With April 15th just around the corner, and W2s and 1099s starting to arrive in our mailboxes, our brains are primed for that inevitable five-letter word: TAXES.
While April 15 is one day on the calendar as it relates to income taxes, for ecommerce merchants, taxes (specifically sales tax) take on an entirely different form and cadence where there are up to 50 days on the calendar that need to stay top of mind. There’s no uniform sales tax in the U.S. as it’s up to each individual state to determine how much they want to collect. And when sales and gross receipts make up 47% of total state revenue, you can be certain of one thing: Each state wants to collect their sales tax.
Yet retailers of all sizes are facing a “you-don’t-know-what-you-don’t-know” crisis when it comes to sales tax, which is not only bad for the business, but bad for customers as the following points demonstrate:
- Whole Foods and Hertz faced class actions for overcharging customers sales tax on coupon purchases.
- Dunkin Donuts was found non-compliant in New York and New Jersey for charging sales tax on 70% of transactions involving tax-exempt items such as bottled water and packaged coffee.
- Target stores in California were dinged for charging sales tax on hot coffee sold to go.
Nexus vs. economic nexus
To further complicate matters, on June 21, 2018, the Supreme Court of the United States ruled in favor of the state in South Dakota v. Wayfair, Inc. The decision overruled a longstanding physical presence rule, allowing states to require remote sellers to collect and remit sales tax. Since Wayfair, most (but not all) states have adopted new rules defining what establishes a sales and use tax obligation, known as nexus.
Unlike nexus (which is based on physical presence), economic nexus is based entirely on sales revenue, transaction volume, or a combination of both. Like many sales tax laws, economic nexus criteria vary by state, but all aim to level the playing field between non-collecting out-of-state sellers and brick-and-mortar businesses. Unfortunately for businesses, no two state sales tax nexus laws are alike and laws can change daily, monthly and yearly.
How do retailers calculate sales tax?
Given the importance of this ever-changing, always-on sales tax landscape, retailers have at least six options for the calculation of sales tax according to an Avalara study, a trusted Guidance partner and end-to-end sales and tax compliance solution.1. The manual approach: (34% of retailers)
Someone in finance or another department periodically checks the state tax codes then IT updates the sales tax collection rules in the ecommerce system.
2. The “set-it-and-forget-it” approach (21% of retailers)
Sales tax collection rules were set at the point the ecommerce system was set up with no further updates.
3. The third-party technology approach (18% of retailers)
Automated tax compliance connects to existing ecommerce platform and automates compliance with state-by-state sales tax collection requirements at the point of sale.
4. The outsourced approach (9% of retailers)
Management of sales tax compliance is outsourced to a tax professional.
5. The “no-approach” approach (3% of retailers)
Sales tax is not collected at the point of sale.
7. The “I don’t know” approach (15% of retailers)
If most business processes are moving to automation, these statistics beg the question: Why aren’t more retailers using automated sales tax compliance? The answer seems to be one of prioritization at the executive level driven again by retailers not knowing what they don’t know. If retailers don’t believe that collecting proper sales tax is enough of an issue, and if they’re unaware of the potential long-term costs of being audited and/or fined by states for improper tax collection, then it makes sense that an automated sales tax compliance platform will not get the green light for investment.
“Post South Dakota v. Wayfair we have seen a number of merchants go from having to only worry about 2-3 states to upwards of 20. Given the amount of time that goes into managing compliance at this level, it only makes sense to look at a solution to automate [your taxes].” —Jeff Roth, VP Strategic Alliances, Avalara
Automated tax compliance technology
To address the situation and bring some clarity to the knowledge gap that prevents automated sales tax compliance from being a business priority, consider the following from Avalara:
- For retailers, the research, calculations, filing, and reporting required for sales and use tax compliance is not only time-consuming, it’s costly and prone to error.
- The average business spends upward of 300 hours per year manually managing sales tax at a cost of around $67,000; this is closer to $400,000 for larger companies. Yet, 8 in 10 businesses don’t have sufficient resources to deal with these tax activities in-house.
- Retailers are opening themselves to costly audits and substantial penalties by not having the systems and internal processes in place to ensure state-by-state compliance.
- Outsourcing can be expensive.
Above and beyond the compliance issues, the payoff of sales tax automation is compelling. Further research from Avalara shows that their customers and Guidance clients:
- Reduced the time spent managing sales and use tax by 58%
- Avoid overpaying sales tax 90% more often
- Pass audits without penalty 50% more often
In addition to the technology, tax automation platforms like Avalara have invaluable subject matter expertise built into the system. They also have battle-tested experience including:
- 9.5 billion tax engine calls
- $36.2 billion returns processed
- 18 million tax documents managed
Given that retailers of all sizes have automated many of their business processes to drive agility and efficiency, automating sales tax compliance should move up the priority chain. Would you rather manage the daunting tax of keeping pace with the 12,000 taxing jurisdictions in the U.S. alone and millions of tax rules? Or would you rather focus on revenue-generating activities that drive growth? Sales tax automation software provides air cover for compliance as you onboard more channels so you can grow with confidence. Need help navigating the murky waters? Guidance can help answer questions around automating your sales tax solution.
While integrating your ecommerce platform with automated software can happen anytime, common trigger events include an ecommerce replatform, expanding a product line, setting up personnel in other states, drop shipping, hosted data centers or updating your ERP.
If any of these are on your roadmap, now is the time to take a non-revenue-generating activity and place it in the hands of a technology expert. Retailers must make this an urgent issue especially in 2020 as several states changed their sales tax laws in 2019 according to Avalara’s 2020 Sales Tax Changes report. Ignorance of the law is no longer a valid excuse as many cases have proven otherwise.