Global Sales Tax Remittance Without the Downsides of the MoR Model

I was settling down to write a final post about global sales tax compliance just before Christmas when an unexpected surprise came across my Twitter feed. In direct response to someone calling for Stripe to offer a Merchant of Record product, a member of Stripe's team team responded with a comment that went relatively unnoticed.

“We’re actively exploring ways to expand Stripe Tax to help our users, without the limitations of an MoR (merchant of record).” -Sam Mcallister, Communications at Stripe

While this probably isn’t much of a surprise to people who live in the depths of the payment processing world, it’s notable because it’s the first time that I've seen the team at Stripe publicly confirm the strategy that they are pursuing to address global sales tax remittance.

This is fantastic news for every business that loves Stripe—founders everywhere can breath a collective sigh of relief. 

A quick recap on global sales tax compliance and the MoR model

There are very few topics that I’d like to be associated with less than global sales tax compliance. But as we needed to solve this not only for our own SaaS business but also for our customers, I quickly recognized how many founders were struggling with this topic.

Our team wrestled with how to solve global sales tax compliance for nearly two years. During this time I published an early exploration of the topic and then later a much more in-depth analysis of the pros and cons of the Merchant of Record model. Those posts show how my thinking on the topic evolved over that time—and importantly they were both written without any bias. Outseta didn’t offer any solution to global sales tax compliance when these posts were written.

Just as importantly, we now do. We announced earlier this year that we very specifically decided not to become a merchant of record (MoR), and Stripe even wrote a story recently on how Outseta chose Stripe Tax over becoming a merchant of record.

Somewhere between these posts and appearing on Rob Walling’s Start-ups for the Rest of Us podcast, I somewhat reluctantly became a resource for a lot of people as they considered this topic. My email inbox quickly filled up with tax compliance questions and screenshots from founders who were angry when they realized they were paying anywhere from 7% to 17% in transaction fees when using a merchant of record.

If I can continue to make this topic less murky for founders I’ll continue to do so. This post has two objectives:

• To clear up some of the bets we made at Outseta so you understand why we chose not to become a MoR
• To address some common misconceptions that I see specific to the MoR world

We ultimately decided that the MoR model was not in the best interests of the majority of our customers. Here's why we felt comfortable making that bet.

We couldn’t see a future where Stripe didn’t address remittance

The biggest bet that we made was a simple one—Stripe is the dominant player when it comes to payment processing for internet businesses. They have a track record of tackling the biggest and most difficult problems in this space. We simply couldn’t see that changing. 

“Our biggest bet was that it was only a matter of time until Stripe addressed tax remittance themselves. It wasn’t a matter of if—it was only a matter of when.”

Few companies actively listen to their customers as much as Stripe. So while the idea of becoming a MoR ourselves was in many ways intoxicating, it was hard to imagine that Stripe wasn’t going to build better tax remittance solutions themselves.

We wanted to avoid a scenario where we invested considerable time and resources into becoming a MoR, only to have Stripe solve the problem themselves. 

We developed conviction that Stripe didn’t view the MoR model as the best solution for most businesses

While Stripe has been relatively tight-lipped when it comes to their plans to build remittance solutions, this was a topic that we explored in great depth over the course of nearly two years. During this time, the popularity of the merchant of record model grew—and rightly so, as people sought solutions. 

But over the course of this period it became increasingly clear to me that Stripe didn’t view the MoR model as the best solution to the remittance problem. They certainly could have offered a MoR product of their own—they chose not to. It’s pretty evident to me that Stripe views the MoR model as a good fit for some relatively niche use cases rather than the best solution to remittance for Stripe customers at large.

The MoR model is best suited to marketplaces—not SaaS or membership businesses

As we sought to better understand my aforementioned point, we came to the conclusion that the MoR model was best suited to marketplaces specifically. This model makes very logical sense for marketplaces like Gumroad. Their users need an easy way to throw up items for sale—things like digital downloads or website templates—with minimal administrative burden.

This use case is very different from a singular SaaS or membership business where the founders are building long term, sustainable businesses. 

If we were building a creator marketplace I'd elect for the MoR model, but our customers are primarily SaaS and membership businesses.

We made a long term bet on Outseta offering the lowest payment processing fees

Just as Jeff Bezos famously bet that Amazon customers would always want the largest selection and the lowest price, we've made a long term bet that our customers will always want the lowest payment processing fees.

Since we started Outseta in 2016 we’ve always chosen the hard road that would allow us to maintain the lowest possible payment processing fees. Most notably, this meant building our own subscription management and invoicing tools which allow Outseta customers to process payments without incurring an additional .8% transaction fee for Stripe Billing. 

Almost all of our primary competitors chose to instead integrate Stripe Billing—a great advantage in terms of speed, but they’re now unable to offer payments with fees as low as we are.

“As more people realize the costs of the MoR model—as well as the various costs that can be associated with “just using Stripe”—Outseta has now built a serious competitive advantage that allows us to charge lower fees.” 

Outseta customers today pay .2% more per transaction than “just using Stripe”—for which they also get authentication, CRM, email, and help desk tools. But we’ve also put ourselves in a position where we could charge fees that are less than  “just using Stripe” while still making money.

It’s clear that these bets are starting to break in our favor—and earlier than expected.

Key insights into the popular MoR vendors

I still field a lot of questions about the MoR model, and I stand by the key takeways you see below. But I also want to address a few misconceptions about the popular MoR vendors that I think many people simply don’t understand. 

While there are many MoR businesses out there, my little corner of the tech industry is dominated by three.

• Gumroad—Gumroad is a creator marketplace.
• Paddle—Paddle sells primarily to SaaS businesses.
• Lemon Squeezy—Lemon Squeezy has their feet in both spaces—while their home page messaging reflects a focus on selling to software companies, they’ve been forthcoming in sharing that their growth has been driven by winning business from Gumroad.

All other things being equal, a few comments that might be helpful if you are considering a MoR.

Gumroad is the most expensive, but helps with distribution

Gumroad famously raised their fees to 10% per transaction + Stripe fees in one of the more poorly communicated price increases in recent memory. That said, it was clearly a good move for their business—profits are way up.

Gumroad has built a moat for creator products because their marketplace also helps with distribution—this has so far allowed them to charge higher fees. Nonetheless, expect fees to be highest with Gumroad.

Paddle has the lowest fees

While many buyers assume that Paddle and Lemon Squeezy charge the same payment processing fees—both advertise 5% per transaction—that's not the case. Paddle has built relationships with local payment processors all around the globe, which allows them to process payments at lower rates without incurring additional Stripe fees in many instances. They have two noteworthy advantages that are simply difficult to communicate and not well understood:

• You’ll pay lower fees with Paddle
• Payments will be accepted at a higher rate with Paddle

Both of these advantages come from the local level relationships that Paddle has built with various payment processors. While I think Paddle will be most directly affected by Stripe offering their own remittance solutions, I expect you’ll see them lean into these advantages that much more.

Lemon Squeezy beats Gumroad on fees, and Paddle on UX

Lemon Squeezy is going to beat Gumroad on payment processing fees by a solid 5%, while they've quickly become a major competitor to Paddle primarily by offering a better user experience. While I'm the first to tell you that Paddle's user experience was pretty lousy for a long time, they did launch a new version of Paddle recently that's a significant improvement.

Expect Lemon Squeezy versus Gumroad to intensify

While Lemon Squeezy is targeting both software and creator marketplace use cases, in start-ups you tend to double down and follow the money. Lemon Squeezy has grown primarily by winning business from Gumroad, their team has a background in marketplaces, and they are currently building their own marketplace.

I expect that you’ll see the Lemon Squeezy vs. Gumroad narrative intensify in 2024, and that’s a formidable fight that’s a good thing for everyone in the creator space.

Paddle and Lemon Squeezy are looking to diversify beyond payment processing

I think it’s fair to say that the knowledge that Stripe is building their own remittance tools is affecting both Lemon Squeezy and Paddle. Both companies sell primarily on the back of solving global sales tax compliance, and when Stripe offers their own remittance solutions it makes them both that much more vulnerable.

Lemon Squeezy has more options and an easier path, as they have expertise in marketplaces and it’s where they are already winning the majority of their business. But offering things like affiliate features also speaks to their interest in showing that they offer more than just payment processing. 

As for Paddle, they have to go more directly head-to-head with Stripe which is certainly a tough position to be in. But they also offer additional tools like Profitwell and can lean into the narrative of the relationships they have with local payment providers.

In both cases it’s clear that these companies will be increasingly focused on showing that they offer more than just payment processing for their fees.

So how do I remit sales tax today?

I don’t want to discount that Stripe’s remittance solutions are not here yet, beyond some tax remittance partnerships. So where does that leave you in 2024?

My recommendation is simple:

1. Turn on Stripe Tax
2. Stripe Tax will tell you where you need to remit—make sensible decisions on where to remit based on your transaction volume
3. Follow along! Outseta will be publishing content all year to demystify this process.

If you’re just getting started, I would continue to follow Patrick McKenzie’s advice—Patrick has likely forgotten more about start-up payment processing than I'll ever know. His point that taxes can be remitted retrospectively is a good one.

It’s unquestionably great news to know that Stripe is working on solving remittance without the downsides of an MoR—I wouldn’t bet against Stripe.

And it’s amazing to see the bets that we made for our customers at Outseta are starting to break in the right direction.