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Merchant of Record and Indie Tax

Posted by Steve Farnworth

Here comes the inevitable disclaimer: this article does not constitute legal or financial advice. I strongly urge you talk to professional when making critical decisions like payment processor selection, and arranging your taxes.

I’m fairly certain you won’t though, that’s why I’ll offer my non-legal and non-financial advice here. You’ll also lose plausible deniability about some basics of taxation if you continue reading - just sayin’.

TL;DR: calculating how much tax you need to pay when selling globally online is different from actually paying it. It’s also something you need to think about from the first payment you receive, so it doesn’t fall under the traditional “optimising too early” response. Merchant of Records are services which take on the tax burden for you, in return for a slightly larger percentage take on the processor fees. YMMV, not financial or legal advice.

“Don’t optimise your startup too early” is a common, and perfectly correct thing to hear all across the bootstrapped community.

You don’t need a redundant Kubernetes cluster, and millisecond response times when validating yet-another-Twitter-scheduling-tool.

You do need to prepare to take payments though.

And, what does every bootstrapped do when they need to take payments?

Set up a Stripe account, and “put more payment links into the world”.

Great. So you’re sorted then?

There’s the small matter of TAX to deal with.

The least popular of the three letter words ending in X, tax is an inevitability, and something the vast majority of Indies just YOLO without understanding what happens.

What do you need to worry about? Stripe has a tax-thingy built in, and you pay your income taxes - what’s this article even about?

Well - the biggest mistake I see indies make when they talk about payments is tax calculation vs tax settlement.

The next section will have a lot of caveats, international tax laws are complex, but there’s some underlying assumptions I’m calling out here that make the concept simpler

When you sell a physical product (most of the time), the taxes on that sale are due at the point of sale. I.e. if you make a chopping board in the UK, sell it, and then ship it to Belgium, taxes on that sale are due in the UK.

Simple, right? You’re in the UK, you make something and sell it, and you pay the taxes on the sale because that’s where the transaction happened. Your customer might pay some import duties, but they’re their responsibility.

Digital stuff is different though. Again, it can vary, but a lot of the global treaties on tax see it that since the digital thing comes into being when they payment happens, the product is technically sold at the point, and location, the customer pays.

You build a web app in the UK, then a user from Germany subscribes - the transaction is deemed to have taken place in Germany and so taxes are due there.

But, but, but… I’m in the UK, I built it, I should decide! Tax authorities don’t care - the purchase of the thing happened on their soil, and it’s much harder to argue about where the value was created when logging into a website, vs a chopping board coming through the post.

To avoid all those pesky arguments, a lot of international tax (again, not all, consult a professional - please…) for digital goods operates on this “point of consumption” principle.
Which is a massive pain in the arse.

You’re probably already assuming the reason this is a pain in the arse, right? You’d need to register and pay taxes in every single tax jurisdiction (I didn’t say “country” here for a reason…) you have a customer.

So why doesn’t Stripe’s tax-calculator help? I turned that on, I should be set, right?

Tax Calculation
As of the time of writing, Stripe Tax is a great tool for giving you the information you need to solve the problem.
It doesn’t solve the problem for you.

Since the rate of tax on different products differs from jurisdiction to jurisdiction (again, this shouldn’t be conflated with “country to country”), you’d otherwise need to calculate how much tax is due in each location. Stripe works this out for you.

It also shows you the thresholds for when you need to start paying tax - some jurisdictions give you some buffer on sales before you need to register and start paying. Quite smartly, it’s often too much effort for them to implement a system to take 20% on your $9/mo subscription service…

However, a lot of jurisdictions make you pay tax from any earnings over $0 - and the penalties for not paying this can range from slightly angry letters, all the way to a free holiday in their corrections facilities.

Right - why “jurisdiction” and not “country”?
Mainly because, USA.
Each state has different tax rules, different sales tax rates and thresholds, and different penalties if you mess up. Other countries might also have multiple tax jurisdictions within them, but as I’m at pains to reinforce - I am not an expert, so don’t know of any.

Now that’s cleared up, I might use “jurisdiction” and “country” interchangeably, because the former is harder to spell. Just remember that nuance though.

What can I do then?

Well, you can either use Stripe’s helpful data and links to register with each place you need to pay tax (they make this easy by showing you a list of the jurisdictions you’re due to pay in, and any that you’re getting close to the threshold in), and take the administration overhead that comes with that.


You pay someone to take care of it for you!

Most people would assume an accountant at this stage, and you can do that - but there’s very few global-indie-boostrapper-friendly accountants that charge reasonable fees. They’d be more than happy to charge you $100/hour to pay your $1.80 tax dues in a market though…

However, this is a solved problem for small time online creators, and this comes in the form of a Merchant of Record service.

Technically, “Merchant of Record” is simply a contractual term for the party responsible for selling something to a customer.

But for our uses, we’ll define it more specifically - namely, a service that takes over the responsibility of handling the transaction between you and the customer, and is therefore responsible for settling the tax bill.

(There are some other pros and cons to using a Merchant of Record, but the main reason indie developers would be using one is to hand off the tax burden).

Tax Settlement
How they work is quite simple: you give them a license to sell your product, then when a customer comes and buys your product, they actually enter in an agreement to purchase it from the Merchant of Record (and not from you).

After the payment is settled, the Merchant of Record then pays you out the price of your product (minus transaction fees) in the form of a license payment.

They then pay all of the taxes due, in all the jurisdictions they operate in. Often times this is even more than even Stripe works in as they can partner with different payment providers based on the location, but sometimes it might be less. Best to check which countries they accept here.

Legally, as far as the transaction with the customer goes, you’re not involved.

Obviously, you’re still on the hook for providing the service and handling customer support. If you bought a chocolate bar from a convenience store and it gave you an allergic reaction, it wouldn’t be the store clerk who could solve your problem, but the manufacturer. The same applies here.

Are you shilling for a Merchant of Record?
Nope - I’ve just been building SaaS side projects for over a decade and have gotten over the unnecessary worries that come with it (i.e. customers don’t care about your tech stack), and focus more on the upfront decisions that will make my life easier from Payment One.

The downsides of most Merchant of Records are the same:
  • - They cost more: rather than 2-3% with Stripe, their fees can be between 5-10% (these do include payment processing fees though, so their “cut” for providing the tax settlement is likely 2-7%)
  • - They’re harder to work with: since they’re taking on the risk of handling the customer payment relationship, often they need to approve the businesses they work with. This adds overhead for approval times, and can often result in back-and-forths based on rejection criteria
  • - They’re less polished: Stripe is the de facto when it comes to the API endpoints, analytics, and webhooks - everyone else is playing catch up, and so far, haven’t quite matched them

Some examples of Merchant of Records you might come across:
Gumroad - the biggest name in creator selling, they have a variable pricing scale based on how much you sell
Paddle - the largest (?) MoR out there, they seem to be moving increasingly up-market, which hopefully means more cash to invest in the platform. Lots of examples and support out there.
LemonSqueezy - a newer entrant, with a pivot more towards small SaaS, and now a flat payment fee of 5% + 50c making it cheaper. This is who I’ve implemented into my personal boilerplate application based on ease of set up, product iteration, and openness from the founding team.

There’s a lot more out there (some a lot older, and more established) - so take a little bit of time to find the right one for your use case if you decide to go down this route.

Previously, I’d have expected a Merchant of Record product to be a logical extension to Stripe’s portfolio, but given the market economics at the moment, I don’t see it happening in the short term (would love to be proved wrong here though).

Has this been helpful? I wrote it as I see a lot of people in Twitter threads say “oh, just turn Stripe Tax on, then you’ll be sorted” and that’s just… unhelpful.

Obviously, lots of indies will tell you not to worry about this. Remember though, lots of the bootstrappers you look up to will probably fall into one of the below buckets:
* they’re working this out as they go themselves, and have probably not even considered this to be a problem worth thinking about
* they have a rather… flexible… view on the international taxation system. Bonus points here if they’re also a digital nomad with a vague answer about where they’re domiciled
* they’re successful and pay someone to handle this for them already

So there we have it.

Tax is a “nice problem to have”. 

It means you have revenue.
It means you have customers.

That can feel very far away when you’re at the start of your journey.

“Customers don’t care what Javascript framework you’re using.”
“Customers don’t care how many unit tests you have.”
“Customers don’t care which hosting provider you use.”

“How am I going to safely, quickly, and painlessly handle payments”

It’s not a waste of time to think properly about how to operate the revenue handling part of your business.

Sure, get more payment links out into the wild - but don’t bury your head in the sand about what happens when someone does pay you.

As the indie movement gets more traction. As we see more micro-acquisitions turn into macro-acquisitions. As countries struggle in the recession to find tax revenue from falling consumer spending. I don’t want to see passionate founders get caught out in the complex world of global taxes.

I’ll leave you with this final, inspiring message:
This is not legal or financial advice.

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