When invoicing the end customer, there are two models that can be applied to calculate taxes. Onport provides back-office SaaS software designed to support both the retained and reverse tax models used by online marketplaces. However, it's important to consider the nuances and potential blockers associated with the reverse model, particularly when integrating with specific front-end platforms.
This is a sensitive subject, so we do recommend that you consult a tax specialist in order to understand the most relevant setup for your specific circumstances. Our team is also available to support in order to ensure a seamless and compliant tax management process for your marketplace.
Reverse model: tax calculation for reverse invoices
When syncing orders with the vendor store, a different tax rate can be applied than the one used to calculate payments. This will have no impact on the payout amounts. However, it is typically requested by vendors if they want a specific tax rate applied to their orders other than that calculated at checkout by the marketplace.
In the reverse model, vendors invoice the customer directly. However, this model can introduce complexities, especially when dealing with multiple vendors in a single customer order. Different tax rates may apply to items from different vendors, and some sellers may be registered for sales tax while others may not. Integration challenges may arise when using platforms like Shopify, which typically allows only a single tax rate per order.
In the reverse model, marketplaces often need to send invoices to customers on behalf of vendors, creating potential discrepancies when e-commerce platforms like Shopify also send customer invoices.
- Shipping: in the reverse model, determining who invoices for shipping becomes more challenging, especially when there is a single shipping charge for multiple vendors. For instance, if a customer pays a $5 flat fee for shipping and there are two vendors involved, decisions need to be made regarding how to split the shipping cost.
- Tax calculation for reverse invoices: When syncing orders with the vendor store, a different tax rate can be applied than the one used to calculate payments. This will have no impact on the payout amounts. However, is typically requested by vendors if they want a specific tax rate applied to their orders other than that calculated at checkout by the marketplace.
- Use the default tax rate: Use the tax rate on the dropship purchase, rather than overriding with a new tax rate.
- Always apply the tax rate: Apply the tax rate regardless of the location of the customer.
- Only apply for EU destinations: If the customer is in the EU, the tax rate will be applied.
- Only apply for domestic orders: If the customer is in the same country as the dropship provider, tax will be applied. Otherwise, no tax will be applied.
Commission based model/Retained model: tax calculation for commission invoices
When invoicing for the commission amount, a different amount can be applied than the amount of tax applied by the customer order. For example, if no tax was applied to the customer order (e.g. where an international customer placed an order), tax may still be applicable on the commission amount (e.g. where the vendor and marketplace are in the same tax jurisdiction).
In the retained model, the marketplace assumes the responsibility of invoicing the customer. This process considers the customer's location, the taxable status of items, and the marketplace's location for determining applicable taxes. The vendor's location is generally irrelevant in this model. By adopting this approach, marketplaces simplify the tax flow and align with most e-commerce platforms, where a single or no tax rate is typically applied.
- Shipping: In the retained model, the marketplace invoices the customer for shipping charges, applying any applicable taxes.
How to set this up
1 - Go to Contacts > Dropship providers
2 - Click on the name of a drop provider and then on the Tax tab.
3 - Under “Tax calculation for reverse invoices” or “Tax calculation for commission invoices”, select the option that best suits this vendor.