It’s March, so taxes are on the minds of most Americans.
April 15 is a big day on the calendar for personal income taxes but for ecommerce merchants collecting transaction tax, there are up to 50 days a year that need to be top of mind. There is no uniform sales tax in the U.S. In fact, there are more than 13,000 tax jurisdictions. It’s a lot to keep track of! Some of the complexity is tied to geographic sensitivity. For example, in Commerce City, CO, in the zip code of 80022, the same product is taxed two different ways (one nearly doubling the other) depending on where the customer buys it. But that is just the beginning. There are many other routine business activities that can trigger the need for an ecommerce merchant to have to register, collect and remit sales tax.
Nexus is an event that establishes a merchant’s obligation to collect and remit taxes. There is physical nexus, which means your business has some physical presence in a state that collects sales tax. It doesn’t have to be the main office: it can be a hosted data center, your inventory warehouse, trade show attendance or even the location where a board or investors’ meeting is held.
There is also economic nexus, which is triggered when a merchant meets a set level of sales transactions and/or gross receipts activity within a state. Each state can set its own thresholds for economic nexus.
How do retailers calculate sales tax?
Given the importance of this always-on and every-changing sales tax landscape, retailers have at least six options for the calculation of sales tax according to Avalara, a trusted Guidance partner that offers automated sales tax calculation and compliance solutions. This is what Avalara found:
- 34% of retailers use the manual approach: someone in finance or another department periodically checks the state tax codes and IT updates the sales tax collection rules in the ecommerce system.
- 21% of retailers use the “set-it-and-forget-it” approach: sales tax collection rules that use tax tables are set up at the same time as the ecommerce system and no further updates are done.
- 18% of retailers use a third-party technology approach: an automated tax compliance solution is connected to their existing ecommerce platform and it automates compliance with state-by-state sales tax collection requirements at the point of sale.
- 9% of retailers have an outsourced approach: management of sales tax compliance is outsourced to a tax professional.
- 3% of retailers subscribe to the “no-approach” approach: sales tax is not collected at the point of sale.
- Finally, 15% of retailers just plain don’t know how they are calculating sales tax.
As most business processes in our time are moving to automation, these statistics beg the question: Why aren’t more merchants using automated sales tax compliance? The answer seems to be one of prioritization at the executive level, largely driven by merchants not knowing what they don’t know. If merchants 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
When considering why you might want to automate your sales tax calculation, state registrations, and filing and remittance, review the state of current affairs discovered by recent Avalara research:
- For merchants, the research, calculations, filing, and reporting required for sales and use tax compliance is time-consuming, 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; for larger companies the cost is closer to $400,000.
- Eight in ten businesses don’t have sufficient resources to deal with tax activities in-house and this is exposing merchants to costly audits and substantial penalties.
- Outsourcing can be expensive.
The payoff of sales tax automation is compelling. Further research from Avalara shows that their customers and Guidance clients:
- Reduce 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 that includes:
- $3.1 million in tax returns processed in 2020
- More than 25 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. Rather than struggling with too few in-house resources, stealing from the bottom line because you are overpaying sales tax, and living with the threat of paying audit penalties, automate it all so you can focus on revenue-generating activities that actually drive business growth. If you would like to learn more about an automated sales tax solution, Guidance can help.
While integrating your ecommerce platform with automated software can happen anytime, common trigger events include an ecommerce re-platform, 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. Merchants must make this an urgent issue in 2021 as state lawmakers are eagerly looking for ways to replace revenue lost due to the pandemic. Audits are one of the tools lawmakers will employ. Read the 2021 Sales Tax Changes Report for additional information.