GMV vs Revenue for a Marketplace: Gross or Net, Books and Tax

Is GMV our revenue?

Usually not. Gross merchandise value (GMV) is the total buyers pay through the platform. Revenue depends on one question: does the platform control the good or service before the buyer receives it? If it does, it is the principal and reports the full price. If it only arranges for a seller to provide it, it is an agent and reports its fee or commission, the take (ASC 606-10-55-37 to 55-38, as amended by ASU 2016-08).

Tax is a separate test. The "gross receipts" that decide whether a corporation can use the cash method, and whether it can elect the research credit against payroll tax, follow Regulations section 1.448-1T(f)(2)(iv), not the investor deck.

What makes a case not simple:

• Mixed models. A platform that resells some goods and only lists others can be principal for one line and agent for another.
• Limits near the line. Gross receipts near the $5 million payroll credit limit or the $32,000,000 cash-method limit make the gross or net call change what the return may claim.
• An audit or a priced round. Auditors and investors may test the call against the platform's own terms.

Gather the platform terms and seller agreements, who sets prices and handles refunds, settlement reports, seller payout records, sales tax collected by state, and any Forms 1099-K the platform filed.

Gross or net in the books: are we the seller or the agent?

The platform reports gross when it controls the specified good or service before transfer, and net when its promise is to arrange for another party to provide it (ASU 2016-08). Control is the test. The standard lists indicators that point to the platform being principal:

No single indicator decides it, and their weight depends on the contract (ASC 606-10-55-39A). Two traps the standard names:

• Taking legal title only for a moment before the buyer does is not, by itself, control.
• An agent can still have some pricing flexibility, for example adjusting its own fee to win more sales.

An agent's fee can be the amount it keeps after paying the seller. Collecting the buyer's payment is not an indicator either way, and ASU 2016-08 removed credit risk, the risk the buyer does not pay, from the list.

What bridge from GMV to net revenue will investors rebuild?

Investors usually ask for GMV, take rate and net revenue side by side, and they check that the three tie. Build the bridge from the settlement reports, month by month:

Label GMV as an operating measure, not revenue. A principal shows the full price as revenue and the seller's cost as cost of revenue, so its gross margin, not its revenue, is comparable to an agent's take. For what goes in the monthly package, see monthly financials for investors and the board.

Which number is gross receipts on Form 1120?

Line 1a of Form 1120 takes gross receipts or sales from all business operations, except amounts reported on lines 4 through 10 (Form 1120 instructions). A principal reports full sales on line 1a and the cost of goods sold on line 2. An agent's line 1a is normally its fees and commissions. Net income is the same either way; the gross receipts figure is what changes.

The test that matters for the limits is wider than line 1a. Under section 1.448-1T(f)(2)(iv), gross receipts are receipts properly recognized under the corporation's tax accounting method, and they include:

• Total sales, net of returns and allowances, and all amounts received for services.
• Interest, dividends, rents, royalties and annuities, even outside the ordinary business. Interest on a large cash balance after a raise counts.

Gross receipts are not reduced by cost of goods sold. They exclude loan repayments and certain sales taxes (below).

The regulation does not say how to treat money a platform collects for sellers and passes on. Whether the sellers' share is the platform's receipt turns on the facts: whose sale it is under the terms and the law, and how the platform reports it for tax. Treat it as a judgment call, write the reasoning down, and keep it consistent with line 1a.

Why the gross receipts number matters: cash method, payroll research credit, other limits

The same gross receipts figure feeds several tests, and booking GMV as receipts can push a platform over them.

The payroll election has a second condition: no gross receipts in any tax year before the five-tax-year period ending with the current year. The Form 6765 instructions say this test uses section 448(c)(3) and Regulations section 1.448-1T(f)(2)(iii) and (iv), not the narrower research credit definition in section 41(c)(6). A qualified small business can elect up to $500,000 of credit a year. How to elect is covered in using the research credit against payroll tax.

Members of a controlled group count their gross receipts together for both tests. If the average passes the cash-method limit, see switching from cash to accrual.

Do state gross receipts taxes use the same number?

Not necessarily. Each state defines its own base. Ohio's commercial activity tax, for example, excludes money an agent receives for another above its commission or fee (Ohio Revised Code 5751.01(F)(2)(l)). Check each state's definition before reusing the federal figure; see gross receipts taxes in other states.

Sales tax we collect as a marketplace facilitator: is it revenue?

For the federal gross receipts test, sales tax is excluded when state or local law imposes it on the buyer and the business merely collects and remits it. If the law imposes the tax on the business, the amount is a gross receipt (section 1.448-1T(f)(2)(iv)). States differ on who bears the tax, so the answer can differ by state.

In the books, the transaction price excludes amounts collected for third parties, and a company may elect to exclude all sales and similar taxes collected from customers (ASC 606-10-32-2A, ASU 2016-12). Taxes on the company's total gross receipts are outside that election. For the returns themselves, see filing sales tax returns.

What does Form 1099-K reporting change for us and our sellers?

A platform that submits the instructions to pay sellers may have to file Form 1099-K for each seller. For third party network payments, reporting applies when a seller's payments exceed $20,000 and more than 200 transactions in the calendar year (Form 1099-K instructions). Seller copies are due by January 31.

What it changes:

• The amount is gross. Box 1a shows each seller's total without subtracting fees, refunds or shipping, so Forms 1099-K add up toward GMV, not the platform's revenue.
• Seller tax numbers. Payments to a seller who has not given a taxpayer identification number may be subject to backup withholding.
• Who files. If another party submits the payment instructions on the platform's behalf, that party files, unless the parties agree in writing on a designee; the party responsible keeps the penalty risk.

Sellers matching their own deposits to the form should see reconciling sales and payouts.

What records support the call?

Keep a short written memo for each revenue stream, then the evidence behind it:

1. Buyer terms, seller agreements and refund policy: who promises delivery and who handles complaints.
2. Price-setting records: who sets the buyer's price, and any platform discretion.
3. Inventory and return records, if the platform ever owns goods.
4. Monthly settlement reports and the GMV-to-net-revenue bridge.
5. A gross receipts computation for each year, including interest income, for the section 448 and section 41(h) tests.
6. Sales tax collected by state, with the law that imposes it.
7. Forms 1099-K filed and the seller W-9s behind them.

Customer prepayments and deposits follow separate timing rules; see customer prepayments and deposits.

Example

Figures are illustrative, in US dollars.

Services marketplace, 15% take

A platform matches buyers with independent service providers, who set their own prices and do the work. Buyers pay $10,000,000 through the platform in the year; providers keep $8,500,000. The platform is an agent: revenue is $1,500,000. Investors see GMV $10,000,000, take rate 15%, net revenue $1,500,000.

Same platform, payroll research credit

The platform treats the $1,500,000 of fees as its gross receipts, adds $100,000 of interest, and has $1,600,000. That is under the qualified small business limit, so, if it also passes the five-year test, it can elect the research credit against payroll tax. Had it treated the $10,000,000 of buyer payments as gross receipts, it would be over the limit and could not elect for that year.

Platform that buys and resells

A second platform buys goods, holds them in its warehouse, sets prices and takes returns. It is the principal. It reports $10,000,000 of sales on line 1a and the cost of the goods on line 2. Its gross receipts are $10,000,000, not reduced by cost of goods sold, so it is over the payroll credit limit. If its three prior years were no larger, it is well under the cash-method limit.

Different for you?

• You are a seller on someone else's platform, matching deposits and Form 1099-K: see reconciling sales and payouts.
• Your gross receipts sit near the payroll credit limit, or you have not yet elected: see using the research credit against payroll tax.
• Your three-year average may pass the cash-method limit: see switching from cash to accrual.
• You sell into Washington, Ohio, Oregon or another gross receipts tax state: see gross receipts taxes in other states.
• You collect sales tax as a marketplace facilitator: see filing sales tax returns.
• Buyers prepay or leave deposits: see customer prepayments and deposits.
• Investors want monthly statements with GMV and take rate: see monthly financials for investors and the board.
• Your model mixes reselling and listing, or the gross or net call is about to face an audit or a round: that is a judgment on your terms and numbers; see bookkeeping services.