Should E-commerce Brands Use a Merchant of Record?

When your e-commerce business sells to a customer, there's more to the transaction than just collecting the money and providing the goods or services. 

You must process the customer's payment, comply with security and privacy rules while doing so, monitor for fraud, and respond to chargeback requests. You may also need to provide an invoice or receipt, and collect sales tax or VAT (value-added tax), which you then remit to taxing authorities after completing required registrations and filing required forms. 

If you don't want to handle all these tasks yourself, you can turn to a merchant of record (MoR) instead. A MoR becomes the legal seller, assuming responsibility for processing payments, complying with regulatory requirements, screening for fraud, validating transactions, managing billing, and handling chargebacks. 

Using a MoR reduces your legal risks and compliance obligations, but this comes at a cost. So e-commerce brands must carefully consider whether using an MoR is the right move. This guide will help you decide by explaining what exactly an MoR does, as well as the pros and cons of working with one.

We’ll also share some practical examples of when working with an MoR makes sense for an e-commerce business, and we’ll explore alternatives for situations when working with an MoR doesn’t make sense. 

A closer look at how merchants of record work with e-commerce brands

A MoR can assume responsibility for the legalities involved with your e-commerce sales for a fee. 

When you partner with a MoR and a customer purchases goods or services from you, the MoR becomes responsible for:

• Arranging for your customer's payment to be processed by integrating with a payment gateway or routing the transaction to a third-party payment processor. The MoR may be embedded in the user interface on your site, or its API may be integrated. Alternatively, your customer may be redirected to a different website used by your MoR to process payments
• Verifying the payment, protecting against fraud, and ensuring that payment processing complies with the Payment Card Industry Data Security Standard (PCI DSS), the Payment Services Directive 2 (PSD2), and other applicable regulations. If the purchase is international, the MoR will also manage currency conversions. 
• Collecting any online sales tax, VAT, or other applicable taxes, depending on the rules where the buyer is located.
• Providing any required invoices or receipts to the customer, ensuring that the documents comply with applicable rules, such as VAT invoicing requirements or invoicing requirements under the reverse charge mechanism. 
• Remitting funds from the transaction, minus taxes and fees, to your e-commerce business.
• Providing reports to your business about transactions, taxes, payments, or other agreed-upon metrics. 
• Registering for sales tax or VAT when required, filing the required tax forms, and remitting collected tax payments on schedule.
• Handling chargebacks, customer questions, and some customer support services.

You'll be responsible for sending out the product or providing the service, and the MoR will transmit the money to you. If there are chargebacks or other issues, the MoR typically manages the dispute process, though your business may need to provide supporting documentation.

Your business can be its own MoR, but you'll need to understand and fulfill your compliance obligations. Choosing to work with a third-party MoR can make things simpler. However, in addition to the cost, using a MoR also requires that you outsource key aspects of the customer experience and add the MoR as a middleman. When your customer looks at their credit card or bank statement, the name of the MoR will be listed, rather than your company's name. 

You can also process payments using a payment service provider (PSP) while acting as your own MoR. Here's how that process works when your customer places an order:

• The PSP may be integrated into your website or the e-commerce platform. For example, Shopify offers Shopify Payments, which is powered by Stripe, while multiple PSPs, including Stripe, PayPal, and Square plugins, are integrated with WooCommerce. The PSP may also provide its own hosted checkout page, which the customer would be redirected to in order to complete the payment process. 
• Your PSP will collect and secure the payment data and perform basic validation.
• The PSP sends the transaction to the payment processor, which is a separate entity. The processor prepares an authorization request and communicates with the bank or credit card network.  
• The credit card network identifies the issuing bank and requests payment, which the issuing bank either approves or declines. 
• If the customer's payment is approved, the order is created, the payment authorization is converted into a real charge, and the funds are reserved for settlement. 
• During settlement, the money is officially moved from the issuing bank to the acquiring bank, which passes the funds to your processor.
• Your processor credits your merchant account with the full amount of the payment you collected, deducting any fees you owe. The money can then be moved to your business bank account. 

Your business is responsible for determining whether you must charge tax during this process. Some PSPs offer tools that help, such as Stripe Tax, which can calculate the sales tax or VAT due. However, the services offered by PSPs are typically limited and require additional integrations with third-party providers or rely on manual processes and exporting information.  

Determining whether your company must collect tax can also be complicated. Plus, if you're obligated to do so, you must register with the taxing authority and remit the tax you collect, along with required tax forms. It can be a lot to stay on top of; however, there are services such as Numeral that can take care of these tasks for you, and that you can integrate with your PSP. 

Pros

There are some big advantages to using a MoR for e-commerce, including:

• Opportunities for rapid global expansion without legal entities: You can expand in Europe, Asia, Latin America, and the Middle East without creating legal entities in foreign countries or worrying about tax registration and the required obligations that go along with registration, like partnering with a fiscal representative (required by many EU countries). 
• Simplified tax collection and compliance: If your company does business in multiple states and countries, you may have to track nexus, register for sales tax or VAT, calculate taxes due, file tax forms, and remit taxes. A MoR can take care of these tasks for you. 
• Eliminate the costs and risks associated with payment collection: Your MoR can handle chargebacks, process refunds, ensure compliance with PCI DSS, and screen for fraud. 
• You can improve conversions: Offering local checkouts and payment methods for international customers may increase the likelihood that they will complete their purchases. 

Cons and risks

There are also significant disadvantages that come with partnering with a MoR, including:

• High costs: The fees associated with using a MoR can be much higher than basic payment processing fees. You may incur setup costs, monthly or annual subscription fees, transaction fees, and fees for currency conversion. The fees often add up to as much as 2.5% to 8% of all transactions, and, unlike with many services, the cost doesn't decline as your company scales. 
• Less control over the customer experience: You hand off your customers to the MoR during the payment process, so you don't control customer service during or after checkout. 
• Reduced access to data: You receive the data the MoR provides, which may not be as comprehensive or in-depth as the data you'd collect if you managed the payment process yourself.
• Branding issues: Since you're not the party completing the transaction, the MoR appears on your customer's bank or credit card statements, receipts, and invoices. This can create customer confusion and weaken your brand identity. 
• Integration challenges: Integrating your MoR with an e-commerce platform can be technically complex. Many MoRs offer an API and include documentation, but you still need the technical expertise to add the API to your platform. If you're using a customized platform, this can become more resource-intensive. 
• Internal tax strategy risk: You're dependent on the MoR to manage your sales tax and VAT compliance, so you relinquish control over indirect tax collection decisions and classification policies within the MoR framework. Your MoR decides how marketplace or platform rules apply, what product tax categories to use, what VAT or sales tax rules apply, how exemptions are handled, and how to interpret nexus rules. You can't align tax policy with finance or legal strategy, change sourcing rules, or customize treatments for edge cases such as when SaaS, digital goods, and physical goods are bundled. 
• Lock-in risk: Once you outsource to a MoR, your checkout experience, compliance models, and historical data are all inside the MoR. Changing your MoR or deciding to become your own MoR requires financial and legal restructuring. 

Carefully consider these downsides before you decide to start working with a MoR to handle your e-commerce sales. 

When e-commerce brands should use a merchant of record 

Since there are both pros and cons to using a MoR, e-commerce businesses should consider whether a MoR is right for them given their stage of growth and their business goals. 

Here are some situations when using a MoR may make sense, along with some circumstances when it may not. 

Ideal scenarios

These types of e-commerce companies may want to work with a MoR. 

• Smaller or emerging brands with limited tax infrastructure: If your company doesn't have a tax compliance team, automated tax calculation tools, filing and remittance workflows, or a process to remain audit-ready, partnering with a MoR could be a good way to reduce your risk. You face significant legal exposure due to the complexities of sales tax and VAT compliance, and partnering with a MoR is a quick, simple way to create an enterprise-level compliance stack. 
• Brands entering multiple international markets quickly: Entering new international markets can create new VAT registration requirements and subject your company to different invoicing rules, refund policies, chargeback rules, and consumer protection laws. Without an MoR, you may need to hire local tax advisors, find local fiscal representatives, and develop compliance processes in multiple jurisdictions. An MoR has established processes in place so you can start selling faster. 
• DTC (direct to consumer) and cross-border focused companies with low internal compliance resources: While the reverse charge mechanism can simplify VAT compliance for B2B sales, DTC sales put a greater responsibility on your business. If you don't have internal compliance resources, following VAT rules becomes a heavy lift. A MoR can manage compliance for you, allowing faster international expansion without the risk.
  

When to avoid a merchant of record

There are also e-commerce companies for whom working with a MoR does not make sense, including: 

• Established brands with strong internal tax and finance teams: If your company already has a finance team and dedicated tax professionals, you're well-positioned to act as your own MoR. There's less incentive to give up control over your tax strategy, your payment process, or your customer experience. You'll be duplicating systems you already maintain, paying a high fee to do so, and entering into a relationship that limits your access to data and that is difficult to get out of.
• Companies whose sites involve complex checkout processes or who have custom payments: MoRs typically work best for standard e-commerce transactions. Since the MoR becomes the legal seller, it controls the payment workflow. Working within that framework can be too restrictive if you have a complex checkout process, customized payment options, custom invoicing workflows, or complicated subscription and billing structures. 
• High-volume or high-revenue brands: Since many MoRs charge a percentage of revenue, this can become expensive with high-margin brands. If you act as your own merchant of record, you can keep costs down by lowering processing fees, optimizing your tax strategy, and controlling settlement timing.
• Companies that want full transaction ownership: If you want full control of the entire transaction, including having your brand on invoices and receipts, owning the buyer relationship from end to end, owning your own customer data, and managing customer disputes and processing refunds directly, you'll need to be your own MoR. 

E-commerce and tax compliance

Sales tax and VAT compliance involves some of the most challenging obligations your e-commerce business faces, and handing off this responsibility is one of the main reasons why e-commerce companies turn to a MoR. 

If you act as your own MoR, you must: 

• Understand when you become obligated to register and collect sales tax or VAT: This can mean tracking economic nexus thresholds, as most states require you to register for sales tax once you have a certain volume of sales or a certain number of transactions within their borders. In many countries where VAT or GST is collected, there's actually no registration threshold for non-resident sellers, so you must register and collect tax from your first taxable sale.  
• Collect the required tax: To do this, you must know when your products and services are taxable, what tax rates apply, and when customers are exempt vs non-exempt. 
• File and remit tax payments: You may need to file sales tax returns or VAT returns monthly, quarterly, or annually, depending on the local rules and your sales volume. 
• Remain audit-ready: This can mean producing compliant invoices, keeping exemption certificates on file, keeping a record of taxes collected, tracking refunds, and more. 

When you work with a MoR, you don't do any of these tasks. The MoR becomes the registered taxpayer. The MoR typically holds registrations in multiple states and countries and is set up to collect the required tax, file tax forms, and remit payment. 

Final thoughts

If you don't want to manage tax compliance, fraud detection, chargebacks, and customer refunds on your own, and you're willing to pay a percentage of your sales and give up significant control over your branding and customer experience, working with a merchant of record makes sense.

This will allow you to offload a great deal of legal risk, wash your hands of many compliance obligations, and expand more quickly and easily. 

It is worth exploring all of your options, though. For example, you can maintain more control over your transactions and outsource just your tax obligations to Numeral. Numeral takes care of sales tax, VAT, and GST compliance in more than 70 countries.

In fact, Numeral provides customized support, so we can help you regardless of whether you partner with a MoR or simply need to outsource tax issues while acting as your own merchant of record.