The Surprising Truth about eCommerce Platforms & Tax Compliance

The eCommerce landscape is growing rapidly, with millions of online stores operating globally. Almost a third of all global business activity is now conducted online, and the global eCommerce market is expected to surpass $6.3 trillion USD in 2024. Popular “Build your own” eCommerce platforms like Shopify, WooCommerce, and BigCommerce have driven much of this growth by making it easier for people without advanced website development skills to set up and run their own online stores, bypassing the fees charged by online retail giants like Amazon. eCommerce platforms also include automated tax modules for state and VAT compliance. However, they are not always setup and/or used correctly – if at all. Today’s blog explores the tax compliance challenges presented by these eCommerce platforms, and what tax authorities can do to improve compliance and revenue collection.

eCommercePlatforms: The Backbone of Democratized Online Retail

Until recently, businesses who wanted to sell their goods and services online had two choices: either attain advanced website development and management skills, or go through an online marketplace, such as Amazon, eBay, or Etsy. As a result, it was typically larger companies with access to more resources who built their own online retail sites, while small and midsized businesses used the online marketplaces. In this sense, the online marketplaces operated much like a shopping mall, giving businesses a way to sell online as well as exposure to larger (and often global) audiences. In exchange for exposure to their large customer base, the online marketplaces in turn charged the businesses fees for hosting their online stores. Tax compliance in this scenario is resolved through the use of 1099s.

The advent of the “Build your own” eCommerce platforms such as Shopify democratized online retail by enabling smaller and midsized businesses to setup and sell without having to pay the transaction fees charged by the large marketplaces. Now, just about anyone who wants to sell goods or services online can do so in a few easy steps. While online marketplaces still account for the majority of eCommerce, the “Build your own” platforms are growing rapidly: it’s estimated that there are currently over 12 million online stores in the world, and that number grows larger every day. IVIX estimates the size of this market to be over $312 billion USD in the US alone.

A few major platforms dominate the “Build your own” market, supplying the vast majority of merchants with the tools they need to operate their online businesses. Here are the leading platforms and the number of active eCommerce stores they host:

• Shopify: Over 4 million active eCommerce sites globally
• WooCommerce: Over 5 million active eCommerce sites
• BigCommerce: Over 60,000 active eCommerce sites

These platforms cater to more than just small-time freelancers and mom-and-pop shops: a broad range of retail businesses across the globe now use them, including Steve Madden, Fashion Nova, and Kylie Cosmetics, and they are often selling their goods and services globally.

What’s most significant about the size and growth of this market is the lack of regulations for tax compliance. The eCommerce platforms provide tax modules; however, due to a variety of factors, merchants (often unknowingly) face challenges in ensuring accurate tax compliance.  

TaxCompliance Challenges for Retailers on eCommerce Platforms

While eCommerce platforms can give sellers a fool-proof path to setting up their online store, they are not immune to configuration errors or regulatory changes. Here are the main challenges:

• Tax (Module) Not Required: Even though Shopify, WooCommerce, and BigCommerce offer automated tax modules to handle state sales tax and VAT calculations, they are not required for use. Exacerbating this issue, many how-to videos for setting up your own eCommerce site simply skip the tax module piece altogether. As a result, some sellers may forget to include tax collection functionality, while others may mistakenly believe it’s not necessary.
• State Sales Tax and VAT Calculations: For online sellers who do locate and implement tax modules, maintaining accuracy is an ongoing challenge. Frequent changes in tax regulations and complex jurisdictional rules mean accuracy is not guaranteed. Merchants must stay up to date to avoid miscalculations. This can be especially challenging when selling across jurisdictions.
• Misconfiguration Rates: Reports by tax compliance firms such as Avalara and TaxJar, along with insights from eCommerce consulting agencies like BlueSwitch and Practical Ecommerce, indicate that 10-20% of eCommerce stores either have incorrectly configured tax modules or do not use them at all. This can result in errors in tax collection and non-compliance issues.

Further complicating these issues, many online sellers now have more than one online store, and may even use a variety of platforms and marketplaces.

With the growth in popularity of “Build your own” platforms, these issues need amore effective solution to monitor tax configurations and ensure accurate compliance.

What Tax Authorities Can Do

IVIX provides an innovative solution to identify and address tax compliance issues across eCommerce platforms at scale, benefitting both businesses and tax authorities:

• Rapid Issue Identification: IVIX’s solution scans and analyzes tax configurations across multiple platforms, quickly identifying discrepancies like incorrect rates or missing tax modules. This is particularly valuable for complex jurisdictions where tax rules are variable.
• Automated Reporting to Merchants: IVIX can help authorities by ensuring eCommerce merchants are notified of specific tax configuration problems. This enables quick and proactive resolution, fostering compliance with applicable tax laws.
• Direct Notification to Tax Authorities: IVIX can alert tax authorities about non-compliant eCommerce sites, enabling authorities to take proactive measures in addressing tax compliance issues. This helps maximize tax revenues for various jurisdictions by ensuring accurate tax collection.

By facilitating faster identification of tax discrepancies and providing both businesses and tax authorities with actionable insights, IVIX plays a crucial role in improving compliance and revenue collection across jurisdictions. For example, one US state tax authority recently used IVIX’s solution in a proof of concept (POC) to rapidly uncover 84 leads totaling more than $100M in untaxed eCommerce sales.  

In conclusion, Shopify, WooCommerce, and BigCommerce power millions of online businesses, but a significant portion of these sites face tax compliance challenges due to misconfigured or unused tax modules. IVIX provides a powerful solution to bridge this gap by identifying and reporting tax compliance issues.

IVIX addresses this challenge by identifying and reporting these issues, helping both businesses and tax authorities ensure accurate and compliant tax collection, ultimately contributing to optimized revenue collection across jurisdictions.

Click here to stay up to date on IVIX news and insights.

‍