Merchant of record vs payment processor: who handles your sales tax?

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If you sell software, an app subscription or a digital download to customers around the world, the hardest part is often not taking the payment. It is the tax. The choice between a payment processor and a merchant of record decides who has to deal with it: you, or the platform.

The short difference

Why digital sales create tax work in many countries

Two rules make cross-border digital selling complicated:

• EU VAT is charged where the customer is. For electronically supplied services to consumers, the place of supply has been the customer's country since 2015. Since 1 July 2021, the One-Stop Shop (OSS) lets a business register in one EU country and report VAT for all EU consumer sales there. Very small EU sellers have a €10,000 EU-wide threshold below which simpler home-country rules can apply.
• US states can tax remote sellers. In South Dakota v. Wayfair (21 June 2018), the US Supreme Court allowed states to require sellers with no physical presence to collect sales tax. South Dakota's threshold, for example, was more than $100,000 in sales or 200 transactions into the state in a year. Each state sets its own rules.

Add the UK, Canada, Australia and others with their own rules for digital services, and a small software business can owe tax in a long list of places.

How a merchant of record works

A merchant of record is "a legal entity responsible for selling goods or services to an end customer", in Paddle's words. When you sell through Paddle, Paddle is legally a reseller of your product. It states it is responsible for "the collection and payment of VAT and tax instead of you", and that it handles refunds, chargebacks and fraud screening. Your name still appears on the customer's card statement alongside Paddle's.

Other examples: Lemon Squeezy is a merchant of record for digital products and software that Stripe acquired in July 2024. Gumroad says that since 1 January 2025 it handles all tax obligations for creators as merchant of record, in the regions where it has tax obligations.

How a payment processor works

With a processor like Stripe, you are the seller. Stripe's documentation is clear that "as a business, you're required to identify the states, provinces, and countries where you have tax obligations" and register with each tax authority. Stripe Tax can then calculate and collect the right tax at checkout, and Stripe can register on your behalf in some places (in the US directly, and outside the US through a partner). The obligations, and the filings, stay with your business.

The upside is control and usually a lower fee per payment. You own the checkout, the customer relationship and the data, and you can combine payments with any billing or tax tool.

Questions to decide

1. Who do you sell to? Consumer sales across many countries create the most tax work. Sales to VAT-registered businesses in the EU are often handled through the reverse charge, which is simpler.
2. How many countries? One or two markets can be manageable on your own. Dozens usually is not.
3. What do you sell? Merchants of record focus on software and digital products. Physical goods and services in person usually need a processor.
4. Can you pay for tax help? Compare the MoR's higher fee with the cost of tax software, registrations and an accountant.
5. How much control do you need? Custom checkout flows, marketplaces and complex pricing are easier with a processor.

Rules depend on your country and customers, so treat this as a map of the options, not tax advice. Compare head to head: Stripe vs Paddle, Paddle vs Lemon Squeezy and Gumroad vs Lemon Squeezy, or see Stripe alternatives and all payment tools. Need tax software instead? Browse tax tools.

Tools in this guide

Frequently asked questions

What is a merchant of record?

A merchant of record is the legal entity that sells a product to the end customer. When you sell through a merchant of record such as Paddle, it resells your product, so it is responsible for collecting and paying sales tax and VAT and handles refunds and chargebacks.

Is Stripe a merchant of record?

Stripe's standard payments product is a payment processor: you remain the seller and are responsible for your tax registrations. Stripe Tax can calculate and collect tax, and Stripe can help register in some places, but the obligations stay yours. Stripe also owns Lemon Squeezy, which works as a merchant of record.

When is a merchant of record worth the higher fee?

Typically when you sell digital products to consumers in many countries and do not want to register and file for tax in each one. If you sell mainly to businesses, or in one country, a processor plus tax software is often enough. Ask an accountant for your case.

Sources

1. Paddle, What is a merchant of record?
2. Paddle Developer, How Paddle works
3. Stripe Docs, Register for sales tax, VAT and GST
4. Vistra, The VAT e-commerce package and the supply of services
5. Avalara, Supreme Court rules South Dakota can tax sales by out-of-state sellers (2018)
6. TechCrunch, Stripe acquires payment processing startup Lemon Squeezy (2024)
7. Gumroad, Pricing

Published 26 October 2026, last checked 26 October 2026. Rules, prices and availability change; confirm with the provider or an adviser before you act. NxtGenFin is an independent directory, not affiliated with the companies named unless marked as featured, sponsored or affiliate link. Not financial, tax or legal advice.