As ecommerce continues to expand globally, businesses are faced with navigating complex import laws and financial obligations abroad. Both Merchant of Record (MOR) and Seller of Record (SOR) serve as solutions to streamline fiscal compliance, ultimately accomplishing the same objective – outsourced indirect tax management – yet their approaches vary significantly. Using an MOR is the conventional model many are familiar with, while SOR introduces a newer, more flexible alternative that’s gaining traction. Grasping the nuances between MOR and SOR is vital for brands as they present specific considerations in terms of cash flow, tax compliance, and customer experience.
In this article, we’ll explore the differences between a Merchant of Record vs. Seller of Record model, outline their key responsibilities, and offer strategic insights for companies aiming to thrive in international markets.
Evolution of Global Ecommerce Transactions
Over the last three decades, the progression of global ecommerce transactions has evolved from overcoming early obstacles in accepting online payments and fraud protection to now handling the intricate aspects of tax compliance. Initially, the Merchant of Record model emerged as a convenient option for sellers to facilitate secure transactions and mitigate fraud risks. However, as platforms like Shopify began to offer native functionalities for these concerns, the focus has adjusted to handling the complexities of indirect taxes.
More than 160 countries worldwide impose a consumption tax such as VAT or GST, which is generally paid by the end consumer. Previously managed by customs brokers during clearance, the responsibility for collecting these taxes on imported products has shifted in recent years to ecommerce merchants and marketplaces, making compliance more challenging. Currently, over 10 key markets require US-based companies to register for a local tax ID and handle tax collection and remittance directly, with obligations varying by the destination country.
[Learn more about International Ecommerce Taxes]
Due to the international tax landscape for direct-to-consumer brands growing increasingly complex, the value of an MOR in managing tax compliance has been highlighted, even with the advancements in ecommerce technology. However, while they take on the tax burden, it often comes at the cost of flexibility which can potentially lead to overpayment for unnecessary services. As an innovative alternative to MOR, Seller of Record was introduced to provide businesses with a more efficient and adaptable approach to fiscal compliance. This model allows merchants to selectively outsource tax compliance, meaning they can tailor their strategy to specifically address markets with unique regulations.
What is a Merchant of Record?
A third-party Merchant of Record solution acts as an intermediary and sells products on your behalf, assuming the responsibilities associated with financial transactions, tax compliance, and other regulatory requirements. On paper, they are legally recognized as the seller, meaning their company name will appear on bank and credit card statements.
Merchant of Record Definition:
A Merchant of Record (MOR) is the entity officially recognized as the seller in a transaction, responsible for legal and financial aspects of sales, particularly in online commerce. This includes ensuring compliance with local and international tax laws, handling payment processing and financial disputes, and managing tax obligations.
Merchant of Record Responsibilities:
- Payment Processing – Controls the processing of customer payments, directly managing payment gateway operations.
- Tax Collection & Remittance – Oversees the collection, reporting, and remittance of relevant tax obligations, complying with local laws where products are sold.
- Financial Transactions – Handles all financial interactions with customers, including receipts, refunds, and disputes.
Example of an MOR Arrangement:
- Customer Purchase – A customer makes a purchase on your website.
- Payment Processing – The MOR collects payment, including all taxes and duties.
- Ownership Transfer – The MOR takes the title of the items, legally becoming the seller.
- Tax Management – The MOR handles tax returns with the proper authorities.
- Revenue Transfer – The MOR deducts fees and taxes, then transfers the remaining sales revenue to your brand.
Note that while international consumers shop via your ecommerce store, their transactions are technically with the Merchant of Record, who operates without holding inventory and serves primarily for legal and financial documentation. From a brand’s administrative perspective, the MOR is considered the purchaser of your products. This arrangement may facilitate smoother global transactions but often results in payment and cash flow delays as the MOR processes and remits revenue after accounting for necessary deductions.
What is a Seller of Record?
A Seller of Record is a newer alternative that offers a more flexible approach to international tax compliance than a Merchant of Record. While offering a similar solution by enabling brands to outsource their indirect tax collection, reconciliation, and remittance to a third party, SOR distinguishes itself by not being involved in financial transactions with customers. Instead, it allows merchants to choose their own payment platform and directly receive funds.
Seller of Record Definition:
A Seller of Record (SOR) is a legal construct that makes the SOR the owner and seller of the goods at the time the order is placed. Through a subsale or flash sale, ownership passes from the merchant to the SOR and from the SOR to the consumer at the time of purchase. With this economic transaction, the SOR becomes the owner and seller of the goods and the party responsible for indirect tax compliance.
Seller of Record Responsibilities:
- Tax Collection & Remittance – Handles the collection, reporting, and remittance of relevant tax obligations.
- Tax Authority Liaison – Interacts with local tax authorities to answer questions and resolve any issues.
Example of an SOR Arrangement:
- Customer Purchase – A customer makes a purchase on your website with duties, taxes, and shipping fees collected at checkout by your brand.
- Official Seller Designation – The SOR purchases items from the brand under a legal construct, officially becoming the seller.
- Tax Management – The SOR handles tax returns with the proper authorities.
- Invoicing – The SOR invoices the brand for any fees and taxes paid.
The Seller of Record model is particularly beneficial for ecommerce companies that ship their products internationally. It allows brands to outsource the complex aspects of cross-border transactions, including compliance with global tax regulations and management of indirect taxes, to a specialized partner all while remaining in control of their customer experience and cash flow.
Comparing Merchant of Record vs. Seller of Record
Depending on the specific arrangement, a Merchant of Record and Seller of Record are entities that assume specific responsibilities and fulfill varying roles within a transaction. We’ll cover their similarities, differences, and how they each impact the level of control a business keeps over its sales process.
MOR vs. SOR Model Comparison:
| Aspect | Merchant of Record (MOR) | Seller of Record (SOR) |
|---|---|---|
| Payment Flow | MOR takes the payment from the consumer and then pays the brand weeks or months later, potentially delaying access to funds. | Brands directly secure funds from the customer through their payment processor. SOR is excluded from the payment flow, ensuring quicker access to revenue. |
| Profitability & Pricing | Predicting recurring revenue and international costs is challenging due to the MOR managing funds. MOR-set pricing, often inclusive of duties and taxes, can strip merchants of control over pricing and margins. | Easier to predict recurring revenue and costs because the brand remains in control of its pricing strategies and margins, enhancing profit optimization and financial planning. |
| Tax Registration | MOR is responsible for registering with tax authorities in various countries, reducing the regulatory burden on brands. | SOR handles the responsibility of registering with tax authorities, offering a similar advantage to brands in terms of regulatory compliance. |
| Distance Selling Thresholds | Taxes are applied from day one, regardless of a brand meeting distance-selling thresholds, as the MOR assumes ownership of all their client’s sales volume. | Taxes apply only after surpassing sales thresholds set by each country, based on the brand’s volume, ensuring taxes are only paid when necessary. |
| Data & Store | MOR often maintains control of a brand’s store and data, restricting transparency and the ability to implement changes independently. | Brands retain full control over their first-party data and store experience, ensuring complete transparency and operational flexibility. |
Key Differences between MOR vs. SOR:
- Cash Flow Timing – With MOR, brands experience delays in receiving revenue, whereas SOR ensures merchants directly collect funds from the payment processor.
- Payment & Pricing Management – The MOR model makes it challenging for brands to forecast profitability due to the intermediary managing funds and reduces control over pricing and margins. In contrast, the SOR model supports more precise financial planning, as brands retain control over their pricing strategies and profit margins.
- Tax Payment Thresholds – In the MOR structure, taxes are incurred from the first sale, regardless of distance-selling thresholds, since MORs own all their client’s sales volume. For example, this means taxes are due from day one, even in markets like Australia that have a $75,000 AUD threshold for GST registration. In contrast, with SOR, taxes are charged only after surpassing these limits based on the brand’s sales volume, ensuring taxes are paid only when required.
- Control Over Data & Customer Experience – Under MOR, control over your first-party data and online store lies primarily with the intermediary. This can directly impact the customer experience by constraining the brand’s adaptability and responsiveness. Conversely, SOR enables merchants to manage their own data and store experience, providing the transparency and flexibility needed to enhance consumer satisfaction.
The main difference between a Merchant of Record vs. Seller of Record lies in the control and flexibility they provide to businesses. While an MOR can simplify compliance, it often comes at the cost of limiting control over data, customer experience, and cash flow. In contrast, with SOR, brands can still enjoy the benefits of the MOR model while retaining access to first-party data and maintaining relationships with their buyers. This enables merchants to maintain greater control and flexibility while still ensuring compliance with regulatory requirements.
Choosing the Right Model for Your Global Brand
When expanding your brand globally, managing international transactions properly can be a challenge. Both the Merchant of Record and Seller of Record models offer easier paths to reach new markets by simplifying compliance, with each providing advantages tailored to different business needs and strategic priorities. Your decision between the two should primarily revolve around the level of control you wish to maintain over your store, data, and finances.
Merchant of Record Model: MORs act as the official sellers to streamline international transactions and ensure fiscal compliance, yet they limit flexibility and may incur extra costs due to a lack of customization and market selection.
Seller of Record Model: SOR offers more control and flexibility over the traditional MOR model, enabling targeted international tax compliance and strategic advantages in managing distance-selling thresholds.
Ultimately, the choice between MOR vs. SOR should be informed by a thorough assessment of your company’s specific needs and goals in the global market. By understanding the roles, responsibilities, and implications of each model, brands can make informed decisions that best support their expansion efforts. This approach allows businesses to focus on their fundamental operations while efficiently managing the complexities of international ecommerce.
Looking for a solution to simplify global growth and compliance? The Passport Seller of Record™ Program takes a smart, flexible approach to compliance. With our solution, you skip the middleman, speed up customs clearance, and stay in control of your store and cash flow. Reach out to the Passport® team today to see how we can enhance your international strategy.
Frequently Asked Questions:
What is a Merchant of Record?
A Merchant of Record (MOR) is an entity officially recognized as the seller in a transaction. It assumes responsibility for the legal and financial aspects of sales, particularly in online commerce. This includes ensuring compliance with local and international tax laws, handling payment processing, managing financial disputes, and overseeing tax obligations. The MOR acts as an intermediary, selling products on behalf of a brand, and is listed on bank and credit card statements as the seller.
What is a Seller of Record?
A Seller of Record (SOR) is an entity responsible for handling tax compliance, including tax collection, reporting, and remittance, in ecommerce transactions. Unlike a Merchant of Record (MOR), the SOR does not engage in financial transactions with customers but focuses solely on ensuring tax obligations are met. This model allows businesses to maintain control over payment processing while outsourcing tax-related tasks to a specialized partner, facilitating smoother operations in international markets.
What is an example of a Merchant of Record?
An example of a Merchant of Record (MOR) scenario involves an ecommerce company selling internationally through its website. When a customer makes a purchase, the MOR steps in to collect payment, including all taxes and duties, and is legally recognized as the seller. The MOR then manages the tax returns and remits the net revenue to the brand after deducting fees and taxes. This arrangement ensures compliance with international tax laws and simplifies financial transactions for the brand, with the MOR acting as an intermediary that assumes the legal and financial responsibilities of the sale.
What is an example of a Seller of Record?
An example of a Seller of Record (SOR) scenario is when an ecommerce company operates its online store and directly receives funds from customers through its chosen payment processor. In this model, the SOR takes on the responsibility of handling tax compliance, including collecting, reporting, and remitting relevant taxes. Unlike the Merchant of Record model, the SOR does not engage in financial transactions with customers. Instead, it enables brands to maintain control over their payment flow while outsourcing the complexities of international tax compliance to a specialized partner.
What are the obligations of a Merchant of Record?
The obligations of a Merchant of Record (MOR) include managing payment processing, overseeing tax collection and remittance, handling financial transactions with customers, and being legally recognized as the seller in transactions, assuming associated responsibilities.
What are the obligations of a Seller of Record?
The obligations of a Seller of Record (SOR) include handling tax collection, reporting, and remittance, as well as interacting with local tax authorities to ensure compliance. Unlike a Merchant of Record, a Seller of Record does not engage in financial transactions with customers, allowing brands to directly manage payment processing.
What is the difference between Seller of Record and Merchant of Record?
The main difference between a Seller of Record (SOR) and a Merchant of Record (MOR) is their involvement in financial transactions. SORs focus solely on tax obligations, allowing brands to manage payments directly, while MORs act as intermediaries, handling both financial transactions and tax compliance. This distinction gives brands using an SOR greater control over financial processes, whereas MORs simplify compliance but may limit control over payments.
What is a Merchant of Record vs. Seller of Record?
A Merchant of Record (MOR) assumes legal and financial responsibilities in transactions, acting as an intermediary for the brand. In contrast, a Seller of Record (SOR) focuses solely on tax compliance, allowing brands to manage payments directly. While MOR offers comprehensive management of sales processes, SOR provides more control and flexibility by simply outsourcing tax-related tasks.
What is the difference between SOR and MOR?
The main difference between a Seller of Record (SOR) and a Merchant of Record (MOR) lies in their roles within international ecommerce transactions. SORs focus solely on tax compliance, while MORs act as intermediaries, managing both financial transactions and tax compliance. This distinction offers businesses varying levels of control and flexibility.
What are the benefits of using an external MOR?
Utilizing an external Merchant of Record (MOR) simplifies compliance with local and international tax laws, streamlining processes such as payment processing and tax collection. This enables businesses to expand globally while reducing administrative burden and mitigating legal risks. Ultimately, partnering with an external MOR allows companies to focus on their core operations and achieve smoother and compliant international expansion. However, for businesses seeking even greater flexibility in managing tax compliance, the Seller of Record (SOR) model presents an alternative solution worth considering.
What are the benefits of using an external SOR?
Using an external Seller of Record (SOR) offers businesses enhanced flexibility, reduced complexity, improved cost efficiency, and tailored tax compliance solutions in international markets. SORs focus solely on tax-related tasks, allowing brands greater control over financial transactions and tailored strategies for specific markets. By streamlining tax processes, such as collection and reporting, SORs simplify compliance and minimize administrative burden, facilitating smoother international expansion.
