Alex Baulf of Avalara takes a look at the changing face of online marketplaces and how regulation is shaping the way that operators manage their marketplace and tax rules for online sellers:
The digital marketplace ecosystem is evolving at breakneck speed. Online marketplaces are redefining and dominating global retail. In fact, nearly 30% of all business activity has been conducted online in 2025. It continues to skyrocket in popularity, online selling experienced a 10-fold increase between 2006 and 2020, followed by a staggering 74% surge during pandemic lockdowns.
With the UK’s Digital Platform Reporting Rules announced earlier this month, and the enhanced IRS Reporting Requirements in the US, regulatory frameworks are changing and fundamentally reshaping the obligations of both marketplace operators and sellers.
New market forces
Under the UK’s new Digital Platform Reporting Rules, marketplace operators must now collect and report detailed information about their sellers’ income to HMRC. This aims to create a standardised system which will extend to international sellers operating through British platforms, meaning information will be shared with tax authorities in other countries.
For sellers, this will significantly increase focus on transparency and documentation requirements. Previously private business details, such as transaction volumes, revenue by geography and customer demographics, must now be disclosed to marketplace operators for reporting purposes. While larger organisations may already be doing this, many smaller sellers will find themselves subject to formal tax registration requirements for the first time.
Across the pond, the IRS has implemented enhanced reporting requirements that dramatically lower the threshold for mandatory reporting. All online sales must now be reported on tax returns, including earnings from platforms like Etsy and eBay. Previously, these platforms only had to send tax forms to users who earned more than $20,000, but this limit has been removed.
Timely in nature
This focus by tax authorities also highlights perhaps the most transformative trend of 2025: the acceleration towards real-time tax reporting and compliance.
Digital platforms are now required to collect, verify and transmit tax-relevant data to authorities almost instantaneously. This represents a departure from the traditional annual or quarterly reporting cycles, which opens the door to new operational challenges for marketplace operators.
These challenges include dealing with transaction data that must be validated and reported within hours rather than months. Businesses require sophisticated, automated systems built on high quality granular data. And marketplace operators must continuously monitor compliance rather than simply complete periodic reviews or return filings. On top of this, the expansion of customer and seller verification procedures could cause friction in the user experience on marketplaces too, potentially resulting in increased churn rates, and increased support costs that could ultimately increase platform fees.
2025 has already shown that the technical infrastructure required to support these real-time requirements necessitates investment from platform operators. Juniper Research estimates that this technology market will surge to $207bn by 2028. As such, major marketplaces will undoubtedly be spending more on compliance technology in 2025 compared to previous years.
But why are tax authorities focusing on marketplaces?
Authorities are lasered in on marketplace taxation this year for several reasons. Firstly, digital marketplace commerce now represents a significant portion of economic activity. The sheer scale of this business has made it a target for authorities, particularly in the EU against the backdrop of the growing tax gap.
In addition, the increasingly sophisticated network of cross-border transactions creates jurisdictional challenges that traditional tax frameworks struggle to address. It’s therefore understandable that governments wish to create a level playing field between physical and digital businesses in an economy where these distinctions blur.
In the UK, HMRC has made it clear that these measures are intended to target sophisticated tax evaders, who have exploited regulatory gaps. This is not to investigate every casual seller on platforms like Vinted, Depop or occasional eBay resellers, but this implementation will inevitably affect all marketplace participants.
What about operations?
With these changes, the tax landscape is helping to reshape business models and operations across marketplaces. Compliance departments will continue to grow, we’ve started to see that the demand for compliance staff is outstripping supply. With expanded verification requirements, seller onboarding processes will naturally become more complex and time-consuming too. Thinking about data, the collection and management aspects will create new privacy considerations and security requirements.
These new parameters are forcing marketplaces to adapt, and many are adopting seller-facing tools to simplify the compliance journey. These include tax calculators, regional-specific VAT or sales tax registration assistants and even reporting dashboards. The burden of change falls heavily on the marketplace operators, who must research, assess and successfully implement these solutions while trying to compete with other platforms. Many marketplaces are leveraging proven tax technology from global providers, to ensure scalability, reliability and ultimately ensure compliance.
An international outlook
The UK government’s alignment with OECD standards represents part of a broader international response to marketplace taxation. The recent enhancements to VAT in the Digital Age (ViDA) by the European Commission also aim to address cross-border complexity.
For marketplaces operating across multiple geographies, this creates a convoluted matrix of obligations. A single transaction may trigger reporting requirements in several countries simultaneously, depending on the location of the buyer, seller, platform and even of fulfillment centres. As a result, we’re heading towards a truly digital tax future.
The road ahead
It’s clear that marketplace taxation will continue to evolve towards greater standardisation, automation and real-time compliance. But for marketplace operators and sellers, navigating this complex landscape isn’t just about avoiding penalties.
The most successful marketplaces will be those that transform compliance from a cost into a competitive advantage, providing sellers with seamless tools to navigate cross-border difficulties. From a regulatory perspective, tax authorities will be deploying advanced analytics to identify discrepancies and enforce compliance with more precision than before.
To misquote Bob Dylan, the rules are indeed a-changing, and understanding the implications of these new rules is essential for anyone participating in the marketplace economy of 2025 and beyond.
