A Merchant of Record (or MoR) is one of those payment checkout services such as Lemon Squeezy or Paddle that handles sales and taxes for your company.
They sit between your company and your customers, ensuring companies only need to deal with the 1 customer in their accounts – the MoR. Overall it makes selling digital products easier by handling a lot of admin. This article from zaap.ai explains it well:
Essentially, they collect all payments from your customers, do the boring legal and tax stuff and send you your earnings at the end of the month, minus their fees. In the eyes of the tax man, you only have one customer, the MoR.
As you can see in the diagram, your company ends up with 1 customer. You're effectively selling your product to that 1 MoR, and have no other customers. Here's a nice green version that labels ownership of goods:
Who actually says it's best to use an MoR?
MoRs are great at what they do, and lots of creators use services like Lemon Squeezy to stay tax compliant. But are they essential for creators? Who actually says it's best to use one?
This is a tweet embed February 14, 2023
After reading this tweet from Michael (quoting Danny Postma), I realised most information I can find about MoRs actually come from the MoRs themselves. Pretty much every article that comes up in a Google search to explain what an MoR is also sells an MoR – there's SEO for you.
Most information I find on MoRs come from MoRs themselves
Even when searching Reddit, MoR recommendations often come from MoRs:
Maybe we used MoR because we were told to? It reminds me a little bit of the whole serverless debate (but not at that extreme, 5% for handling tax is probably decent in comparison).
With that, if you're an indie creator, do you really need one?
This is a tweet embed February 14, 2023
Letter
Why Creators Don't Need a Merchant of Record
The only way I could find an unbiased opinion on MoRs when I searched 'Why you don't need a merchant of record'. That's when this popped up:
10% of a $10 product?
The article from Zaap.ai highlights that for every $10 sale, you can expect to pay a 5% fee ($0.50), plus a flat fee of $0.50 per transaction. That totals $1, which is 10% of your product sale (based on Lemon Squeezy 2023 fees).
In comparison, using Stripe directly would be around 2% fee. If your product was $50, this percentage would drop to around 6% though, but it's still triple.
Generate your revenue, then get tax compliant
I think using an MoR can be worth it at some point, but you don't need to have everything covered until you're making a decent sales volume. Geoff Roberts (cofounder of Outseta) echoes this when sharing his learnings on using 3rd party MoRs:
There’s no point in preparing for global sales tax remittance before you have a viable business generating significant revenue.
He goes on to highlight how Patrick Mackenzie says he'd only worry about these tax issues when generating $X00k in revenue:
There's more in the article, it has some genuine opinions, not the advice you'll read from an MoR:
If you're still worried, consider the nexus thresholds that Zaap.ai article also outlined. Tax in various states isn't going to be a real issue until you're making a decent amount of sales:
if I sell $50,000 worth of products to my customers in Arizona, I legally don't have to collect sales tax. In fact I could sell up to $100,000 in just Arizona alone before having to collect sales tax. Many other states have a similar threshold with some states, like California having a threshold of up to $500,000.
If you go straight in with an MoR, you don't see these limits as the MoR is the merchant, and has used them all. For clarity, here's Stripe's definition of nexus thresholds:
The term economic nexus refers to a business presence in a US state that makes an out-of-state seller liable to collect sales tax there once a set level of transactions or sales activity is met.
Let's just go with Stripe
I still don't know what the right way is, but based on the above, I'm going with Stripe directly for my upcoming SaaS, which is this thing:
This is a tweet embed February 14, 2023
You can find me on Twitter to hear more about how this tax stuff plays out as the product grows.
Further reading
Responses in this tweet:
This is a tweet embed February 14, 2023
Then here's some related articles I came across where the authors aren't payment processors:
Buy me a coffee
