Navigating e-commerce tax to enable global business growth

E-commerce businesses across Europe and beyond find themselves navigating a complex network of e-commerce tax laws that continually shift and redefine the rules of engagement.

What Are the Challenges With e-commerce Tax Rules?

As e-commerce growth continues to surge and online marketplaces flourish, traditional e-commerce tax laws and structures struggle to keep up with online transactions' the dynamic and borderless nature. E-commerce taxation of digital platforms that enable cross-border sales, redefining what constitutes a taxable presence in global trade.

Initially designed for brick-and-mortar businesses, conventional tax rules are no longer effective. The borderless nature of e-commerce makes it challenging for tax authorities to determine where economic activities occur and where tax obligations should be fulfilled. This lack of geographical boundaries complicates the assessment of tax responsibilities associated with online transactions. The challenges of borderless e-commerce make it hard for tax authorities to identify the locations of economic activities and determine where tax obligations must be fulfilled.

Tax authorities have re-evaluated and adapted their policies in response to e-commerce for several years. Tax policies, rules and regulations continue to evolve to better capture e-commerce tax revenue and close the value-added tax (VAT) gap – and it’s working. These efforts have contributed to a significant reduction in VAT losses in recent years. According to the 2023 VAT Gap report released by the European Commission, approximately €61 billion in VAT was lost by member states in 2021 – down from €99 billion in 2020. However, the VAT gap increased slightly in 2022, reaching an estimated €89 billion or 7.0% of the total VAT tax liability. While progress has been made, tax authorities continue refining compliance measures, including digital reporting and e-invoicing, to further reduce VAT fraud and evasion.

Reaching consumers worldwide is a huge advantage for businesses, but staying compliant with ever-evolving e-commerce tax laws is increasingly difficult. Complex VAT treatment for imports and exports within the European Union (EU) and beyond, coupled with the disruptions caused by Brexit, means tax teams must constantly monitor and adjust their e-commerce tax compliance and planning strategies.

The sheer volume and speed of e-commerce transactions require tax authorities to keep pace with rapid financial flow and prevent VAT revenue leakage. Businesses must also keep up with the latest international e-commerce taxes, VAT rate changes, and digital tax policies to remain compliant.

Tax on e-commerce - FAQ jargon buster

Navigating the world of e-commerce taxation can sometimes feel like deciphering a secret code. Our jargon buster simplifies key terms —covering fundamental concepts to the latest tax regulations—so you can confidently navigate global e-commerce tax complexities.

What is e-commerce?

E-commerce refers to the buying and selling of goods or services online. It includes transactions between businesses (B2B) and consumers (B2C) and other models like direct-to-consumer (DTC) and marketplace sales.

What is distance selling?

Distance selling occurs when goods are sold remotely, often across borders, without the seller having a physical presence in the buyer’s country or region. Many tax authorities impose specific VAT/GST or sales tax obligations on such transactions.

What is a digital service?

A digital service is an electronically supplied product or service delivered over the Internet, such as software downloads, streaming platforms, e-books, or cloud-based solutions. Many countries have introduced specific tax rules for digital services, including VAT, GST, and digital service taxes (DST).

What Are E-Commerce Taxes?

E-commerce taxation includes VAT, sales tax and digital service taxes. The specific taxes that apply can depend on several factors including:

• The location of the buyer and seller
• The type of goods or services sold
• The value of the transaction
• The applicable e-commerce tax tax in each jurisdiction

What is the One-Stop Shop (OSS)?

The One-Stop Shop (OSS), introduced in July 2021, is a simplified system for managing Value Added Tax (VAT) on cross-border business-to-consumer (B2C) sales of goods and services within the European Union (EU). It streamlines VAT compliance for e-commerce businesses by allowing them to register in a single EU member state and report all eligible sales across the EU through a unified quarterly return. Starting January 1, 2025, the OSS will expand to cover additional B2C transactions, including domestic supplies of goods within individual EU member states. This expansion aims to reduce administrative burdens further and simplify VAT obligations for businesses engaged in e-commerce across the EU.

What is the Import One-Stop Shop (IOSS)?

The Import One-Stop Shop (IOSS), introduced in July 2021, is an electronic portal designed to simplify Value Added Tax (VAT) collection and reporting for businesses selling goods valued at €150 or less to consumers in the European Union (EU). It allows sellers to register in a single EU member state and use this registration to report and remit VAT for all eligible sales across the EU, thereby reducing customs clearance times and administrative burdens. As of February 2025, proposals are underway to expand the IOSS by removing the €150 threshold, enabling its use for all distance sales of imported goods, further streamlining VAT compliance for businesses.

What is the EU VAT in the Digital Age (ViDA) proposal?

The VAT in the Digital Age (ViDA) proposal is a comprehensive initiative by the European Union aimed at modernizing VAT systems to align with the evolving digital economy. It focuses on three key areas: 

1. VAT Reporting Obligations and E-Invoicing: Introducing a standardized digital reporting system based on e-invoicing to enhance efficiency and reduce fraud.
2. VAT Treatment of the Platform Economy: Ensuring that services provided through online platforms are subject to VAT, thereby eliminating market distortions.
3. Single EU VAT Registration: Allowing businesses to register for VAT once and use this registration across all EU member states, simplifying cross-border transactions.

Overall, ViDA represents a significant step toward creating a more efficient and equitable VAT landscape that supports businesses in the evolving digital economy.

Listen to our webinar to learn more about Vertex’s approach to ViDA.

What are some scenarios of e-commerce tax?

One challenge many scenarios that could apply. Tax rules and rates change depending on your business location, buyer's location, the products' storage location, and the transaction's value. It can be challenging to work out the right way forward. Here are some scenario examples:

Cross-border sale of goods

Scenario: An Italian e-commerce company sells fashion accessories to customers in Belgium and the Netherlands, storing inventory in a German fulfillment center for efficient distribution.

Tax Implications: The company must consider distance selling regulations and the applicable VAT thresholds in each destination country. Utilizing the OSS can simplify VAT reporting by allowing the company to report all EU sales through a single VAT return, eliminating the need for multiple VAT registrations.

Digital services across borders

Scenario: A digital marketing agency based in France providing online advertising services remotely to clients in Germany and Spain. 

Tax Implications: The French agency will have to apply the EU's rules on the taxation of digital services, ensuring compliance with VAT regulations in Germany and Spain. The OSS can facilitate streamlined VAT reporting to these cross-border services.

One-Stop Shop (OSS)

Scenario: A Danish home accessories retailer decides to expand its market to customers in the Netherlands. 

Tax Implications: To manage VAT obligations efficiently, the retailer can utilize the OSS, allowing it to register for VAT in Denmark and report all EU sales through a single return, thus avoiding multiple VAT registrations.

Marketplace facilitation – Import One-Stop Shop (IOSS)

Scenario: A UK-based online marketplace facilitates transactions between Swedish sellers and Italian buyers, handling payment processing and logistics.

Tax Implications: The marketplace may use the IOSS to simplify VAT collection on low-value consignments (currently up to €150) imported into the EU. This involves collecting VAT at the point of sale and remitting it through a single IOSS registration, expediting customs procedures, and enhancing customer experience.

These scenarios highlight the importance of understanding and navigating the complex VAT landscape in e-commerce. Mechanisms like the OSS and IOSS provide valuable tools for compliance and simplification.

Navigating E-Commerce Tax Compliance: Best Practices for Businesses

Whether you’re launching a new e-commerce business or are a well-established corporation compelled to recalibrate for the digital age, getting tax right should be a priority on the to-do list.

Why E-Commerce Tax Planning Matters

Embarking on the exciting journey of building a new e-commerce platform should not mean relegating tax considerations to an afterthought. Instead, integrate tax planning into the very fabric of your business strategy. Even if regulatory reporting requirements seem distant, proactive planning from the outset is essential. Waiting until your business gains momentum before addressing tax concerns can be costly, but also and time-consuming to unravel.

Larger enterprises accustomed to traditional business models can be thrust into the dynamic environment of e-commerce and may need to re-evaluate their operational structure. This could involve rethinking supply chain strategies, as tax policies for differ significantly from those for traditional brick-and-mortar.

The Importance of Tax Compliance in a Rapidly Growing Market

E-commerce can scale rapidly, and failure to anticipate tax considerations can pose challenges as your business grows. Overlooking critical details can lead to significant costs and an increased risk, impacting your established business’s stability.

Regardless of your business's size, industry sector or product offerings, proactive tax planning and constant monitoring of your business operations is the key. The e-commerce model introduces a new set of challenges:

1. Where are you selling from and where do your customers reside?
2. What tax registrations should you have?

Additionally, contractual agreements with logistics suppliers and warehouse arrangements can reshape your e-commerce tax compliance tasks. The location of your warehouses is a critical factor in applying the latest e-commerce tax regulations. Each transaction is unique and can alter your tax position, making tracking good a strategic imperative in the face of complex e-commerce VAT rules.

Europe vs. U.S.: How Global E-Commerce Tax Laws Differ

While there are similarities with Europe and the U.S. regarding e-commerce taxation, regulatory frameworks differ significantly. It’s important to recognize that understanding the tax landscape in one region does not guarantee success in another. As your business expands across state and local jurisdictions, you must to navigate the complex layers of e-commerce tax laws that govern each territory. Assuming familiarity can lead to costly oversights.

Europe offers a certain level of simplicity in its approach to e-commerce taxation; however, while the European Union provides a framework for taxing global digital commerce, individual countries maintain distinct tax policies. This results in variations in how the same goods or services are taxed. E-commerce tax rules and tax rate harmonization are still developing, and local cultural policies can influence the categorization of goods. Consequently, there is no one-size-fits-all solution.

Understanding the tax laws of one jurisdiction does not automatically ensure accurate calculation of e-commerce tax in others. The rapid pace of change further complicates the landscape, with updates occurring regularly, demanding a continuous commitment to staying informed.

Expanding into new territories requires a comprehensive approach. It’s not just about tax rates; businesses must also consider local buying habits, payment timelines, and the regulatory attitudes toward newcomers. A robust support system, including e-commerce tax technology and tax experts familiar with each jurisdictions specificities, is essential for seamless global operations.

Forge partnerships with tax technology experts for seamless e-commerce tax automation.

Navigating the complexities of e-commerce tax is a multifaceted challenge that requires agility and foresight. Whether you’re entering the e-commerce space for the first time or integrating it into an established business, partnering with the right tax technology experts is essential. By collaborating with a tax technology partner, you can proactively address potential pitfalls and establish best practices that lay a strong foundation for your operations. While e-commerce tax regulations may seem daunting, the proper support allows you to embrace these challenges confidently.

Contact Vertex today to strategize for uncertainties and help stay compliant with ever-evolving e-commerce taxation regulations.