A rapidly expanding ecosystem of e-commerce platforms has created a wide range of fresh opportunities for businesses to sell direct to consumer (DTC) online and pull customers into an online brand experience. The rise in these platforms' popularity was largely uplifted by the pandemic and the change in customer buying behaviours.
And this trend is here to stay. According to the D2C and The New Brand Loyalty Opportunity study by PYMNTS, nearly three quarters (73.2%) of consumers plan to continue shopping online.
These shifts have led many manufacturers to adopt an omnichannel approach and include selling DTC.
For manufacturers looking to establish a brand, where they have multiple products or ranges of products, setting up a unique e-commerce shopfront offers many advantages. Manufacturers have more brand control and gain access to valuable customer behaviour data which can be used to improve pricing and customise shopping experiences, creating greater customer lifetime value.
This data can also help inform better decisions on how best to upsell and cross-sell complementary items. In addition, DTC in manufacturing also offers global growth opportunities as selling direct to consumers across the globe has never been more accessible for businesses.
According to the e-commerce insights provided by ECDB, Europe’s e-commerce market is expected to reach a new peak of USD $659 billion this year, with projections rising to USD $756 billion by 2027.
However, with great growth comes great responsibility from a tax perspective. When selling DTC cross-border via e-commerce in manufacturing, businesses face a diverse regulatory landscape including logistics, several VAT and customs duty considerations, as well as e-invoicing compliance obligations.
Due to the rise of e-commerce and its global reach, many countries started taxing these transactions where the consumer resides. The aim of these changes is to create a 'VAT level playing field' for sales between local and foreign sellers, as well as increase the transparency around DTC sales and close tax gaps.
A clear example of this is in the EU, where low-value goods are now subject to this level of compliance, with Low Value Consignment relief being abolished in 2021. Low-value goods are now subject to the domestic VAT rate for each country you're selling to, and this VAT must be charged to customers at the point of sale.
For businesses adding DTC to their traditional channel(s), this VAT calculation at the point-of-sale implies a departure from the traditional approach via indirect sales channels, where agents or third-party platforms typically manage this process. This shift requires meticulous attention to detail to ensure accurate VAT assessment, considering varying rates across jurisdictions, exemptions and thresholds.
When considering e-commerce in manufacturing, it’s important to note that there are additional foreign exchange (FX) obligations, as different jurisdictions impose different FX requirements for invoicing and reporting.
What's more, with DTC sales, manufacturers are responsible for arranging cross-border formalities, including customs clearance and import procedures. This involves a whole new set of reporting requirements, to ensure smooth cross-border transactions with minimal delays or disruptions to the supply chain.
For DTC in manufacturing, it means having to answer directly to tax authorities, and uphold greater responsibility when it comes to indirect tax compliance.
And for those eyeing up the U.S. market, a whole new set of tax complexities is opened up, with over 13,000 local tax jurisdictions to contend with, each with their own unique sales tax rates and rules.
In an era where consumers expect a quick and seamless shopping experience, manufacturers selling DTC via e-commerce cannot afford to have a slow tech infrastructure for calculating indirect tax at checkout. Not when over half (53%) of shopping baskets are abandoned, according to Kissmetrics’ research.
Going DTC in manufacturing should involve investing in robust tax technology solutions capable of automating VAT calculations, generating compliant invoices and fostering seamless cross-border transactions to ensure a good customer user experience.