Why Creating an Online Marketplace from Europe is Not a Very Good Startup Idea
Let’s start with a definition, an online marketplace is a “type of e-commerce site where product or service information is provided by multiple third parties, whereas transactions are processed by the marketplace operator”. Sounds simple — a platform for anyone to sell anything. There are lots of existing marketplaces (Amazone, various App Stores, Airbnb and even Uber) and giving the fact that as a society we are moving towards crowd-driven economy I can only expect there will be more to come.
While building a platform for content creation, publishing and transaction processing is a challenge on its own, it is mostly a technical problem which already was sold most of the times. If you have an idea for yet another marketplace (AirBnB for dogs or Uber for cats) building it from scratch or using one of many open source solutions (Magento, Openbazzar) is just a matter of time and technical chops of your team.
However, things get very interesting when you start looking at legislative part of the problem, in particular — taxes.
Startups from the US get it easy. For decades, Amazon is lobbying their interests to keep any product purchase online free of otherwise mandatory sales tax. Getting an iPad from a local apple store will cost you additional 4–6% tax while buying it online from Amazon you pay only the product price. The same applies to any other sales done online — whether it is an online course, a book or a Uber ride. Neither customer nor marketplace operator needs to care about sales tax.
Things are not so easy when your startup operates from EU. A sale of service or product within EU was always subject to so-called Value Added Tax. Until 2015, in Finland, in particular, it was structured like this:
- B2B transactions are subject to 24% VAT
- B2B transactions when one of the parties registered outside of Finland are tax exempt (btw, this makes hiring freelancers from another country a very good idea from financial perspective)
- B2C transactions to EU residents are subject to 24% VAT
- B2C transactions to non-EU residents are tax exempt
- C2C transaction (for example huuto.net), are tax exempt for small amounts
We at Eliademy (a global online course marketplace), had to solve a very interesting problem. A person from Russia creates a course which is purchased by a person from Germany and transaction is handled by a company operating from Finland. Do you want to guess where such transaction falls in the existing ruleset?
Unfortunately for our users, local tax office decided that despite individuals (and in many cases non-residents of Finland) selling online goods to each other, each transaction had to be taxed as an online product sold by a Finnish company. This way buyer from Russia and US (non-EU) ended up paying 24% less for exactly the same content bought by people from Finland and Germany. No one was really happy about this.
An EU parliament came to rescue. From the beginning of 2015 each company that sells digital goods is forced to collect VAT not according to a flat rate of their home country, but instead calculate it based on country of residence of each buyer. According to this table. Sounds as a fun technical challenge, right?
With credit card payments it is usually simple. Most of the payment gateways (Braintree, Stripe) returns the data about eminent’s bank country. But, if you process payment via PayPal there is absolutely no data about person’s residence provided at any point in time.
Naturally, asking people where they live and hiking up VAT depending on the choice is a straightforward solution, but our friends from EU parliament thought about this. In order for each transaction be “correct”, a marketplace has to collect at least 2 non-conflicting pieces of evidence about buyers location, for example:
- User IP
- Location of bank of user’s credit card
- “Please tell us where you are” dropdown
All of this data, for each transaction, has to be keep for several years on your backed and reported monthly to the tax office (they actually send the tax to their counterparts in other EU countries).
In conclusion, here are just 4 reasons why running an online marketplace from Europe is not such a good idea:
- Online goods which are being sold via your platform are more expensive to EU customers
- It forces startups to invest into a sophisticated system of reliable “residence detection”
- It substantially complicates UX and frequently scares buyers off
- It introduces a very high cost on accounting for both company and all EU member states
Despite all the hurdles, we still keep going forward with Eliademy. I would love to spend the same amount of time we had to deal with this problem on something that really adds value for our customers (if someone from EU government reads this, please take a note), but sometimes you simply have to comply with the rules.
Don’t get scared off by various complexities of running your own business. The only thing that really matters is your mindset. Rephrasing famous Ford’s quote:
Success is 99% perspiration and 1% inspiration
Just keep in mind what you will need to do. For more on EU taxation policty very intense official site.