COVID-19 has accelerated online retail growth as much as 10 years in three months, introducing an entirely new customer demographic to the online retail landscape – just in time for the holiday shopping season, when about 19 percent of annual retail sales take place.
A holiday sales surge will be a welcome conclusion to the year, but few retailers have thought ahead to proactively understand and address the tax implications that can come with such a spike in revenue and activity from online customers – or the importance of automating those tax processes to maintain compliance with complex and still evolving rules and regulations.
“Retail’s always changing, and retailers need to be ready,” says Pete Olanday, retail practice leader at Vertex. “When it comes to sales tax, compliance isn’t optional.”
Here are three ways automated tax partners help retailers proactively understand and manage holiday tax obligations:
1. Automatically calculate more accurate tax on whatever you sell, wherever you sell it
Several factors will influence what retailers are selling and where they are selling it this holiday season, and each of these small shifts in consumer behavior can impact a retailer’s tax obligations.
For example, less interaction with friends and family calls for more delivery options. Customers may have holiday gifts delivered directly, leading to multiple ship-to addresses for different items in the same order, each with its own set of tax rates and rules. Or, seeking to avoid supply shortages on hot-ticket items or delays in shipping, people may have started shopping earlier in the holiday season. Even just a change in sales volume can have an impact, such as in the case of a retailer that is suddenly selling 200% more product from a new state now has a responsibility to calculate and remit that tax – and the rules vary by jurisdiction.
“Tax automation software seamlessly and accurately calculates tax on whatever items you sell, wherever you sell them,” says Olanday. “It will record all transactions, even 0-rated or non-taxable transactions, to enable the retailer to track transaction counts and revenue per jurisdiction. So that when an economic nexus threshold is met, taxes for that jurisdiction can be automatically calculated simply by checking the registration checkbox.”
2. Navigate murky marketplace responsibilities
In 2018, the Wayfair ruling established marketplace facilitator laws, which attempt to define the relationship between the marketplace facilitator and the marketplace seller. These rules outline which party is responsible for filing which levels of tax, and which party’s economic nexus profile to use when calculating the tax to the customer.
Operating manually, retailers might be distracted by the rules, requirements and moving parts when it comes to their responsibilities in the marketplace. But a tax automation software provider can help monitor and manage the transaction count or revenue dollars that mark the economic nexus to determine if and when a retailer has to register in new jurisdictions.
“Wayfair levels the playing field between brick-and-mortar retailers and online sellers by requiring that online sellers register to charge, collect and remit sales tax on transactions even if they do not have a physical presence in that jurisdiction,” says Olanday. “The thresholds that define this economic nexus, versus the traditional physical nexus, can either be the number of transactions per month, the revenue dollars or a combination of the two. Once a retailer meets a threshold, they are obligated to charge and file sales tax immediately.”
3. Swiftly generate monthly tax returns
Retailers lose about $5 for every $100 of returns processed. Returns can also complicate a retailer’s tax obligation considering the location of the purchase and return, or a return delayed by a manufacturing or shipping delay. These kinds of complexities challenge the accuracy of monthly tax return reports for retailers that have not automated them.
“Customers may be more likely to shop early, making returns even more complicated with more time between the purchase and return dates,” explains Olanday. “This widens the window where the tax rate at purchase time can be different from the tax rate at the time of the return, requiring more attention on historical rate information.”
Olanday also points out that tax obligations can be affected by manufacturing and supply disruptions or shipping delays, where the tax estimated when a customer places an order has increased the risk of being different when the order finally ships. For retailers that calculate taxes manually, managing tax responsibility in these conditions leaves a lot of room for error. But for retailers with this tax software in place, their monthly tax returns are generated automatically and accurately, despite the complexity.
Focus on What Matters During the Holiday Surge
This is only the beginning of COVID-19’s long-term impact on today’s consumer and the overall online retail landscape. But as we approach the high-volume, high-sales holiday period, it’s critical for retailers to direct their attention to attracting customers, meeting their needs and driving sales – not calculating all the ways changing customer behaviors impact their tax responsibility. Tax automation removes the burden of these calculations, ensuring retailers understand their tax obligations no matter what the holiday season brings.