New forms of order fulfillment create tax challenges for midsize businesses
If you’re a retailer, order fulfillment is one of the key steps your company must take to complete a sale and please a customer. However, the rise of omnichannel marketing, coupled with pandemic-related supply chain snarls worldwide, have made order fulfillment more challenging than ever before.
All these factors also make sales tax compliance more challenging, because whether you’re a brick-and-mortar merchant with a website, or an online entity that sometimes drop ships from your supplier, you’ve got a shifting web of tax requirements to meet.
“The more complex the transaction, the more complex the tax compliance requirements — and complex transactions are increasingly common,” said Asad Ahmed, who is principal industry solutions advisor at Oracle NetSuite.
“Gone are the days when you just bought one thing from a retailer in a simple transaction and it’s done,” he said. Instead, tax compliance in today’s retail environment is “really complex.”
Omnichannel marketing creates operational complexity
Omnichannel marketing has created new opportunities for companies to capture new business.
But it has created new operational challenges at the same time, according to Ahmed, who was part of a discussion on order fulfillment and tax automation during Avalara CRUSH Global, a virtual conference focused on emerging business processes and tax trends earlier this year.
“It’s not only brick-and-mortar,” Ahmed said. “It’s not only your best properties. We have seen retail add in things like going through marketplaces to meet their customers.” Pop-up stores and sales through consignment shops have also emerged as new sales channels, he added.
Retailers — and really, all companies that sell physical goods — are faced with managing inventory against orders coming from any number of new channels. That requires them to have real-time views into exactly where their inventories stand, and whether they’ve actually got enough product to fulfill customer orders in a timely fashion.
As a buyer, “I want my products now,” Ahmed said. “I want to know when they’re getting to me. If you can’t tell me that, if you’re not able to allocate inventory to those orders in real time and tell me, the end user, this is when you’re delivering this, I’m going away.”
Accurate data is essential
At the same time, selling companies must have accurate real-time data for sales, inventory, and sales tax obligations.
For sellers, it’s a matter of knowing exactly what’s flowing to your company’s bottom line.
“Sellers need to know exactly what the financial impact of a transaction is,” Ahmed said. “If you sell something for X dollars, you need to know, at that time, what is the taxable impact of that transaction.”
If you don’t know, you won’t be able to close your books at the end of your next financial reporting period, he explained.
And there are a vast number of factors that can influence what you should be collecting and when you should be remitting.
The way companies fulfill orders can change tax obligations
Sales tax compliance is challenging to start with, given that there are more than 13,000 taxing jurisdictions across the United States, some with overlapping boundaries, which means you can’t just plug in a ZIP code and assume you’re collecting the right tax.
But when companies start changing their operating models to incorporate new sales channels, things start to get really hard.
The rules for collecting and remitting sales tax at a brick-and-mortar location are different from the tax rules on products that are shipped to a buyer’s location. If you’re making a B2B sale, your buyer may have multiple locations you’re shipping to, which can also affect the taxes due on a transaction — particularly if state lines are involved. (Certain B2B sales can be tax exempt, and managing tax exemption certificates creates another layer of complexity.)
There also are tax implications when you allow customers to place an order online, then pick up the product at your brick-and-mortar location closest to them. If you allow them to make in-person returns of online purchases, that also affects how you calculate the tax on the transaction.
“It also matters how you ship the product,” Ahmed said. Some retail chains prefer to fulfill orders from their nearest brick-and-mortar location, in order to cut down on shipping time, and to help those locations cycle through their inventory. But that changes the tax collection requirements compared to what they’d have been if the company had fulfilled the order through a centralized warehouse.
Also, the method a company uses to deliver a product matters. Different states have different rules for whether delivery charges should be taxed, depending on whether the product is delivered in your own company truck or from a common carrier, or even the U.S. Postal Service. Sometimes it can come down to how you write up the invoice for the order.
The current issues with supply chain snags have led many companies to diversify their supply chains, and sometimes their warehousing and delivery arrangements as well. If you’re a Chicago company that’s temporarily hired an Evansville, Indiana, shipping company to store and deliver product — or if you’ve started working with a third party like Fulfillment by Amazon — you may have created a new tax obligation. And if you ask one of your suppliers to drop ship a product directly to a buyer in order to save time, that also can have tax consequences.
According to Ahmed, it’s become increasingly common for companies selling physical goods to also sell a service package with them. And there can be differences in how the two products are taxed.
Furthermore, as the metaverse and NFTs become a bigger part of real-world business, “how you deal with digital goods vs. physical goods sales” becomes a more urgent question, he added.
Tax errors cut into your bottom line
There are countless examples of businesses that got the tax wrong in one of these common business scenarios and didn’t find out until it came time to reconcile accounts, Ahmed explained. In each one, managers were faced with either eating the cost for failing to collect enough tax — or annoying customers by going back to ask them for the correct amount.
“If you’re not doing calculations correctly, you’re impacting your bottom line,” Ahmed said.
He urged companies to automate their order fulfillment — and tax compliance — processes.
“How are you going to manage those systems manually?” he asked. “Excel is a great tool, but it’s not a tool to run your business on.”
For more information on tax requirements for midsize retailers, read our whitepaper on Six surprising ways sales tax affects retailers.
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