Merchant of Record: Essential Insights for International Ecommerce

May 16, 2024 
|  Passport

As global ecommerce continues to grow, businesses entering international markets face numerous regulatory challenges. The Merchant of Record (MOR) model offers a streamlined solution by handling crucial responsibilities to promote seamless cross-border transactions. This article covers the definition of a Merchant of Record, outlines its roles and responsibilities, and introduces an enhanced strategic alternative to the traditional MOR approach.

Understanding Merchant of Record in Ecommerce

Leveraging a Merchant of Record model is commonly used in ecommerce to support global expansion efforts. By managing indirect tax compliance, an MOR enables companies to cross borders without the need for extensive knowledge of local laws or setting up multiple international subsidiaries.

MOR Definition:

A Merchant of Record (MOR) is the legal entity recognized as the seller in a transaction, responsible for handling all legal and financial aspects. This includes compliance with tax laws, managing payment processing, and resolving financial disputes. As an intermediary facilitating sales on behalf of other businesses, the MOR is listed on customer bank and credit card statements.

Merchant of Record Responsibilities

A Merchant of Record is responsible for three pivotal aspects of international ecommerce:

  • Payment Processing – Controls the processing of customer payments and directly manages payment gateway operations.
  • Tax Collection & Remittance – Oversees the collection, reporting, and remittance of relevant tax obligations and complies with local laws where products are sold.
  • Financial Transactions – Handles all financial interactions with customers, including receipts, refunds, and disputes.
Transactional Roles

Even though international customers shop through your website, transactions are technically with the Merchant of Record, who manages legal and financial documentation without holding inventory. From a brand’s administrative perspective, the MOR is considered the buyer of your products. This arrangement typically gives the Merchant of Record control over your ecommerce store and first-party data, affecting transparency and the ability to make changes independently.

How a Merchant of Record Works

Let’s break down the process of a transaction under the Merchant of Record framework:

  1. Customer Purchase – A customer from another country makes a purchase on your website.
  2. Payment Processing – The MOR processes the payment, including the calculation and addition of all relevant taxes and duties, such as VAT or GST.
  3. Ownership Transfer – The MOR takes the title of the items, thus legally becoming the seller.
  4. Tax Management – The MOR handles all obligations related to tax returns and remittances with the appropriate authorities.
  5. Revenue Transfer – Once all deductions for taxes and fees are made, the MOR transfers the remaining revenue to your brand.
Tax Application & Distance Selling Thresholds    

It’s important to note only about 10 of the 220 global markets have tax registration requirements that make outsourcing these responsibilities beneficial, as taxes are paid upon import in most regions. Additionally, adopting a Merchant of Record structure results in the immediate application of taxes since MORs assume ownership of all their clients’ sales volume. This means brands could potentially miss out on substantial savings in countries with distance selling thresholds.

To illustrate a Merchant of Record example, consider a US-based cosmetics company expanding into New Zealand. Local regulations require non-resident businesses to start collecting GST only after their annual sales exceed $60,000 NZD. Normally, imports valued under $1,000 NZD are exempt from the 15% GST until this sales threshold is reached. However, when using a Merchant of Record, the brand must collect the 15% GST from the start, regardless of whether order values fall below the exemption limit. This partnership relieves the burden of handling taxes directly but at a significant cost. On top of that, the cosmetics company faces delays in accessing funds and loses control over its store and data, as the MOR manages these aspects.

Considerations for a Merchant of Record Model

Although a Merchant of Record provides notable advantages for expanding businesses, it also imposes certain limitations. Under this model, control is relinquished to the MOR, which, while simplifying operations, can restrict flexibility and often leads to higher costs from bundled services that may not be necessary for all brands. Furthermore, relying on a third party to handle payments may delay access to sales revenue, adversely affecting cash flow and reducing control over the customer experience. Therefore, companies should carefully evaluate if the convenience provided by a Merchant of Record aligns with their specific international ecommerce needs and strategic goals.

A Flexible Alternative for International Tax Compliance

As an innovative alternative, Passport Seller of Record™ (SOR) stands out as a smart and more flexible international tax solution that effectively addresses the challenges associated with an MOR, while maintaining all the essential benefits.

Seller of Record uniquely positions itself by not intervening in financial transactions with customers, focusing instead solely on tax compliance. This key distinction allows companies to choose their preferred payment platforms and receive funds directly. Plus, the SOR model allows for alignment with country-specific distance selling thresholds, avoiding the need for immediate tax collection on all sales. Overall, SOR provides brands with the perfect balance of flexibility and regulatory compliance, facilitating smooth international selling and easier access to global markets.

To learn more about the advantages Passport Seller of Record™ offers ecommerce businesses and how it differs from a Merchant of Record, check out our in-depth comparison in this “Merchant of Record vs. Seller of Record” article.

Frequently Asked Questions:

What is an MOR (Merchant of Record)?
A Merchant of Record (MOR) is the entity officially recognized as the seller in a transaction. It handles all the legal and financial responsibilities involved, including tax compliance, payment processing, and financial disputes. Overall, MORs enable businesses to operate across international borders without needing extensive local regulatory knowledge, facilitating seamless global transactions.

What is the definition of a Merchant of Record in ecommerce?
In ecommerce, a Merchant of Record (MOR) is the legal entity recognized as the seller in transactions, responsible for handling payment processing, managing taxes, and resolving financial disputes. Essentially, MORs simplify international ecommerce by enabling companies to operate in global markets without extensive knowledge of local regulations

What are the responsibilities of a Merchant of Record?
A Merchant of Record manages payment processing, tax compliance, and financial interactions with customers, including issuing receipts, processing refunds, and resolving disputes.

What services does a Merchant of Record provide?
A Merchant of Record provides key services such as payment processing, tax compliance, and managing all customer financial interactions, including issuing receipts, processing refunds, and resolving disputes.

What is an example of a Merchant of Record?
A typical example of a Merchant of Record involves an ecommerce business expanding internationally. The Merchant of Record handles all payment processing, tax compliance, and financial disputes on behalf of the company. This allows brands to operate in global markets without needing extensive knowledge of local tax laws and regulations, thus simplifying international transactions. However, while this setup manages compliance hurdles, it may also lead to delays in access to funds and limits the business’s control.

What is the difference between a Merchant of Record and Seller of Record?
The main difference between a Merchant of Record (MOR) and a Seller of Record (SOR) lies in their handling of financial transactions. While MORs take charge of payment processing, tax compliance, and customer financial interactions, SORs focus on ensuring tax compliance and allow businesses to select their own payment platforms, thus providing greater operational flexibility and control

Why is Passport Seller of Record™ a potentially better alternative to Merchant of Record?
Passport Seller of Record™ (SOR) is a great alternative to traditional Merchant of Record (MOR) models due to its emphasis on flexibility and control. Unlike an MOR that handles all financial transactions and interactions, SOR focuses on tax compliance, letting businesses control their own payment platforms and receive funds directly. It also aligns with country-specific tax thresholds, enabling certain tax exemptions, which reduces upfront financial burdens and supports smoother market entry.

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