Stripe Debuts an App to Ease the Burden of Sales Tax Collection for Merchants

Heeding years-long requests from merchants for a solution to simplify sales-tax compliance, Stripe Inc. on Thursday introduced Stripe Tax, an application that allows merchants to automatically calculate and collect sales tax, value-added tax (VAT), and goods-and-services tax (GST) in the United States and more than 30 other countries.

Spurring the need for the application is that calculating and collecting sales taxes has become increasing complex, governed by a maze of tax laws that is difficult for merchants to navigate, Stripe says. Digital and physical goods are taxed in more than 130 countries. The U.S. alone features more than 11,000 different tax jurisdictions. A further complication is that not only are tax rules in each jurisdiction frequently amended, there can be subtle variances between them. 

For example, Texas levies sales tax on cowboy boots but not on hiking boots. In other examples, Webinar attendees pay varying tax rates for tickets to the same event based on their location. There’s VAT for food fed to pets in the United Kingdom, but not for food fed to animals, such as birds, fish, crustaceans, and mollusks, according to Gov.UK.

About two-thirds of merchants say tax compliance constrains their growth, and a majority say they would introduce more products and expand to more countries if compliance were easier, Stripe says. 

In Europe, managing VAT has become an increasingly nettlesome problem for merchants, with 48% saying they want help managing VAT and non-VAT taxes, according to a recent study by Stripe, which found more than half of all their operating costs go toward managing VAT compliance.

Another downside to the increasing complexity of sales-tax laws is that many governments have stepped up penalties for late or inaccurate filings. In the United States, for example, merchants pay 30% interest on past-due sales tax, on average. 

“No one leaps out of bed in the morning excited to deal with taxes,” said John Collison, co-founder and president of Stripe, in a prepared statement. “For most businesses, managing tax compliance is a painful distraction.”

The San Francisco-based company says Stripe Tax enables real-time tax calculation by determining the merchant’s exact location and matching that information to the product or service being purchased and its corresponding sales tax. Stripe Tax also reduces friction at checkout, the company says, by using location information to calculate and show consumers the taxes being charged. 

For business-to-business purchases, Stripe Tax collects the tax identification number from customers and automatically validates VAT IDs for European customers, applying a reverse charge or zero VAT rate when necessary.

In addition, Stripe Tax generates reports for each market in which a business is registered to collect tax, speeding up filing and remittance. 

Stripe says Stripe Tax can be installed by adding a single line of code or updating a single setting in a merchant’s Stripe Dashboard.

Merchants using Stripe Tax pay 0.5% per transaction. The rate drops to 0.4% for users with large processing volumes. Stripe automatically applies the rate reduction when a merchant reaches a particular threshold, depending on its region. The strategy behind the pricing model, Stripe says, is to minimize upfront compliance costs. The rollout of Stripe Tax follows Stripe’s acquisition in May of TaxJar, a provider of sales-tax software for Internet businesses in the U.S. Stripe Tax integrates TaxJar, though development of Stripe Tax was in the works months before the acquisition, Stripe says.