New EU ecommerce VAT and marketplace rules go into effect July 1
What U.S. sellers should know about the marketplace deemed supplier rule for cross-border sales
Sellers around the globe are seeing continued growth in ecommerce sales, which has governments moving quickly to enact laws that regulate the taxation of goods sold through online marketplaces to combat fraud. Businesses based in the United States that sell to international customers should pay special attention to new tax rules for value-added tax (VAT) on ecommerce sales.
Similar to the U.S., the United Kingdom, and the European Union often usher in new tax changes at the start and midpoint of the year (January 1 and July 1). Following the finalization of Brexit in December 2020, the U.K. now has its own VAT reforms separate from the EU, including U.K. marketplace VAT regulations that went into effect January 1, 2021.
The 2021 EU ecommerce VAT package slated to take effect July 1, 2021, will have a major impact on ecommerce businesses with customers in the EU. U.S. sellers should pay particularly close attention to the new marketplace deemed supplier change, which is one of three VAT obligation reforms along with one-stop shop (OSS) single VAT return and the elimination of the VAT exemption on low-value imports.
What obligates marketplaces to collect VAT
The EU marketplace deemed supplier rules are akin to the U.S. marketplace facilitator laws for sales tax on ecommerce sales. Under the new regulations, marketplaces will be liable to collect, report, and remit VAT when they facilitate certain cross-border business-to-consumer transactions on behalf of their third-party sellers.
To be considered facilitators, marketplaces must meet specific EU Council criteria, which stipulate:
- Controlling the terms and conditions of the sale
- Authorizing the charge to the customer for the payment of goods
- Ordering or delivering goods
Marketplaces are exempt from deemed supplier responsibility if they provide only one of the following services: payment processing; listing or advertising goods; or redirecting buyers to other online marketplaces.
How the deemed supplier rule works for cross-border sales
The deemed supplier rule impacts two types of cross-border transactions:
- Goods valued below €150 imported by EU or non-EU sellers and sold to EU customers
- Goods of any value sold by a non-EU seller to an EU customer
Once the marketplace becomes the deemed supplier, the sale between the seller and the customer is treated as two separate transactions for VAT purposes:
- The seller sells the goods to the marketplace. This becomes a business-to-business (B2B) tax-exempt sale and no EU VAT is due.
- The marketplace sells the goods to the customer. This becomes a business-to-consumer (B2C) sale with the marketplace now responsible for collecting the VAT due based on the customer’s country of residence.
Here’s an example of how this would work: Let’s say a U.S. merchant sells goods to French and German customers through an online marketplace. As it stands now, the seller has to be VAT-registered in France and Germany in order to charge 20% VAT to its French customers and 19% VAT to its German customers. Starting July 1, under the new rule, the seller becomes the underlying supplier and the facilitating marketplace becomes the deemed supplier, purchases the goods from the seller, resells them to EU customers, collects the VAT, and reports the sales through either local VAT registration or single EU Import OSS for those sales.
Marketplaces must also keep detailed records of sellers’ transactions to show VAT has been correctly accounted for, and electronically maintain these records for 10 years from the original transaction date. The marketplace won’t be held liable for underpaid VAT if the seller failed to provide the correct information required for the VAT calculation and the facilitating marketplace can reasonably show it wasn’t aware of the error. It’s also important to note that while the marketplace facilitator is responsible for VAT, it may not be responsible for other obligations related to the sale, such as product liabilities.
When the special arrangement provision applies
The EU ecommerce VAT regulations include a special arrangements provision, which allows sellers or deemed supplier marketplaces to opt out and pass the VAT collection role to postal services. This is exclusive to the EU reforms; the U.K.’s marketplace deemed supplier rule doesn’t include this option. Additionally, the U.K. rules call for use of a regular U.K. VAT return rather than the IOSS import return.
Where U.S. sellers can turn for help
Cross-border trade rules are already complicated. While the U.K. and EU ecommerce VAT reforms aim to increase confidence in global ecommerce sales, U.S. sellers may find these changes create yet another layer of complexity and a barrier to international sales. It can be difficult to keep up with ever-changing cross-border compliance obligations while focusing on expanding into new markets and keeping customers happy. Avalara helps you do it all by simplifying how you manage VAT, customs duties, import taxes, and tariff code classification. Learn more about managing VAT compliance.
The 2021 sales tax changes report: midyear update
Your guide to navigating the complicated world of tax compliance and preparing for the future
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