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New VAT Rules Hit Low-cost Goods

The 2021 EU ecommerce VAT package that was effective July 1 is having a major impact on ecommerce businesses with customers in the EU. U.S. sellers should pay particularly close attention to the new  EU marketplace deemed supplier rules, which are similar to the U.S. marketplace facilitator laws for sales tax on ecommerce sales, and impact 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

Under the new regulations, marketplaces are 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:

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. Previously, the seller had to be VAT-registered in France and Germany in order to charge 20-percent VAT to its French customers and 19-percent VAT to its German customers. Effective 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.. Learn more about managing VAT compliance

Avalara helps businesses get tax compliance right. Avalara’s customers face demanding tax obligations imposed by state, local, and other taxing authorities around the world, and rely on Avalara to provide efficient and accurate solutions to manage those requirements. The company provides solutions for various transactional taxes, including sales and use, VAT, excise, communications, and others. Each year, Avalara serves customers by processing billions of tax transactions, filing more than a million transaction tax returns, and managing millions of tax exemption certificates and other compliance documents.
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