Digital platforms have caused massive disruption across multiple industries and reshaped global trade. There are currently thousands of companies applying this business model in all kinds of sectors, including e-commerce, transport and hospitality. Platforms have become the backbone of the sharing economy which revolutionised the way people access goods and services and opened up new opportunities to make better use of products and resources.
Given the increasing popularity of the platform business model, countries started involving platforms in the tax collection process by requiring them to collect tax on transactions that they facilitate. However, there is no uniform approach to taxing the platform economy: a platform operator engaging in the same activity may act as a tax collector in one country but not in another. In the United States, this may even vary by state. Some countries drafted their laws in such vague terms that it may not be easy to determine when a platform is liable to collect tax. This patchwork of inconsistent and ambiguous rules makes it difficult for global platform operators to manage tax compliance. Let’s illustrate these problems by looking at the tax liability rules for digital platforms in the United State and the European Union.
United States: who is a marketplace facilitator?
U.S. sales tax legislation refers to platforms as marketplaces. All U.S. states that levy a sales tax have enacted laws requiring platform operators that qualify as marketplace facilitators and have nexus with a state to collect and remit tax on behalf of retailers selling through the platform. Although most state laws define a “marketplace facilitator” in a similar way, it’s important to read them carefully as even a minor difference in the wording may lead to completely different tax consequences.
Recently, two U.S. states have issued private letter rulings that examined a nearly identical scenario but reached divergent conclusions on whether the marketplace operator was liable to collect tax. The scenario that they considered was as follows: an online platform provided dealers with the possibility to list vehicle parts for sale to their customers. Customers could access the platform upon invitation from a participating dealer and were only able to view and order parts from the specific company that invited them. If a customer made an order, the platform would notify the dealer through the Dealer Management System (DMS) software. Once the order was approved by the dealer, the sale would progress through the DMS. The platform would no longer be involved in the transaction and would not collect any payments.
North Carolina ruled that the platform operator qualified as a marketplace facilitator and was required to collect tax on behalf of the dealers. However, Florida did not consider the platform operator to be a marketplace facilitator. These different interpretations resulted from one notable distinction in the definition of a marketplace facilitator in the two states’ laws. Florida defines a marketplace facilitator as a person who directly, or indirectly through agreements or arrangements with third parties, collects payment from the customer and transmits all or part of the payment to the marketplace seller. However, to be a marketplace facilitator in North Carolina, it is not necessary to collect payments. North Carolina’s definition imposes tax collection obligations on marketplaces that “collect the sales price” or “make payment processing services available to purchasers”. The North Carolina Secretary of Revenue determined that the platform operator who requested the ruling met the second condition: it made payment processing services available when the platform notified the DMS to accept an order and when it opened a pop-up window to the credit card processor’s payment gateway. Both rulings clearly show that the same activity may have different tax consequences in different U.S. states.
European Union: who is a deemed seller?
While U.S. sales tax laws require marketplace facilitators to collect tax on behalf of the seller, the E.U. value added tax (VAT) law takes a different approach. Under E.U. VAT law, the platform operator may act either as a deemed seller or as an intermediary.
In the deemed seller model, the platform operator must collect VAT on the goods or services sold to the customer. The VAT law creates a legal fiction of two identical sales taking place consecutively. Under that fiction, the seller is considered to be supplying services or goods to the platform operator who in turn supplies them to the customer. Thus, the platform operator has to collect tax it actually owes on the sale and not tax owed by the seller. The legal fiction exists only for VAT purposes. It does not change the commercial position where the title of the goods passes from the seller to the buyer.
If the platform operator qualifies as an intermediary, the seller is the person supplying the goods and services to the customer and needs to account for VAT on the sale. The platform operator is not required to collect any taxes on behalf of the seller.
The VAT law does not offer much guidance on how to identify whether a platform acts as an intermediary or a deemed seller. It merely states that an intermediary acts in the name and on behalf of another person, whereas a deemed seller acts on behalf of another person but in its own name. To determine whether a platform acts as an intermediary or a deemed seller, it is necessary to examine all the legal and factual circumstances of an individual case to identify in whose name the platform operator is acting. If there is a contradiction between the contractual arrangements and economic reality, the latter prevails. Common indicators suggesting that the platform operator acts in its own name and qualifies as a deemed seller include:
- Being responsible for the actual delivery;
- Being responsible for collecting payment unless the only involvement is the processing of payment;
- Controlling or exerting influence over the pricing;
- Providing customer support services in relation to products sold or services provided via the platform
- Exerting control or influence over the presentation of the marketplace such that the brand and identity of the platform operator are significantly more prominent than those of other persons using the platform.
This list is neither exhaustive nor must the indicators be cumulatively present for the tax collection liability of the platform operator to apply.
The E.U. realised that the tax liability rule for online platforms leaves significant room for discretion and, as a result, implemented more explicit deemed seller rules for certain transactions (e.g., sales of digital services, sales of low-value goods imported from non-E.U. countries and sales of goods owned by non-E.U. businesses). A platform operator who facilitates one of the above-mentioned sales and authorises the charge to the customer or the delivery of services, or who sets the general terms and conditions of the sale, will be treated as a deemed seller who is responsible for tax collection. However, platform operators facilitating sales of non-digital services or other types of goods must rely on the vague legal provisions to determine whether they are required to collect tax or not.
Conclusion
As digital platforms come in all shapes and sizes, it is not easy to design clear and unambiguous tax collection rules for the platform economy. The fact that digital business models are constantly evolving does not help either. However, it must not be forgotten that platform operators have become a kind of unpaid tax collectors. While helping governments collect large amounts of tax revenue, they incur significant costs complying with ever-increasing tax obligations, which also include indirect costs associated with the complexity of tax legislation.
The opinions expressed in this article are those of the author and do not necessarily reflect the views of any organisations with which the author is affiliated.