A merchant of record is the legal entity selling to your customer. When you use one, they are the seller of record on the invoice, they collect and remit the sales tax or VAT, and they carry the fraud and chargeback liability. You are supplying the product to them, not to the end customer.
What actually transfers
| Payment processor | Merchant of record | |
|---|---|---|
| Legal seller | You | The provider |
| Sales tax / VAT | Your responsibility | Theirs |
| Tax registration | Yours, per jurisdiction | Theirs |
| Invoicing | Yours | Theirs |
| Chargeback liability | Yours | Theirs |
| Typical rate | ~2.9% + 30¢ | ~5% + 50¢ |
| Customer relationship | Yours | Nominally theirs |
The rate gap looks large until you price the row above it. Registering for VAT in several European countries, filing returns, and tracking US state nexus is real, recurring work — and the penalties for getting it wrong are not small.
When it is worth it
- You sell internationally. EU VAT rules require registration once thresholds are crossed, in every country you sell into.
- You are a small team. The 2% premium is cheaper than the first month of an accountant plus the engineering time.
- You sell digital products. Digital goods attract the most complex cross-border tax treatment.
- You want one relationship. Payments, tax, invoicing and disputes in one place.
When it is not
- You sell domestically only. You are paying for compliance you would not otherwise need.
- You are at real scale. Above a few million in revenue, doing it yourself and paying 3% is usually cheaper than 5%, even with a tax provider.
- You need to own the customer relationship — enterprise contracts, procurement, custom invoicing.
- Your margins are thin. Two points of revenue is a large share of gross profit on a low-margin product.
Paddle, Lemon Squeezy and 2Checkout are the common merchant-of-record providers. Their rates sit alongside pure processors in the fee comparison, which is worth reading with this distinction in mind.
GOOD QUESTIONS
Frequently asked
What is the difference between a merchant of record and a payment processor?+
A processor moves money while you remain the seller — you owe the sales tax and handle refunds and disputes. A merchant of record becomes the legal seller, taking on tax registration, remittance and fraud liability. That is why the rate is 5% rather than 3%.
Is a merchant of record worth 5%?+
It depends on where your customers are. If you sell internationally and would otherwise register for VAT across multiple jurisdictions, it frequently is. If you sell domestically to one country, you are paying a compliance premium for compliance you do not need.
Whose name appears on the customer's statement?+
The merchant of record's, usually with your brand as a soft descriptor. Customers sometimes do not recognise it, which is a real cause of disputes — check what the descriptor actually looks like.
Can I switch away from a merchant of record later?+
Yes, but it is more involved than switching processors. You take on tax registration and remittance yourself, and the customer relationship transfers from the MoR to you, which affects contracts and invoicing.