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Software companies can easily sell to customers around the world, right? So why not market your product globally?
Anyone who does business across borders can tell you: It’s not that simple.
- Do you need to translate your website?
- Do you accept their country’s form of currency?
- Do you know local privacy and tax regulations?
We spoke to a software entrepreneur based in the Caribbean who was facing this issue.
Customers liked his products, and his company was growing rapidly. “But my country has less than a million people,” he told us. “If I really want to grow my business, I need to expand to other markets.”
He knew that selling his software in other countries would create a variety of tax, transaction processing, and compliance problems.
“That’s why I need a merchant of record,” he explained.
In this piece, we’ll explain what a merchant of record is — and why using one can make it much easier for software companies to go global.
What Is a Merchant of Record?
A merchant of record (MoR) is the legal entity that sells goods or services to a customer. Companies can be their own MoR, but you can also outsource this work to entities that sell goods or services on behalf of a business and, by doing so, take on the legal liabilities related to the transaction for you.
The merchant of record model helps you stop worrying about the regulatory and tax compliance issues involved with accepting payments from around the globe — so you can focus on what you do best: building great products.
Note: FastSpring is the merchant of record for thousands of growth-stage SaaS and software businesses around the globe. Learn more about how FastSpring can help you grow your business globally.
How Is a Merchant of Record Different from a Payment Service Provider?
A payment service provider (PSP), such as PayPal or iDeal, is a platform that acts as a bridge, connecting sellers with back-end networks required for processing payments, like payment gateways, payment processors, and merchant accounts. And you’re probably already working with one or two PSPs — whichever are most popular in your country or the country of your customers.
A PSP only handles the processing of payments, not anything else that goes into an order process, such as VAT (value-added tax) and sales taxes or payment disputes.
Some PSPs like Stripe accept multiple currencies — which is a big step towards being able to support customers from multiple countries, regions, or jurisdictions. But various PSPs are popular in different places. For instance, in Sweden, Swish is far more popular than PayPal or Stripe for mobile payments.
And while PSPs are equipped to accept payments in different countries, they’re not responsible for helping you calculate a country’s tax requirements.
A merchant of record, on the other hand, handles all of it. The MoR becomes a seller of record (SoR) and, as such, the one to worry about differing rules across credit and debit card brands, regulations in each geography, consumption taxes, and general risk and liability. Unlike with a PSP, when you partner with a merchant of record, you transfer those responsibilities to your MoR provider.
8 Reasons to Use a Merchant of Record
For many software companies, taking the business global is a no-brainer. But navigating sales tax and VAT regulations, figuring out how to accept multiple currencies, understanding the nuances of regulatory compliance in various countries — and staying up to date on all of the above as regulations flux and evolve — adds unnecessary complexity to your operations and slows down expansion plans.
That’s where a merchant of record can help your business grow more quickly, and with less liability, too.
1. Yes, Digital Goods Do Require Sales Tax and VAT
It’s one thing to ignore transaction-related taxes or kick the can down the road on figuring them out. But it’s a mistaken idea to assume that that sellers of digital goods aren’t required to collect or remit sales taxes, VAT, and goods and services taxes (GST) for digital goods sold via online payments.
That just isn’t true. Sales of digital goods — including software — often require the same consumption taxes as sales of physical products. Ignoring that fact or putting off figuring it out could have disastrous consequences that reach well beyond just back taxes, ranging from exorbitant interest fees and penalties to multi-million dollar valuation adjustments.
A merchant of record is the ideal solution, allowing you to offload the complexity of sales, VAT, and GST tax collection and remittance and expand into new markets and regions quickly, all while avoiding the consequences of ignoring global tax laws altogether.
2. Software Companies Often Struggle With Foundational Billing Tasks
Even before they consider selling in another country, many software and SaaS companies struggle with the foundational tasks related to billing, such as:
- Ensuring compliance with PCI-DSS standards for cardholder information, along with the EU General Data Protection Regulation (GDPR), California Consumer Privacy Act (CCPA), and Data Privacy Framework (DPF) requirements.
- Decreasing payment failure rates.
- Managing and maintaining relationships with merchant banks, financial institutions, and payment processors.
- Negotiating payment processing fees.
- Handling payment disputes, refunds, and chargebacks.
- Calculating, filing, and remitting software sales tax, VAT, GST tax, and other consumption taxes.
- Risk analysis and fraud prevention.
- Reconciling transactions, payments, refunds, cash flow, and more.
Some of this work may be done for you by your accountant, subscription management platform, or payment processor, but they’re probably not doing everything — like helping you decrease customer churn or issuing refunds.
Most likely (unless you’re already working with an MoR), you’re doing some of this work internally — or not at all.
When you sell products to buyers in another country, things get even more complicated.
3. VAT and Sales Tax Are Usually Based on the Buyer’s Location for Digital Goods
When selling software or digital goods, VAT and sales tax is almost always calculated based on the location of your customer, not the location where you do business.
(This is different from professional services, which are often taxed based on where the service is performed rather than the location of the buyer.)
For example, let’s say you sell software (or a digital product) and you choose a simple payment processor (like Stripe or PayPal).
In that situation, if you have enough customers in Canada to meet the Canadian threshold for tax filing, then you must track, file, and remit taxes in Canada — regardless of your location or the headquarters of your company.
With a merchant of record, unless you’re located in Canada, you’ll outsource the sales tax, VAT, and many of the compliance responsibilities to your MoR — who will track, file, and remit taxes on your behalf in Canada and in all the various countries where your customers live — instead of you doing that on your own.
If you multiply the Canada example by the number of countries where your customers live, you can see why so many software companies choose the merchant of record model over simple payment processing when they expand globally.
With a merchant of record, you can grow your business much faster,with much less stress, and with much less cost from accountants and tax professionals.
4. The Rules Change All the Time
The specific requirements for doing business across borders vary from country to country, and they can vary further based on how much business you’re doing there, the structure of your business, and a variety of other factors. But common steps for setting up successful cross-border business include:
- Learning the preferred payment methods of a given region.
- Handling currency conversions when taking global payments.
- Understanding foreign tax requirements, including whether your offerings are subject to a value-added tax (VAT).
- Detecting and handling fraud, which can be more prevalent on international payments.
That’s work you do per country, which means if you have a lot of customers in ten different countries, that’s ten sets of the above steps to figure out — a timely and costly process.
And this is why it’s so helpful to use a merchant of record service when you’re ready to go global.
5. A Merchant of Record Simplifies Your Financial Operations
You didn’t start a software company to spend your days figuring out complex tax rules in countries all over the world. You started it because you had a great idea for a product, and you knew how to build it.
A merchant of record lets you get back to what you do best: developing your product.
The MoR acts as a reseller, buying the software from you, then reselling it to your customer. Instead of working directly with customers and financial service providers, you communicate with just one entity — your MoR.
Your customers will still visit your website to buy software or update subscriptions, but when they’re ready to check out, they buy the software from the MoR.
They’ll receive a receipt from the MoR, and the MoR will be the company name listed on their bank statement or credit card statement. This is how the MoR becomes the liable party for the sale.
MoRs maintain robust ecommerce platforms to manage payment and tax processes. At FastSpring, we also provide other services like digital invoices and interactive quotes that are a part of our customer’s financial system.
6. A Merchant of Record Is Cost-Effective
If you’re paying a lawyer or accountant to figure out the taxes and business regulations of each country where your customers live, those costs add up fast. Not to mention localizing your payment platform, such as making sure your site accepts the preferred payment method of each country.
An MoR (like FastSpring) already has an understanding of local taxes, multiple payment gateways, and more. This makes it the most cost-efficient way to collect payments and remit taxes from a global customer base.
Cobbling together a payment infrastructure that encompasses all the functions an MoR handles is a lot more costly and complex than dealing with one merchant of record partner.
7. With a Merchant of Record, You Can Go Global Immediately
Localizing pricing, currency, and your checkout for an optimal customer experience is a project that often takes years for companies who build those features on their own.
Since an MoR already has everything set up and ready to go, as soon as you become a customer of a global MoR, the currency, preferred payment options (from credit cards to digital wallets to global PSPs), and the checkout experience can be customized for your customers right from the start.
8. A Merchant of Record Helps You Stay Compliant
Each country has its own sales and privacy regulations, and they’re always changing. This means you’ll need to keep a lawyer on retainer that’s familiar with the ever-changing global tax regulations if you’re handling compliance internally.
Once again, an MoR will do this work for you, avoiding costly fines and lawyer fees.
How FastSpring Can Help
FastSpring is the leading full-stack merchant of record service for growth-stage SaaS and software businesses. If you’re looking for a merchant of record to help your business expand globally, we’re here to help.
Our platform serves as an all-in-one payment platform that handles everything from payment and checkout localization, to sales and VAT tax management, to customer support for end consumers, and so much more.
Learn more about how FastSpring can help you grow your business globally: Set up a demo or try it out for yourself.
