Paddle entirely handles sales tax for all digital products sold to customers where it's a legal requirement. This includes VAT (Value Added Tax), GST (Goods and Services Tax), Sales Taxes, and other local equivalents around the world.

Paddle's Role: Your Merchant of Record

Paddle operates as the Merchant of Record for your digital products. This means we take on the responsibility for all aspects of the transaction, from processing payments to handling sales tax compliance.

Essentially, when a buyer purchases your product through Paddle, we act as the seller to them. Because Paddle is registered in over 100 jurisdictions worldwide, we can:

• Collect the necessary customer information.
• Calculate and charge the correct amount of sales tax (VAT, GST, state sales tax, etc.).
• Remit those taxes to the relevant tax authorities globally.
• Issue compliant invoices.

This model ensures your sales are always tax-compliant, and all the tax-related risk rests with Paddle, not with you. No additional work is required on your part.

Understanding Reverse Charge

The term "reverse charge" refers to a specific mechanism that applies in some regions for cross-border business-to-business (B2B) transactions, particularly concerning VAT.

Normally, when a business sells a product, they charge the sales tax (like VAT) to the customer and then pay that tax to the government. With the reverse charge mechanism, this process is "reversed" for certain B2B sales.

There are two moments when Reverse Charge may apply with Paddle: 

1. In the sale from our Customers (the software providers) to Paddle: Here the transaction will be B2B and most likely cross-border, in which case reverse-charge would apply.
2. In the sale from Paddle to the final buyer (if they are a business): If a VAT-registered business purchases products through Paddle and the transaction is cross-border, they will not pay VAT to Paddle at the time of purchase. They achieve this by entering their (valid) VAT ID during checkout. Instead, the buying business becomes responsible for calculating and reporting the VAT on that transaction in their own country's VAT return. They effectively pay this amount but may be deducted in the same VAT return provided the buyer's business activities allow full recovery of input VAT.

Why it's used: This system simplifies international trade for businesses. It removes the need for sellers (like Paddle) to register for and remit VAT in every country where their business customers are located, streamlining tax compliance for cross-border B2B sales.

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Learn more about Tax and Compliance here. Don't hesitate to get in touch if you have any questions.