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  • Merchants On High Alert About Taxes On Digital Products (Pt. 2)

    Merchants On High Alert About Taxes On Digital Products (Pt. 2)

    Welcome back to part two of our blog on the implications taxes have on digital products in the US and around the world. In this part of our series we will give you some tips on how to control aspects of your online business in light of tax regulations. Don’t forget to read part one here.

     

    How can high-risk merchants protect business in light of differing taxes?

    Many governments are targeting the lucrative e-commerce market for more taxes, specifically sellers of intangible products. The increasingly popular digital market is making this a necessity in many countries.

    So, what you can do now is prepare; even if you aren’t yet required to charge sales taxes on the digital products or services you sell. At this stage, these are just some of the questions you should consider in the interim.

    • Is my payment gateway advanced enough to manage changes in tax requirements if local regulations change?
    • Can my merchant services account manage the various tax regulations across multiple states and/or countries?
    • Do I have a tax specialist, a lawyer, an accountant and a merchant services provider to help me prepare my business for the digital tax push?
    • Can my payment gateway facilitate taxes for recurring orders especially where it’s a subscription service?

    Laws can change, and quickly too. Your business payment processes, checkout page, etc. needs to be agile and adaptable to these changes. In fact, as a successful online merchant selling digital products, you need a merchant account provider that understands government regulations. They should be up-to-date on local tax changes in the various markets in which you operate and can help guide you on where to get more information.

     

    When and where should you charge sales tax?

    Some online marketplaces and CRMs like Shopify have built-in systems and add-ons that can simplify the tax process based on country or state. But, when you manage your own sales, you’ll need to manage collecting and dispersing taxes. With the correct gateway and checkout, this process should be quite simple!

     

    What pricing strategy should you use for your digital products?

    Pricing strategy should be based on the location in which you intend to sell. In some areas such as in the US, consumers are used to seeing the price before taxes. However, in other jurisdictions, they generally expect to see the taxes already included in the final price displayed.

    Also, you can decide whether to increase your product and service prices to accommodate VAT/GST/Sales Taxes, or absorb the costs.

     

    Can your payment gateway facilitate multiple tax calculations?

    As an e-commerce business specializing in digital products, these changes can seem daunting. You have to consider taxes based on different requirements across states and countries. Therefore, it’s essential that you consider the payment gateway you use for your e-commerce business.

    Some merchant account providers will have restrictions on what you can sell, especially if you’re in a high-risk industry such as business opportunities, dating advice or coaching. It’s, therefore, useful to get one that facilitates automatic sales tax calculation.

    It’s also important to assess your checkout page and shopping cart provider. You need to determine if they comply with the relevant regulations for taxation.

    To make the accounting process more efficient, it’s always best to separate your clients by region. As part of this, you’ll often need a merchant services account to make payment processes easier for your customers. You’ll want to remove friction in the buying process as much as possible. And with the right merchant account, charging applicable taxes can be a seamless process.

     

    What’s next for your digital products and services?

    To ensure that you cover all the bases regarding taxes and to run a healthy online business, talk to relevant professionals in the industry. They can give you the best advice based on the jurisdiction(s) that you operate and local regulations.
    A tax professional or accountant can help you determine the taxes liable and any specific conditions that may affect your business. A merchant services company will work with you to ensure you have the best options possible for processing payments for your online digital products.

    If you sell an info product, then it’s important to have an advocate on your side to navigate compliance. They can also assist you with how to sell to customers without risking termination of your merchant account. You can always contact DirectPayNet to get help in that area.

    Our team can help you get approved for a merchant account for your digital product no matter how risky your business model is. Our services can also ensure you meet compliance requirements necessary for a successful digital product or service business. Contact our team for help today!

  • Merchants On High Alert About Taxes On Digital Products (Pt. 1)

    Merchants On High Alert About Taxes On Digital Products (Pt. 1)

    The recent “Netflix Tax” has reignited the discussion about tax on digital products and services. While this may seem reserved to big tech companies, it’s a widespread issue for many internet marketers and merchants. When and where should you apply sales tax on digital services and products? How much and what type of implementation happens on a checkout page? What impact do charging taxes have on high-risk merchants? It’s getting harder to overlook these issues and continue operating like business as usual. 

    As high-risk merchant services and payment solutions experts, we’ve helped many of our clients navigate this issue. Taxes become a challenge when you’re selling info products. Avoiding tax obligations will definitely put you at risk and may lead to the loss of your business. 

    The main thing to understand is digital tax imposition varies based on countries – and within states – like the US, as well as product type. In this two-part blog series, DirectPayNet will offer a brief guide on the impact of taxes on info products. It’s important to conduct additional research about this based on the countries and specific states/provinces in which your customers live. Obtain specialized help from your accountant and payment provider to keep your business compliant, and your merchant account operational.

     

    Two things are inevitable – taxes and …

    For the past few months, the so-called “Netflix Tax” has dominated the news in addition to record profits earned by big companies like Amazon and Facebook. There’s been a massive shift to consumer digital products and services online. Consequently, more governments in US states and European countries are proposing more taxes on streaming and other digital products like online dating apps.

    The EU is debating the terms of the imposition of a new digital tax primarily aimed at large tech companies. While the EU continues to deliberate, France went ahead and implemented their new digital tax law. The latter became effective January 1, 2019. In the UK, their digital services tax – which is expected to target more profitable tech companies – is to be fully implemented by 2020.

    Now, similar measures that will have an impact on smaller sellers of digital products in several US states. Questions about the long-term implications of the “Netflix Tax” have been raised in Georgia. Meanwhile in Chicago, litigation ensues over proposed tax changes on “digital goods and services” that will affect big and small entrepreneurs.

     

    Taxes on digital products affects big and smaller businesses

    Keep in mind; no matter the size of your business, it will be subject to paying state (or provincial) and federal taxes. The roll out of taxation for digital goods is still uncertain, so it is important to continuously keep abreast of news. Not knowing the rules and regulations doesn’t absolve you from following them!

    Most of these newer laws are designed to target corporate digital giants like Netflix, Amazon and Facebook. However, some regulations will impact small-to-medium-sized merchants too. So, what if you’re an affiliate marketer but have decided to now sell a business opportunity or another info product (say through affiliate networks like ClickBank)? You earn modest revenue compared to these tech giants. Will you be affected and respond to these changes? How will you navigate selling to customers across states/provinces and internationally?

    As an online merchant, be aware of how these changes will affect the digital courses and e-books you sell. And as we’ve seen with digital subscription services like Netflix, streaming models aren’t exempt. Plus, online coaches and trainers must also become aware of these new and current tax regulations. It doesn’t matter if they are stated as Value Added Tax (VAT), Goods and Services Tax (GST), or just sales tax. These fees may soon be inevitable, as most merchants will be subject to them.

    It’s also possible that your jurisdiction already imposed a digital goods tax, but you haven’t been collecting them. What to do now?

     

    Digital products are already taxed… Just not everywhere

    Sales tax is currently charged on digital products and/or services in at least 20 US states. In the US, states like Washington, Florida, Pennsylvania, and North Carolina, have already levied a digital services tax on items such as streaming and digital goods tax on ebooks and courses. So, if you and your customer are located in Pennsylvania, you must include the sales tax. It’s also important to review exact tax legislation to see what is the scope of taxation and which customers should be taxed.

    This is among the growing trend across the world, and especially in North America and Europe, where taxes are being levied on digital products. In January 2018, Uruguay implemented a sales tax on digital products. Argentina followed suit in June 2018. Digital sales tax came in effect in January 2019 in Quebec, Canada.

     

    Digital products/services are not uniformly defined

    The definition of digital products and services can vary across states in the US. Then, those definitions vary again in different countries. As such, local regulations on taxes will differ by country and by state as in the case of the US. For the most part, the EU has a more uniformed definition of what consists of a digital product or service. The exact definition determines what is taxable or not. Info products like e-books and online courses are great examples of how it can differ. For example, digital goods may be taxed differently based on whether they can be downloaded versus being accessed solely online through a member’s area.

     

    Sales tax for online courses

    In showing the diverse nature of taxes for digital products we can take a look at online courses and business opportunities. The online course market is booming. According to Statista, the worldwide e-learning market is expected to surpass USD $243 billion by 2022.

    Each US state has its own rules on taxes for online courses. Consequently applicable taxes for e-learning sold will differ and depend on whether you or your clients are in Wisconsin versus New York, Texas, or Florida. There are different rules based on course type: downloadable, pre-recorded, or delivered as live webinars. The difference in regulations also covers whether students interact with each other or the course is fully automated. Generally, automated online courses are subject to digital sales taxes in these states while those with human interactions are not.

    So, what do these current and future changes in regulation mean for your online business? Digital taxation isn’t new. There are merchant service providers, legal experts and taxation professionals available to help you navigate these complexities. Adjust your payment system to facilitate your customers‘ ability to pay taxes on your products.

    For example, if House Bill 426 (which proposes a digital products tax) is passed in Maryland, that’s another state you’ll need to cover in your tax processes. While operating in multiple jurisdictions like Netflix does across the world – even on a much smaller scale – you must become aware of the tax requirements for your business.

     

    Call on DirectPayNet for help

    The implications of taxing digital products is quite important for high-risk merchants. It makes a big difference having an advocate to support and provide guidance on compliance for regulatory measures. In the second part of our blog post we will touch on more information about this, but in the meantime contact us. Contact our team for expert advice on how to navigate these types of regulations for your industry.

  • Beat Targeted Chargeback Fraud And Friendly Fraud, Increase Net Profit (Pt. 2)

    Beat Targeted Chargeback Fraud And Friendly Fraud, Increase Net Profit (Pt. 2)

    Welcome back to part two of our blog about chargeback fraud and friendly fraud. In part one of this series we established what the difference was between both of these schemes. We also looked at a few effective tools and tricks that can be used to fight fraud.

    There are many merchant types that are more prone to chargeback fraud than others. However, merchants with a recurring order model tend to suffer more than others in the high-risk space. One example is gaming merchants. They often see chargeback fraud from users who consume games and then call their bank claiming they did not use the service. This has become a thorn in the side for gaming companies. Businesses that offer soft games (be it via mobile or desktop), and more intense online casino gambling tend to endure a lot of this type of fraud.

    Another category of vendors that incur a lot of chargeback fraud is subscription merchants. Merchants with a recurring billing model experience a high rate of chargebacks from users, particularly after the holiday season. Some might classifythis as buyer‘s remorse. However, it is chargeback fraud when the customer’s intent is to happily consume your product or service and then get refunded via theirbank.

    To read part one of Beat Targeted Chargeback Fraud and Friendly Fraud, click here.

    Here is a look at several more tools merchants can use to combat this type of high risk activity.

    Fraud detection software

    There are several ways to combat chargeback fraud. The first is to use third-party tools like fraud detection software. A platform of this nature can analyze, detect and prevent harmful transactions from happening. Note that there is no 100% guarantee of stopping fraud, but a tool like this can identify many anomalies that human resources might not catch. Moreover, this is not a set it and forget it type of software. You must keep tailoring it to support the needs of your business model, technical environment and target countries you serve.

    CRM and gateway tools at your fingertips

    Some merchants may not realize it, but their CRM and gateways have fraud prevention features that are going unused. Some platforms allow you to block countries, create a customer blacklist, add velocity rules and even automatically decline certain combination of digits in card numbers. A feature like this is really convenient. It can help block countries you don’t ship to or prevent a customer from using multiple credit cards over a brief period of time.

     

    Collect customer evidence

    Collecting evidence on all customers is an excellent way for subscription merchants to prove fraud has occurred against them. For example, take screenshots of internal logs with time and date stamps. This can prove a user connected to a specific fraud was logged into your system. This activity should be used as evidence proving that a customer knowingly paid for and actively consumed your product. This is extremely pertinent when disputing with Visa and MasterCard. Just as loss-prevention professionals in restaurants and physical retail stores show proof of chip payment or video of in-person credit card purchases, merchants with rebills must follow similar techniques.

    Finally, some customers abuse their chargeback rights by merely contacting their bank. Make sure to keep recordings of phone conversations with your customer service agents in the event a buyer calls your support phone number. This can demonstrate they agreed to buy or even confirm a refund is or was issued. 

     

    3D-Secure guards against fraud

    The tool 3D-secure (3DS) remains a great guard against fraud when implemented via a checkout page. This is in spite of it is not being the most popular among high-risk merchants. The tool has vastly improved over the years. It has also eased fears about low conversions. Visa and MasterCard were made aware of many pain points 3DS caused. However, they enhanced this line of defence against fraud. It is now embraced much more than in the past and they even have implementation guides to help merchants adopt this tool.

    Integrating 3DS into your order processing will reduce your chargebacks significantly. The reason is that it authenticates an order with the potential buyers themselves. Consequently, risk is reduced and merchants are not left with little liability. There are also other great benefits when adopting 3DS. To learn more, click here.

     

    Secure shipping

    High-risk merchants that ship tangible products frequently suffer the worst chargebacks and credit card fraud. It is hard to recover items when the order was placed with a stolen credit card. Consequently, merchandise will likely be lost to the individual that committed the scam, unless you can cancel the order before it is shipped. To counter this, vendors should set some ground rules for their operations.

    Foremost, do not ship to high-risk countries where you have no chance of fighting a false order. For example, let’s say a US-based nutraceutical merchant has a registered US company with a physical office and staff under their corporate umbrella. That merchant has a great chance of getting their funds back by properly disputing a chargeback fraud claim if it was committed by someone residing in the US. However, if the fraudster lives in Mexico or India and is receiving the package at an address in those countries, recovering funds against the suspect will be difficult.

    Do not authorize sales from or ship to foreign locations. It’s the best way to prevent this type of fraud in foreign countries where you have no presence. In this case, using fraud detection software can complement your efforts. Orders can be flagged based on rules you set to identify certain IP address information.

    Before delivering products to international countries, warn your customers of shipping delays. They should be aware if there are any customs or duty to be paid. Furthermore, be aware of import laws as some legal products in the US cannot be legally brought into other countries. For example, cannabis laws are still not clear in many parts of the world. Therefore, it is significant to check that your customer can actually receive products of this nature purchased from your website.

     

    Next steps for fighting chargeback fraud and friendly fraud

    As you can gather, fighting friendly fraud and targeted chargeback fraud requires effort. We understand that not all merchants can afford to pay the costs associated with these extra tools. We also know not all companies have internal resources to combat these risks. If you are a high-risk business in need of some outside help, our team can assist you.

    Call DirectPayNet to help you reduce friendly and chargeback fraud and get approved for your next merchant account.

  • Beat Targeted Chargeback Fraud And Friendly Fraud, Increase Net Profit (Pt. 1)

    Beat Targeted Chargeback Fraud And Friendly Fraud, Increase Net Profit (Pt. 1)

    Merchants often think that chargeback fraud and friendly fraud is the same thing, but they are quite different. Not knowing the difference between both of these is crucial for your business. Chargebacks are often the number one reason why a company’s credit card processing results in termination. And, excessive chargebacks are the cause for why merchants are put on MATCH list.

    In this two-part blog series, we will provide more details about what these fraud schemes really are. Also, you will learn how to win more chargeback disputes in both cases.

     

    Difference between friendly fraud and targeted chargeback fraud

    The difference between friendly fraud and chargeback fraud naturally depends on the specific intent of the consumer. The former occurs by accident, while the latter is achieved maliciously.

    For example, let‘s say you launched a seduction, PUA or matchmaking info product in November 2018. Imagine potential customers were offered a 12-month digital access to an online course via video content in the members’ area of your site. You charge at a cost of $24.99 on the 10th day of every month.

    Now, imagine Customer A never logged in to use your offer and went away on Christmas vacation for two weeks. Two months later and still not having logged in, they check their credit card statement and don’t recognize your company’s descriptor and charge. Consequently, they call their bank and ask for a chargeback to be issued. This is an example of friendly fraud. In this scenario, Customer A genuinely forgot that they either signed up for your offer, which involved recurring billing, or may have not intended to purchase a subscription.

    Now, imagine Customer B signed up for your product at the same time and even logged in to consume your content. If Customer B calls their bank to request a chargeback three months later knowing they did indeed use your product, this is considered targeted chargeback fraud. He/she will likely avoid speaking with your customer support team. They will also consider themselves a victim to get a product or service without paying for it.

     

    The role of affiliates

    Now that you know the difference between friendly fraud and chargeback fraud, it’s important to recognize the role affiliates play in your business. Affiliates are your partners; therefore, it’s important to know how they are representing what you are selling.

    Fraud may occur due to affiliates sending you traffic from campaigns misrepresenting your products or services. The intent by these affiliates is to just to receive their commission one way or another. Consequently, customers are uninformed about what they are purchasing and end up initiating a chargeback. It’s critical to recognize how affiliates are sending you traffic to ensure it correctly represents your business.

    Merchant categories prone to chargeback fraud

    There are many merchant types that are more prone to chargeback fraud than others. However, merchants with a recurring order model tend to suffer more than others in the high-risk space. One example is gaming merchants. They often see chargeback fraud from users who consume games and then call their bank claiming they did not use the service. This has become a thorn in the side for gaming companies. Businesses that offer soft games (be it via mobile or desktop), and more intense online casino gambling tend to endure a lot of this type of fraud.

    Another category of vendors that incur a lot of chargeback fraud is subscription merchants. Merchants with a recurring billing model experience a high rate of chargebacks from users, particularly after the holiday season. Some might classify this as buyer‘s remorse. However, it is chargeback fraud when the customer’s intent is to happily consume your product or service and then get refunded via their bank.

    Some merchants actually do file criminal charges, as chargeback fraud is punishable by law with the right evidence. It could be considered a felony and if the customer is convicted, will result in up to 15 years of prison time. This is a rare exception of course, as merchants would rarely pursue a customer legally unless there is a sizable sum of money being charged back.

     

    Visa and MasterCard want to avoid liability

    Whether your company is completely innocent in the matter of chargeback fraud makes no difference to Visa and MasterCard. All card companies expect merchants to accept responsibility for managing fraudulent activity. They do not care about how many chargebacks are disputed or reversed. What they want is for merchants (especially high-risk companies) to keep fraud minimal and under control.

    All the more reason you should be vigilant of reviewing your online orders on a consistent basis – if not every day, then at least weekly. Acquiring banks already frown upon high-risk merchants with recurring billing. Putting preventative measures in place is necessary to ensure you prevent chargebacks from happening in the first place. It also benefits your business, because you curb your company from incurring chargeback fees and other penalties that eat away at your profit.

     

    Tools and tricks

    We are going to get into several tools and tricks you can use to beat friendly fraud and chargeback fraud.

    Use a clear descriptor and refund policy

    While friendly fraud may not be maliciously intended, it still costs merchants thousands of dollars in unnecessary fees annually. Having a clear credit card descriptor can help avoid some of these financial penalties. The best way to do so is to display your information clearly on the order page of your website in a visible area where your customer can see it. Make sure the descriptor is not too long or confusing; ultimately it should be relevant to your company from where customers buy. It also helps if you add the descriptor to any invoices or receipts sent to the buyer.

    Additionally, your website’s policies and customer service agents should be communicating the exact same information to buyers. Go through your terms and conditions, and refund and cancellation policies to ensure they are transparent and not confusing in any way. If a refund is issued up to 10 days, clearly explain to the customer how long it will take to get their money back on their credit card. Plus, encourage them to call you back (not their bank) if they do not receive the money. Often times, merchants end up with double refunds. That’s because when customers aren’t reimbursed fast enough they call their banks requesting a chargeback. You want to communicate and make repayment as simple as possible to avoid this.

    We have come to the end of part one of this blog series. But, stay tuned next week for part two when we explore more tools and tricks to fight friendly fraud and chargeback fraud. Meantime, we recommend you contact our team to assist you in reducing fraud and getting approved for your next merchant account. Contact DirectPayNet today!

  • Everything Free Trial Merchants Must Know About New MasterCard Rules

    Everything Free Trial Merchants Must Know About New MasterCard Rules

    New MasterCard rules are bringing changes to the ecommerce sector. They apply to merchants who offer free trials to establish selling relationships with buyers. They also apply to some vendors use recurring billing methods in their business. Free trial (also known as negative option billing) is a very popular sales method. Merchants selling subscriptions for items such as weight loss supplements, skin whitening creams, and other physical products must be aware of upcoming requirements for recurring billing practices.

     

    Free trial merchants expected to send detailed receipts

    Under the new MasterCard rules at the end of a free trial for a product a merchant must get approval from the cardholder before billing him or her for a continued subscription. Before billing, the merchant must send the cardholder an email or text message with the following information:

    • Merchant name
    • Transaction amount
    • Payment date
    • Detailed and clear instructions for cancelling the subscription

     

    Merchants must send similar receipts by email or text message every time they take an additional payment. Subsequent receipts must continue to include contact details and the merchant’s cancellation policy. All charges on cardholder statements must also include contact information for the merchant such as a website URL or a phone number. These rules will take effect on April 12, 2019.

    New MasterCard Rules affect mostly subscription merchants

    MasterCard has likely adopted these new standards in response to a large number of complaints from cardholders about negative option billing. According to credit industry analyst Ted Rossman, over half of US adults have had an issue with getting charged after unintentionally enrolling in a subscription with an automatic payment plan. This problem has frustrated consumers and forced credit card companies to waste time and money issuing refunds and reversing charges.

    MasterCard‘s new rules create the following conditions for merchants who use negative option billing and wish to accept orders via ecommerce platforms:

    1. MasterCard will assign merchants a merchant category code (MCC) designating them as “Direct Marketing – Continuity/Subscription Merchants”.
    2. Merchants who use the free-trial model to sell physical products will be classified as high-risk merchants.
    3. Companies will be required to participate in the MasterCard Registration Program (MRP) in order to make sure they are complying with standards.
    4. Merchants’ website URLs must appear on the customer’s credit card statement as the descriptor and a customer service phone number.
    5. Merchants must provide MasterCard with a list of third-party service providers who have access to cardholder information. These service providers must also be registered with MasterCard.
    6. When a cardholder signs up for a free trial, the trial must start on the date that the cardholder receives the product. The free trial cannot start before that date.
    7. When a free trial ends, a merchant cannot charge a cardholder until the merchant has provided the following information:
      • Charge amount
      • Date of charge
      • Merchant name
      • Cancellation instructions
    8. The merchant must have consent from the cardholder for the transaction before authorizing it. If an initial charge is declined due to insufficient funds, the merchant must communicate the date of a second attempt to charge the card.
    9. Merchants must process any future transactions with the same information as they used to process initial transactions.
    10. eCommerce merchants must make it easy to access their cancellation policy. The policy must be located via a direct link on the website where the cardholder shopped.
    11. Merchants must include their cancellation policy and instructions on receipts for future transactions. They must send receipts for every single transaction.
    12. When a cardholder cancels a negative option billing plan, the merchant must send him or her written confirmation that the subscription has been cancelled.

    *Note: Merchants selling physical nutraceutical and cosmeceutical products, as well as subscription boxes are all already considered high risk. This label from MasterCard applies whether or not you include free trials in your offer. Therefore, merchants are going to be under even more scrutiny by payment providers during the merchant account application process.

     

    Updated MasterCard rules will actually help lower chargebacks

    These new MasterCard rules may mean changes for ecommerce merchants who sell product subscriptions. However, they offer an opportunity to make more revenue. Being compliant will reduce the number of chargebacks that result from unclear terms and conditions, and cancellation policies. Additionally, increased communication with customers will lead to fewer complaints about them being unaware of the order or transaction.

    A great benefit of the new rules is that merchants can use these rules to develop stronger relationships with their customers. Unfair and unclear business practices frustrate and drive away customers. Complying with MasterCard’s new rules will help merchants to ensure that communications with customers foster a higher level of trust and consumer loyalty.

    A cancellation policy inclusive of subscription cancellation steps and the date when the cancellation will be effective is a must! Merchants should review MasterCard’s new rules to avoid potential issues with taking payments and ensure they have required policies and procedures in place by April 12, 2019. Some payment providers may enforce merchants to adopt the new rules earlier.

    Help us help you adjust to the new MasterCard rules

    In spite of perceived difficulties with compliance, following through with these new standards from MasterCard can ultimately help ecommerce merchants. Customer relationships will be naturally strengthened by ostensibly promoting a more superior sense of integrity and accountability.

    DirectPayNet has and continues to work with many subscription and continuity merchants. Contact our team for expert insight about becoming fully compliant and ensuring you don’t lose any revenue!