Three Approaches to Tax Administration of Conventional Marketplaces

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Conventional Marketplaces and the Challenges They Present for Tax Administration

In this article, we will use the term “marketplace” as a public location where people regularly gather to purchase and sell livestock, food, merchandise, and other goods. Usually, marketplaces attract many sellers who rent sales stalls from management companies or marketplace owners.

Marketplaces can be general or specialized in food, construction materials, automotive, etc.; permanent or temporary, only trading on a particular day; and retail or wholesale. Management companies or marketplace operators get permits from local authorities to open and operate them. This is the dominant form of trade in developing countries, competing with shopping centers and retail stores. In developed countries, conventional marketplaces are being replaced by online marketplaces and large shopping and entertainment centers.

Marketplaces are a big headache for tax and other government agencies. On the one hand, they are a source of uncontrolled trade. But they allow producers to sell goods directly to consumers and enable buyers to purchase them at low prices. Thus, marketplaces perform an important social function.

Marketplace vendors often offer low prices that rely on illegal trade and tax evasion. Shadow business can trigger increased crime and various conflicts.

For the state, it is difficult to eliminate marketplaces because of their social significance. Many merchants and marketplace operators do not pay taxes and sell counterfeit or contraband goods without paying duties. Tax evasion encourages unfair competition. Low prices of goods represent a significant competitive advantage to law-abiding taxpayers, who include taxes and duties in their pricing. This creates conditions that favor a growing shadow economy and fewer conscientious taxpayers.

Approaches to Tax Administration of Marketplaces

The purpose of the tax administration of marketplaces is to eliminate the risk that the shadow economy will grow while maintaining the social benefits that these marketplaces bring. We will now consider three methods that help solve this challenge.

Test Purchases

Tax inspectors in almost all countries use this method to conduct mystery shopping tests and unannounced raids. They check sellers’ tax status and verify they are using fiscal cash registers properly. There are two drawbacks to this approach:

• Tax inspectors in almost all countries use this method to conduct mystery shopping tests and unannounced raids. They check sellers’ tax status and verify they are using fiscal cash registers properly. There are two drawbacks to this approach:
• Retailers put marketplaces at popular sales locations with high foot traffic. There are always enough people who want to rent a sales stall. If authorities punish one seller, others will immediately take their place. It’s like an endless battle with the Hydra: you cut off one head and it immediately grows three as a replacement.

That means classical control methods are not effective with marketplaces. Instead, they are more likely to create fertile ground for the flourishing of local corruption and the appearance of sources of profit for unscrupulous tax officials.

Raising Motivation of Buyers to Demand a Fiscal Receipt from the Seller

An alternative way is to enforce marketplace sellers to use fiscal cash registers (if they are not already required to do so) and to increase buyers’ motivation to demand a fiscal receipt from sellers. Tax authorities can use the revenue data to calculate tax amounts. This approach has the following limits:

• The state should inform buyers about the benefits of demanding and verifying receipts and persuade them to download and use a mobile app for receipt verification.
• The government, tax authorities, and/or marketplace operators should create a substantial need for buyers to demand receipts from sellers. Otherwise, buyers would not play a part in this process. Good motivators include lotteries, tax deductions, cashback, discounts, and other incentives^[1].
• Tax authorities must quickly process and respond to any complaints from consumers. For example, if a seller does not issue a receipt, the penalty should be inescapable and visible to the buyer.

This method requires additional funding. Tax authorities must create tools to motivate buyers and ensure sellers cannot avoid punishment. They also need to organize interactions with other regulators, market operators, and major retailers.

Delegation of Tax Authorities Responsibilities to Marketplace Operators

A third approach is to shift some tasks from tax authorities to marketplace operators. Marketplace operators must maintain a list of tenants, monitor their registration status and benefits, and verify the registration of fiscal cash registers and the seller’s revenue. Tax authorities should enable operators to collect and transmit the following data:

• The tenant’s taxpayer registration status and applicable taxation regimes.
• Information about tax benefits they use under current law.
• The tenant’s fiscal cash registers they use at the marketplace’s address.
• Information about sellers’ daily revenues.

If a tenant violates contractual obligations, the marketplace operator may refuse to lease out a sales stall. If the marketplace operator violates its obligations, it is liable and pays formidable fines. Marketplace operators can also act as tax agents and pay taxes on behalf of tenants by including them in the rent.

From an implementation point of view, this approach is the simplest. There are a relatively small number of marketplace operators in a country, so it is easier to control them than individual merchants. If this method is combined with consistently motivating buyers to demand receipts, the result will be receipts issued with every sale.

Liability for violation of tax obligations should be placed on the marketplace operator, not the seller. This empowers the retail space owners to refuse to lease to dishonest taxpayers. Tax authorities may also continue to use the first method, conducting on-site inspections based on consumer complaints or randomly.

[1] For more information, read “How to Ensure the Use of Online Electronic Cash Registers”. Anatoly Gaverdovsky. URL: https://taxtech.digital/2022/04/18/ensure-the-use-of-online-cash-registers/