A lack of sales tax used to be one of the great perks of ecommerce. By shopping online, consumers skipped over the need to pay state or local sales tax, making it easier to get a good price and giving online retailers an opportunity to gain a competitive edge. Then ecommerce grew. It kept on growing, and states couldn’t ignore the revenue losses any longer. This has made tax collection a key issue for ecommerce companies, and it is an especially acute problem for small retailers that may lack the resources to keep up with tax-related demands. All of these issues are complicated by the ever-changing nature of the ecommerce industry.
An industry in flux
The rapid rise of ecommerce in recent years isn’t a secret. However, a recent PricewaterhouseCoopers study found that ecommerce is not only growing at a much faster rate than traditional brick-and-mortar retail, it is also set to continue expanding by approximately 15 percent each year. This expansion is exciting, but it is among the factors driving tax complexity. States can’t afford to neglect large sources of revenue, and ignoring online stores for tax purposes isn’t feasible. However, ecommerce alone is only a starting point for this complexity.
“The meteoric rise of ecommerce isn’t threatening brick-and-mortar stores.”
According to the news source, the meteoric rise of ecommerce isn’t threatening brick-and-mortar stores anymore. Instead, it is pushing brands to reconsider how they organize shopping experiences as consumers shop across multiple channels. For example, the report pointed out that somebody in New York City could purchase an item online, but then go to a store to get the product replaced if it is damaged in transit.
What are the tax implications of this transaction? Does the individual have to pay tax now because he is getting a physical product in a physical store, or does the initial online purchase protect against state sales tax? This is just one line that is blurring, and the answers aren’t clear. PwC pointed out that telling the difference between an online and offline sale is becoming more and more difficult. Options like in-store pickup, browsing online and purchasing in-store, and using in-store visits to try products out before ordering online all create layers of complexity and uncertainty.
For small retailers, this changing market with uncertain boundaries makes it incredibly difficult to manage tax processing quickly and accurately when users place orders online.
Dealing with tax complexity
Streamlining and accelerating the process of going through checkout is critical for online stores, and the need to calculate tax adds a layer of complexity that can frustrate users – this is especially true when one site charges sales tax and another doesn’t. An ebook from Vertex SMB pointed out that ecommerce has given small retailers unique opportunities to grow and expand their geographic reach, but these gains come with tax complexity. There are more than 10,000 tax jurisdictions in the United States alone, and ecommerce sites must comply with tax regulations or risk falling prey to increasingly frequent and automated audits.
Finding success here isn’t easy, but it can be simplified by overcoming three key problems:
1. Handling growth
Rapid growth through online channels is exciting, but it also forces small retailers to look at tax issues that they may been able to avoid in the past. Companies now must consider where their products are considered luxury items and where they’re treated as necessary goods. They must assess use taxes and they need to evaluate how their warehouse, sales and productions strategies may impact tax laws. Beyond bringing in a specialist, which can be useful, retailers can also prepare for growth by building their site on a web platform, such as Magento, that features tax module extensions to simplify order processing in real time.
“Retailers must track sales carefully to ensure they are in compliance with tax regulations.”
2. Crossing geographical boundaries
With so many tax jurisdictions and rapidly changing laws in place, small retailers must track sales carefully to ensure they are in compliance with regulations at all times. The ebook pointed out that this becomes especially challenging as small retailers leverage third-party warehouse and fulfillment services that make it difficult to identify where there is a strong enough brand presence to make tax payments necessary.
As tax laws can be impacted by everything from warehouse location to customer address, having clear data to cover every phase of the order workflow is critical. Integrating backend data systems that track orders can make it easier to understand the full geographic complexities of every order and adjust tax strategies accordingly.
3. Addressing automation
Automating repeatable process can be exciting when it comes to efficiency, and states are well aware of this. According to the ebook, many states are beginning to use data to automatically track tax payment requirements and use automation tools to audit retailers. In many ways, automation is also the best response to this challenge. Tax automation platforms help retailers understand the full implications of their sales environment by gathering key data in one place and reduce the amount of time it takes to process tax related to specific orders.
Getting ahead of tax challenges
The rapidly changing nature of both today’s ecommerce environments and the taxation landscape makes tax management particularly challenging for small retailers with major resources to put into legal and technological solutions. Modern web platforms and tax management solutions are coming together to resolve these issues, and retailers that take full advantage of these technologies can gain big-business-like functionality at an accessible price point.
Learn how SMB retailers can simplify sales and use tax processes in five easy steps.