreme Court Wayfair ruling last year freed states to tax out-of-state sellers, the taxes up for grabs are estimated at $33billion per annum.

European and US tax authorities are struggling with the overwhelming burden of attempting to detect and register these international businesses. Meantime, they have enviously looked at the huge transactional data lakes of the marketplaces – with the all the tax calculation information and sellers’ details – and decided to make tax compliance their problem, too.

Governments co-opt marketplaces on e-commerce tax evasion

In the past twelve months, governments around the world have implemented or lined-up legislation to impose tax compliance obligations on the marketplaces. In particular, they are looking at platforms that have evolved from simple listings into becoming ‘facilitators’. A marketplace facilitator is an online service that sells third-party merchants’ products and services and accepts money from customers on their behalf. Websites like Amazon, eBay, Etsy, Alibaba, Otto and eBay are the best-known examples.

Compliance measures imposed on marketplaces in the Europe, the US and beyond include:

  • UK has compelled marketplaces since last year to check that non-resident sellers have properly UK VAT registered.
  • US has 17 states with marketplace tax collection laws in place for out-of-state sellers, with new territories being added each month since Wayfair. This number is likely to be double within twelve months.
  • EU is to make marketplaces the VAT principal for non-EU seller sales online when they have been the facilitator of the sales.
  • EU will also make marketplaces liable for sellers’ unpaid VAT from 2021.
  • Germany now obliges marketplaces to get digital VAT certificates from the tax agency for all their sellers to show they are up-to-date on VAT compliance.
  • Austria has announced plans to follow Germany next year.
  • France is believed to be next on imposing VAT checking obligations on marketplaces.

Payment companies are next

The tax authorities are not stopping with the marketplaces. They also have picked-up on the fact that typically 90% of online sales are processed through a payment provider – credit card companies to online money transfer agents. Again, they hold the key to identifying the parties in cross-state transactions and hold most of the data to estimate the tax due.

The UK is undergoing a review with the payments industry into whether they could share sellers’ data. Or even go further with ‘split payments’ whereby the credit card company or payments provider withholds the VAT or sales tax for direct payment to the tax authorities.

In the US, a number of states have tabled payment provider withholding legislation. Massachusetts is the most advanced with its designs. Globally, from Argentina to Thailand, credit card withholding tax legislation is already in operation or ready to roll out.

A journey ending in the death of the tax return?

As tax authorities around the world learn how to tap marketplaces’ data and relationships with non-resident sellers, they are going to become very efficient at automating the whole process. Particularly since they have the legislative muscle to compel the marketplaces to surrender all the data, including the components for the tax calculations. It is therefore very tempting to see the tax agencies ending non-resident sellers’ cumbersome VAT or sales tax reporting with marketplace and payment providers’ collaboration.

It’s a long way from ending tax returns for foreign or out-of-state online sellers; but this is how the journey begins.

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