Merchant of record vs payment processor: who is the seller, who handles sales tax, and which model fits what you sell
A payment processor such as Stripe moves the money and leaves you as the seller; a merchant of record such as Paddle, Polar or Dodo Payments becomes the seller and handles sales tax and VAT for a higher fee. How each model works, which fits what you sell, and what each costs.
A payment processor takes your customer's payment and pays it out to you, but you remain the seller. Stripe, PayPal and Airwallex work this way, so any sales tax or VAT owed on the sale is yours to register for, collect, file and pay. A merchant of record (MoR) becomes the legal seller of your product to your customer. Paddle, Polar and Dodo Payments work this way: the customer buys from them, they handle the sales tax or VAT on that sale, and they pay you what remains. In exchange, they charge more per sale and accept a narrower range of businesses.
So choose by what you sell and where your buyers are, not by the headline rate. Software and digital products sold to consumers in many countries are what merchants of record are built for. Client services and physical goods are not: Paddle, Polar and Dodo Payments all exclude them, so agencies, freelancers, consultants and online stores generally need a processor.
Two terms used throughout: sales tax is the tax US states charge on sales, each under its own rules; VAT (value added tax) is the equivalent in many other countries, which often tax digital sales to consumers where the consumer lives. This guide explains the two models. Foundlie's ten provider-pair comparisons, listed at the end, apply it to Stripe, PayPal, Airwallex, Dodo Payments and Polar with fees on the same sale.
How the money and the tax move
With a payment processor:
- Your customer buys from your business, at a checkout the processor runs for you.
- The processor collects the payment, deducts its fee and pays the rest into your business account.
- You work out where you owe sales tax or VAT, register there, charge it, file the returns and pay.
With a merchant of record:
- Your customer buys your product from the merchant of record, at its checkout.
- It collects the price plus any sales tax or VAT, and remits that tax in the places it covers.
- It deducts its fee and pays you what remains, as its supplier.
| Payment processor | Merchant of record | |
|---|---|---|
| Examples | Stripe, PayPal, Airwallex | Paddle, Polar, Dodo Payments |
| Customer buys from | Your business | The merchant of record |
| Seller named on the charge and receipt | Generally your business | Generally the merchant of record |
| Sales tax / VAT registration and remittance | You, wherever you owe it | The MoR, on its sales, where it covers tax |
| Refunds and disputes | You handle them; the processor charges dispute fees | The MoR handles them as seller, under its policies; some charge a fee per dispute |
| Customer relationship | Your customer, on your terms | The purchase is with the MoR; you deliver the product |
| What you need to open it | A business registered in a country the provider supports | Acceptance of you and your product after review |
| Price per sale | Lower | Higher |
How each provider shows your business and product name on the receipt and card statement varies, so check it in the provider's settings before you launch.
The tax column has two limits. First, a merchant of record covers tax only where it says it does. Paddle, for example, says it acts as a reseller and is the merchant of record, handling the collection and remittance of VAT and sales tax (Paddle on tax), and it publishes the countries for which it charges sales tax or VAT. Second, it covers only the tax on the sale. Your income tax and your company's filings stay with you, as explained below.
On the processor side, tools help with the arithmetic but not the obligation. Stripe Tax calculates and collects tax for 0.5% on transactions where you are registered, as published on Stripe's pricing page on 27 September 2026; deciding where to register, filing returns and the liability remain yours.
Which model fits what you sell
| What you sell | Usual fit | Why |
|---|---|---|
| SaaS and subscriptions | Either | All three MoRs are built for software; a processor costs less per sale |
| Templates, e-books, courses | MoR if accepted, or a processor | Polar lists such products; Paddle's docs name e-books and courses; Dodo reviews some |
| Client services: agency, freelance, consulting, coaching | Processor | Paddle, Polar and Dodo exclude human services |
| Physical goods and e-commerce | Processor | All three exclude physical products |
SaaS and subscriptions
Both models work here, and the choice turns on tax and volume. A merchant of record suits a product sold to consumers in many countries, where registering for sales tax or VAT in each place would cost more than the higher fee. A processor suits a founder who has a company the processor accepts, sells into a limited number of tax jurisdictions or mainly to businesses, and has enough volume that the gap per sale outweighs the cost of doing the tax work.
Subscription surcharges also differ. As published on 27 September 2026, Stripe Billing adds 0.7%, Dodo Payments adds 0.5% and Polar's current plans add nothing, which narrows the gap on recurring revenue (Stripe vs Polar works through it). For the Stripe route from Egypt, including subscriptions, read opening a Stripe account from Egypt.
Digital products: templates, e-books and courses
Polar's acceptable use policy lists software, digital products such as templates, e-books, PDFs, code, icons, fonts and design assets, and premium content and access such as courses. Dodo Payments' merchant acceptance page welcomes SaaS and AI products, digital goods, templates, plugins and apps, and lists e-books among the categories that often require review. Paddle's acceptable-use page says it is built for software companies (B2B SaaS, consumer software and games) (Paddle's rules), while its developer documentation says you can "sell your e-books, software licenses, courses, plugins, and other downloadable files" with Paddle as merchant of record (Paddle for digital products). Templates are not named on either page, so confirm your product with Paddle before building a store on it (both checked on 29 October 2026).
Keep the line between a product and a service in mind. A recorded course is a digital product; one-to-one coaching delivered live is a human service, and the rules below apply to it.
Client services, agencies and freelance work
This is where the models separate most clearly. All three merchants of record exclude human services:
- Paddle says that if your company's "primary offering is human services (such as consultation, support, or design services) or the sale of physical goods, Paddle is not a good fit for your needs", and its prohibited list includes "human services that are not related to a software offering" (Paddle).
- Polar lists "Human services" and "Physical products" among prohibited categories, and says that if your primary offering is either, its services "are not designed for and should not be used by you" (Polar).
- Dodo Payments says "selling custom design, development, coaching, freelancing or consulting services via digital platforms isn't allowed", and "if the majority of the value sits in the human labour rather than digital systems, it will not be accepted." It may consider a productised service, meaning a fixed, pre-defined digital product delivered the same way to every buyer, under review (Dodo Payments).
So an agency, a freelancer billing clients, a consultant or a coach generally takes payments through a processor: Stripe or PayPal with a company those providers accept, or Airwallex where your company's country is eligible. If you invoice clients, Stripe Invoicing adds 0.4% per paid invoice on its Starter plan or 0.5% on Plus, on top of payment processing, and reconciles invoices paid by ACH credit or wire transfer (Stripe Invoicing pricing, checked on 29 October 2026). That reconciliation covers transfers the client sends to the virtual bank details Stripe shows on the invoice, at Stripe's bank-transfer fees, not transfers into your own bank account (Stripe bank transfers). A merchant of record's higher rate pays mainly for handling sales tax and VAT on sales to consumers, which business-to-business client work often does not need anyway, as PayPal vs Dodo Payments explains.
If your agency also sells its own software product, that product may suit a merchant of record while the client work stays on a processor. Sales tax and VAT on services billed to businesses is a different question from tax on digital sales to consumers, so ask a tax adviser where your client work creates obligations. For options that do not need an Egyptian commercial register, read payment gateway without a commercial register.
Physical goods and e-commerce
All three merchants of record exclude physical products. Paddle prohibits "physical products or products that require physical delivery", Polar lists "Physical products" as prohibited, and Dodo Payments says "We only support digital delivery" (each on the pages cited above, checked on 29 October 2026). An online store therefore takes payments through a processor or its store platform's own payments, and sales tax becomes a registration question you check state by state, as do you need an LLC for dropshipping? sets out.
What each costs on the same sale
The figures below are for a $100 sale paid with a US card. The first five are US rates as published on 27 September 2026, for example on Stripe's and Dodo Payments' pricing pages, and come from Foundlie's pair comparisons. Paddle's pay-as-you-go rate of 5% + 50¢ per checkout transaction was checked on its pricing page on 29 October 2026; the fee shown is our calculation from that rate.
| Provider | Model | Published rate | Fee on a $100 US-card sale |
|---|---|---|---|
| Airwallex | Processor | 2.8% + $0.30 | $3.10 |
| Stripe | Processor | 2.9% + $0.30 | $3.20 |
| PayPal Checkout | Processor | 3.49% + $0.49 | $3.98 |
| Dodo Payments | Merchant of record | 4% + $0.40 | $4.40 |
| Polar (Starter plan) | Merchant of record | 5% + $0.50 | $5.50 |
| Paddle | Merchant of record | 5% + 50¢ | $5.50 |
The worked example in Stripe vs Dodo Payments shows how the gap scales: $1.20 on a $100 US-card sale, and $11.10 on a $1,000 sale paid with a card issued outside the US.
What the rate leaves out
On the processor side, the rate excludes the tax work: deciding where you owe sales tax or VAT, registering, filing returns on a schedule even in periods with no sales, and often paying an adviser. Stripe Tax adds 0.5% on transactions where you are registered.
On the merchant-of-record side, the rate excludes payouts, currency and plan costs. As published on 27 September 2026, Dodo Payments charges $5 for payouts under $1,000 (payout structure) and nothing for standard payouts from $1,000, though a non-US business paid by USD SWIFT wire pays $25 per payout (Dodo Payments pricing, checked on 29 October 2026); it also charges $1 per refund and $30 per chargeback, and its Adaptive Currency passes a 2–4% conversion fee to the buyer by default. Polar pays out through Stripe Connect and passes on the cost, $2 for each month with a payout plus 0.25% + $0.25 per payout, and 0.25%–1% more for cross-border payouts (Polar fees), and its paid plans lower the rate in exchange for a monthly fee. Paddle's pricing page describes its rate as all-inclusive, with no monthly fee, and lists chargebacks and buyer support among what it covers; it does not state payout or currency-conversion costs, so confirm those with Paddle before you compare (checked on 29 October 2026).
A merchant of record is worth its premium when your tax obligations would be spread across many places and your revenue is too small to justify registering and filing in each. It is worth less once revenue is steady and your obligations are known; then the gap per sale is a recurring cost. To test your own prices, use the all-gateways fee comparison or the calculators for Stripe, PayPal, Airwallex, Dodo Payments and Polar. Foundlie has no Paddle calculator; apply 5% + 50¢ to your own price.
Who can open each from Egypt or the Gulf
Payment processors. Stripe opens accounts for businesses registered in the countries on its supported list. As checked on 29 October 2026, that list includes the UAE but not Egypt or Saudi Arabia, and it is about where the business is registered, not where the founder lives. For a founder in Egypt, the usual route is a US Stripe account, which needs a company registered in the US: Stripe asks for the address of the physical location where most business activity is carried out, does not accept PO boxes, and verifies the legal entity name and type, EIN, SSN or ITIN, and business address (requirements for a US Stripe account). Is Stripe available in Egypt, Saudi Arabia or the UAE? covers the country picture. PayPal operates accounts in Egypt with limits on receiving and withdrawing, and Airwallex opens accounts for businesses registered in its eligible countries; Stripe vs PayPal and PayPal vs Airwallex cover both.
Merchants of record. You do not need a company in a Stripe-supported country to apply. Paddle says it works with software businesses anywhere except the countries on its unsupported list; as checked on 29 October 2026, Egypt, Saudi Arabia and the UAE are not on that list, which Paddle notes is subject to change (Paddle's supported countries). Dodo Payments onboards sellers from many countries; check its current list for yours. Polar pays out through Stripe Connect Express, and its supported-countries page listed Egypt, Saudi Arabia and the UAE among payout countries when checked on 29 October 2026.
Review. A merchant of record takes on the legal sale, so it reviews you and your product before it agrees to sell for you. A processor reviews your business against its own rules on restricted businesses. With either model, approval is the provider's decision. The accepting payments page separates what Foundlie prepares from what stays with the providers.
What neither model does for you
- Your income tax. A merchant of record handles the tax on the sale it makes. Tax on your profit stays with you, under the rules where you live and, if you own a US company, under IRS rules for that company.
- Your company's filings. A US LLC owned by one non-US person may have to file an annual Form 5472 with a pro forma Form 1120, whichever model it sells through; Form 5472 for a foreign-owned US LLC explains when. Annual state reports or fees, where your formation state has them, are due as well.
- A contracting party. If a client insists on contracting with and paying a US company, a merchant of record does not change that. It sells products to buyers; it does not become your company for a client contract. You would still need the entity; how to open a US LLC as a freelancer from Egypt covers that route.
- Acceptance. Neither model obliges a provider to take your business.
Each question has its own decision-maker: the provider decides whether to accept you; US states and other countries' tax authorities set sales tax and VAT obligations; the IRS decides federal income tax and information returns; your formation state sets its annual report and fee rules.
Read the pair comparisons
A processor against a merchant of record
- Stripe vs Dodo Payments: the two models side by side, with fees on the same sales and who handles sales tax.
- Stripe vs Polar: how Polar's four plans change the gap, and payouts through Stripe Connect.
- PayPal vs Dodo Payments: PayPal's currency-conversion spread against a merchant of record's tax handling.
- PayPal vs Polar: a buyer wallet against a merchant of record for software and digital products.
- Airwallex vs Dodo Payments: a low-cost processor with a multi-currency account against tax handled for you.
- Airwallex vs Polar: multi-currency balances against Stripe Connect payouts, for software or services.
Two processors
- Stripe vs PayPal: card fees, checkout experience and account-hold risk.
- Stripe vs Airwallex: near-identical card rates, with currency conversion and product range as the difference.
- PayPal vs Airwallex: a buyer-facing wallet against a business account, and the conversion spread.
Two merchants of record
- Dodo Payments vs Polar: per-sale rates, subscription surcharges, payouts and the volume at which Polar Pro becomes cheaper.
Frequently asked questions
Is Paddle a payment processor or a merchant of record?
A merchant of record. Paddle says it acts as a reseller of your product, so it is the seller to your customer and handles VAT and sales tax collection and remittance in the regions it lists. Its pay-as-you-go price was 5% + 50¢ per checkout transaction, with no monthly fee, when checked on 29 October 2026.
Can an agency use a merchant of record?
Generally not for client work. Paddle, Polar and Dodo Payments all exclude human services such as consulting, design, development and coaching. An agency usually takes client payments through a processor such as Stripe, PayPal or Airwallex. If the agency also sells its own software or a fixed digital product, that product may qualify, subject to the provider's review.
Do I still need a US company if I use a merchant of record?
Not to open the merchant-of-record account: they onboard sellers from many countries, and Paddle's unsupported-country list did not include Egypt, Saudi Arabia or the UAE when checked on 29 October 2026. You may still want one for other reasons: a US Stripe account needs a US-registered company, and some clients will only contract with a US company.
Which is cheaper, a processor or a merchant of record?
Per sale, a processor. As published on 27 September 2026, a $100 US-card sale costs $3.20 on Stripe and $4.40 on Dodo Payments; Paddle's 5% + 50¢ comes to $5.50. The processor's figure does not include the cost of registering for and filing sales tax or VAT yourself, which is what the merchant of record's higher fee pays for.
Can I use both models at once?
Yes. You could sell self-serve subscriptions through a merchant of record and invoice larger business clients through your own processor account. That means two sets of payouts to reconcile, so decide which customers belong where before you start.
What comes next
- See what is prepared for you, and which decisions stay with the providers, on accepting payments from abroad.
- Compare fees at your own prices in the all-gateways fee comparison.
- If you choose a processor and need a US company first, read about US company formation.
This article provides general information and is not legal or tax advice. Provider terms, prices and tax rules change; check the current official source or consult a qualified professional before you decide.