Let’s be direct: If you sell to consumers, sales tax is an issue
Getting closer to the customer is no longer a retail-centric sales strategy. More manufacturers, suppliers and wholesalers are starting to sell direct to consumers (D2C). Motivations vary: brand awareness, customer loyalty, even product innovation. But for the most part, B2B sellers are simply looking to give consumers what they want — the ability to buy products directly from the source. Many are already doing it. A June 2015 PricewaterhouseCoopers survey found that 70% of U.S. consumers already purchase directly from manufacturers.
Adding a D2C sales channel can help you grow and expand your business, but it’s a vastly different buying experience for the customer. Before diving in, you should ask yourself: is the company operationally ready to handle direct to consumer transactions? Is your web store mobile-friendly? Can you manage high-volume inventory and order management? Have you ramped up customer support? How are you handling transactional tax? That’s right. As soon as you supply items to the end user, you’re on the hook to collect sales and use tax.
While many B2B transactions involving goods are tax-exempt, the opposite is true of D2C sales. The sales of most goods (and some services) are taxable in 45 states in the U.S. There are more than 12,000 different taxing jurisdictions, most with different tax rates and rules. Add product taxability on top of that and things get tricky. Depending on where your new customers are located and where you have a business presence (inventory, warehouses, employees), you could be on the line to collect sales tax in multiple states.
Bottom line: whatever you’re doing now to manage orders isn’t going to be robust enough to handle the volume of transactions that will flow through your business once you sell direct to consumers. You’ll likely need to add capabilities to your ERP or accounting system to help you do this efficiently. For example, ecommerce or shopping cart software to handle online sales transactions and business systems integrations to optimize inventory, orders, distribution and other key process functions. And, of course, sales tax compliance.
What was once the somewhat simple task of exchanging exemption certificates is now a time-intensive process. You’ll need to determine which sales are taxable and which are exempt, apply the right tax rates and rules to each taxable transaction, and ensure the right amount of sales tax is remitted in a timely manner to every state taxing authority in which you have an obligation to collect and report sales tax. Whew! It’s exhausting just listing those steps, never mind complying with them.
The easiest way to manage sales tax for D2C sales is through automation. SaaS solutions like Avalara AvaTax integrate into your ERP or ecommerce system to manage all your transactional tax needs. In addition to tax rate calculation, Avalara has expertise and solutions that can help streamline exemption certificate management and returns filing. Having a whole-business tax compliance solution to handle D2C sales as well as B2B transactions ensures you can focus on your new channel and new customers and not on tax compliance.
The tax implications of direct to consumer is covered in more depth in Sales Tax Quality Process and the Manufacturer/Distributor.
The 2021 sales tax changes report: midyear update
Your guide to navigating the complicated world of tax compliance and preparing for the future
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