Paddle makes it easier to sell software globally

How do we operate?

We act on your behalf as what is called a Merchant of Record (MOR).

From a legal point of view, this means that we are the reseller of your software. Most importantly, this also means that we assume responsibility for both compliance with local laws and regulations and handling of taxes on your behalf. We have to behave as if we had created the software ourselves.

Contracting with MOR gives considerable benefits to you, because you don’t need to do anything, when it comes to dealing with compliance and taxes anywhere in the world: we handle everything for you automatically as part of our normal service. As we detail in a minute, you’ll see that this is both really important and really complex.

This is very different from a normal Payment Service Provider like PayPal, Stripe or Adyen, who do not act as a Merchant of Record. They process your payments just as we do, but you still need to handle all the local compliance and taxes yourself. Not doing this properly in any country you’re selling, exposes you to potential fines, penalties and other legal issues - even if you’re just a solo developer!

In practice, your customers are still your customers. They’re buying your software, they see your name, your design, your website or app. We just facilitate the operations for you by handling the payment processing, compliance and end-to-end taxes.

How complex can sales tax be?

Very complex - and getting more complex each year since 2015.

First, it is important to know that this applies to everyone selling digital software or content whether you are a solo developer working on your fledgling app or a large multinational software business.

In 2015 the European Union changed their VAT rules: taxes are now charged based on where your customer is based, rather than where your company is located (our CFO wrote about it back then). Some other countries decided to follow the same route, which means that there are now 40+ countries where you need to deal with local taxes.

The rates applied vary. The type of transactions where taxes apply (with individual customers, companies or both) vary. Minimum thresholds vary (although in most countries you need to collect taxes from your very first local customer).

At this point, you probably feel relieved that we have a dedicated finance and legal team who handles all of that for you, so you don’t need to handle any of it.

All you need to do is decide, whether you want to charge on top of your price, or keep it “all inclusive". In the background, we’ll collect the right taxes, follow the proper accounting rules organize and process local tax payments.

I like details: what exactly do you do on my behalf?

Here is a list of our responsibilities. If you sell using a payment provider, rather than a Merchant of Record like us, please note that you must handle all of this yourself if you want to comply with the local laws enacted in Europe, Australia, South Africa etc.

• Monitoring the Sales Tax thresholds in the jurisdictions where Sales Tax is introduced and applying for Sales Tax registration once the threshold is reached;
• Applying for Sales Tax registration in jurisdictions with no threshold;
• Appointing Tax Agents and Tax representatives in jurisdictions where it is mandatory to have one (this additional external cost of compliance can exceed thousands of dollars annually);
• Differentiating the sales between B2C and B2B to make sure we account for Sales Tax on either B2C sales or both B2B and B2C transactions (this is case-by-case based and detailed and up-to-date knowledge and understanding of the local Sales Taxes and other relevant laws is required);
• Reporting and remitting the Sales tax to the Local Tax Authorities (a monthly / quarterly process with 40 different countries, involving cross-border funds transfers in multiple currencies);
• Monitoring all the changes with regards to the Sales Tax rates in jurisdictions where the Sales Tax has already in place as well as all the proposed changes for the new jurisdictions around the world;
• Ensuring the supporting documentation / receipts / invoices that are issued to both B2C and B2B customers are also fully compliant with local Sales Tax laws;
• Ensuring we have systems in place to support the automation of the sales process from the Sales Tax perspective (i.e. applying correct rates to the correct jurisdictions / types of sale / types of customers / collecting / storing of data etc);
• Dealing with other relevant reporting and compliance requirements (i.e. EC Sales list applicable in Europe to detail all the transactions with all your B2B customers)