What is a Merchant of Record? A Deep Dive into Sales Tax Management for Creators

As creators, entrepreneurs, and businesses discover new opportunities to sell their products and services on their ecommerce shop, they're also faced with the incredibly complicated world of sales tax compliance. 

Have 200 fans in Illinois? You’ll hit the economic nexus threshold with as low as 200 transactions (or $100k, whatever comes first). That means you have to register with Illinois, collect taxes, and remit sales tax after order number 200.

What about California? The threshold there is a whopping $500,000 in sales, so you need to do a lot more promotion before needing to register.

What about the other 50 states? Europe? Everywhere else? All different! And if that's not complex enough, states and countries can change their rules at any time, making it nearly impossible for creators to keep up on their own.

That's where the concept of a merchant of record (MOR) comes into play. A merchant of record is an entity that acts as a payment processor, manages sales tax, remits taxes to each state, and handles any related liability/compliance issues on behalf of a seller. By acting as the MOR, companies like Fourthwall can help creators streamline their operations and focus on their core business. 

In this article, we'll explore what a merchant of record does as a payment processor and the importance of sales tax management for creators. 

What is a Merchant of Record (MoR)?

A merchant of record is an entity or business (like Fourthwall) that accepts payments on behalf of another business (like your creator business). Merchants of records act as a legal or financial intermediary.

Having an MoR is like having a backstage crew in a concert. They handle:

• Taking card payments.
• Sorting payment processor fees.
• Chatting with banks.
• Handling refunds and charge-backs.
• Answering billing-related questions.
• Keeping your business in line with rules.
• Taking responsibility for your transactions.

When customers check their bank statements, they'll see the MoR's name as it temporarily holds the processed funds before transferring them to your business. This means that the merchant of record is effectively a payment processor, who handles any dispute or chargeback, payment processing, and other transactions.

Opting to be your own MoR means you handle the entire gamut of responsibilities, from processing online payments and issuing refunds to maintaining compliance. This includes dealing with issues such as resolving payment disputes directly with customers, managing currency conversions, and handling charge-backs, potentially a complex and time-consuming process. By utilizing an MoR, you can effectively delegate these tasks, freeing up time and resources for core business operations.

The Growing Complexity of Sales Tax Management in the US and EU

The world of sales tax is constantly changing, with new tax laws and regulations being introduced regularly. In the United States, for example, each of the 50 states has its own sales tax regulations, rates, and registration requirements. Additionally, many states have different sales thresholds that trigger economic nexus, which obligates businesses to collect sales tax.

The US and the EU have different approaches to sales tax, which can be confusing for online sellers. In the US, sales tax is a state-level tax, and rates can vary between states, counties, and municipalities. In the EU, VAT is a harmonized tax applied across all member states but with varying rates depending on the country and product category.

Here are some key differences between the two systems:

• In the US, sales tax is applied to the final sale of a product or service, while in the EU, VAT is applied at each stage of the production and distribution process.
• US sales tax is a destination-based tax, meaning it is charged based on the customer's location. In the EU, VAT is generally applied based on the seller's location, with some exceptions for digital products and services.
• VAT-registered businesses in the EU can reclaim input VAT paid on goods and services used in their business, whereas in the US, sales tax is not generally recoverable by businesses.

Understanding these differences is crucial when selling to customers in different regions. By working with a merchant of record like Fourthwall, creators can have peace of mind knowing their sales tax and VAT obligations are expertly managed.

Tax Automation for Digital Creators

As a creator, dealing with sales tax can be daunting, especially when selling across multiple jurisdictions. Tax automation tools can significantly simplify this process by automatically calculating, collecting, and remitting taxes on your behalf. Fourthwall is pre-configured to use Avalara’s AvaTax, a leading tax compliance software, to ensure accurate tax calculations and compliance for creators. Fourthwall handles all the paperwork, so you can focus on marketing and promotion.

Why a Merchant of Record Matters

As a creator, you likely got into your craft to do what you love, not to become a sales tax expert. With the complexity of varying nexus thresholds and tax rates, it's no wonder that creators are searching for ways to simplify their lives and focus on what truly matters: creating.

Enter the merchant of record. By partnering with a MOR like Fourthwall, creators can offload the taxing (pun intended) responsibility of navigating sales tax compliance. This means you can spend more time doing what you're passionate about, while the MOR handles the nitty-gritty details of payment processing, managing sales tax, and ensuring compliance across multiple cities, states, and countries.

A reliable MOR doesn't just save you time; it can also save you from potential headaches and costly penalties associated with tax errors or missed filings. Plus, as the digital landscape continues to evolve and regulations change, you can trust that a MOR stays up-to-date with the latest developments, ensuring your online sales are always compliant.

Importantly, not all creator monetization and ecommerce platforms act as a merchant of record. While ones like Fourthwall, Gumroad, and LemonSqueezy act as a Merchant of Record, others like Shopify require that you fully manage sales taxes on your own. When you use a merchant of record, they will aggregate transactions across all users on the platform. Without a MOR, you’re responsible for all tax work. 

With a MOR like Fourthwall, you can confidently focus on your craft, knowing that the complex world of sales tax is being handled by experts. Fourthwall takes on the burden of sales tax management, payment processing, and chargebacks so creators can focus on what they do best: creating.

A merchant of record is an entity or business (like Fourthwall) that accepts payments on behalf of another business. Merchants of records take responsibility for all the legal liabilities involved in the transaction when a customer buys your product. 

Frequently Asked Questions:

What does MOR stand for?

MOR is the abbreviation for merchant of record. 

Is the seller of record the same as the merchant of record? 

 No, the seller of record is the person or company that is selling the product to the end consumer and it’s responsible for customer service, delivery, fulfillment, and customer support of the product sold. The merchant of record facilitates the payment transaction on behalf of the seller of record, and it’s only responsible for payment processing and related liabilities. 

Why is having a merchant of record beneficial? 

Having a merchant of record allows you to focus on the daily operations of your business, which is creating content, and not have to worry about sales tax compliance and other payment processing details that are required when transacting online. 

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