The retailer's guide to agentic AI

The U.S. retail industry continues to grow, with sales expected to go up by approximately 3.5% year over year and reach $5.3 trillion by 2026. That growth is increasingly driven by sales across ecommerce sites, marketplaces, brick-and-mortar stores, and cross-border channels.

As retailers expand across these channels and markets, obligations become harder to manage consistently. Product taxability rules vary by jurisdiction, marketplace responsibilities differ by channel, and cross-border sales introduce additional regulatory and reporting requirements. Processes that once worked at a smaller scale often struggle to keep pace as activity builds.

Managing tax obligations at this scale requires systems that can operate continuously, not intermittently. Avalara Agentic Tax and Compliance™ streamlines and automates compliance across the retail business ecosystem. Designed to operate within the systems retailers already use, this approach helps observe activity, apply guidance, and execute compliance tasks as part of day-to-day operations. This blog post examines the evolving compliance challenges facing retailers and how agentic AI helps address them more consistently across the business.

Key takeaways

• Tax compliance for retail businesses is becoming more complex. Ongoing regulatory changes, expanding mandates, and frequent updates mean compliance must be managed in an environment that is continuously evolving.

• Consistency and accuracy require data-driven execution. Applying the right tax logic across products, jurisdictions, and sales channels depends on reliable data and current tax content embedded into everyday operations.

• Agentic AI supports a more sustainable compliance model. Shifting from manual and periodic processes to automated execution helps businesses improve efficiency, reduce rework, and drive better long-term return on investment.

Tax compliance challenges shaping modern retail

Retailers aren't facing one tax problem. They're managing a network of interconnected compliance risks that continue to evolve. Changes in tax policy are expanding what gets taxed, how it gets taxed, and when new obligations apply.

States are broadening the sales tax base, introducing retail delivery fees and other transaction-based charges, refining rules around digital goods and services, and more. These changes often apply unevenly across jurisdictions, creating added complexity at the transaction level.

Against this backdrop, retailers must apply the right tax treatment consistently across products, channels, and fulfillment models. The sections below examine the most common compliance challenges retailers encounter as these risks converge.

Omnichannel and marketplace complexity

The global B2B ecommerce market is expected to grow at a CAGR of 14.5%, reaching $36.16 trillion by 2026. This growth is spread across digital storefronts, mobile channels, and third-party marketplaces, increasing the number of platforms involved in each transaction.

As sales move across these environments, tax responsibility isn't always clear. Marketplace facilitator rules vary by jurisdiction, making it difficult to determine whether the retailer or the marketplace is responsible for collecting and remitting tax. When tax logic is applied differently across POS, ecommerce, and marketplace systems, retailers can face duplicate payments, missed collections, and inconsistent tax treatment.

Product taxability and research

Product taxability varies widely across U.S. sales and use tax jurisdictions, with different exemptions, reduced rates, and special rules applied at the state and local level. Categories such as digital goods, services, and bundled products are treated differently depending on where a transaction occurs.

This variability is difficult to manage at scale. With more than 12,000 U.S. sales and use tax jurisdictions and 11,192 sales and use tax rate updates in 2023 alone, product tax rules change frequently and often unevenly. Temporary scenarios such as promotions and sales tax holidays add further complexity.

When current taxability rules aren't followed or applied consistently, retailers risk overcollecting or undercollecting tax. These errors often surface later during reconciliation or audits, increasing compliance risk and rework.

Economic nexus thresholds

Nexus obligations can be triggered as retail activity expands across states and channels. Sales volume, transaction counts, and delivery activity accumulate across systems, making it harder to maintain clear visibility into when new registration or filing requirements arise.

These thresholds are also evolving. As of July 1, 2025, 16 states, including South Dakota, have eliminated the 200-transactions threshold from their economic nexus laws, changing how and when obligations are triggered. For retailers operating in multiple jurisdictions, this furthers the need for ongoing monitoring rather than periodic review.

When nexus registrations are missed, the result is often additional administrative work to reconcile past activity and align filings going forward. Addressing these gaps later can be more time-consuming than identifying obligations as they emerge.

Cross-border complexity and customer experience

Selling across borders introduces additional layers of tax and trade compliance that directly affect the customer experience. When duties and tariffs are calculated late or inaccurately, buyers may encounter unexpected costs at delivery or checkout, leading to frustration and abandoned orders. Nearly 48% of shopping cart abandonment is attributed to unexpected costs, making transparency especially critical for international sales.

Classification issues add even more friction. Incorrect HS codes can delay customs clearance and create inconsistencies in how duties and taxes are applied, raising the likelihood of adjustments or duplicate charges after a sale. As cross-border activity grows, managing these variables manually becomes more difficult.

Operational hidden taxes

Not all compliance risk shows up at the point of sale. Many retailers manage obligations like business licenses, property tax assessments, and vendor documentation through manual, disconnected processes. These tasks often sit outside core tax workflows, making them easier to overlook as operations expand.

When licenses lapse, property data is outdated, or W-9 information is incomplete, the result is added administrative effort and avoidable exposure, including backup withholding issues and compliance follow-ups. Managing these requirements manually becomes harder as the number of locations, vendors, and jurisdictions rises.

Merchandise returns

Retail returns are becoming a more complex part of tax compliance operations. As return volumes grow, reversals and credits are no longer occasional adjustments. In 2025, the value of U.S. retail returns reached $849.9 billion, with an average return rate of 15.8%.

Returns add complexity after the original transaction is complete, particularly when they stem from promotional periods or sales tax holidays when tax treatment may differ from standard sales. When returns are processed after taxes have already been filed, credits and adjustments often require manual handling, increasing the risk of overpayments and reconciliation issues.

Drop shipment complexity

Drop shipment models are now a common part of retail fulfillment. More than 27% of retailers use dropshipping to fulfill orders, expanding the number of parties involved in a single transaction and the number of tax rules that may apply.

In these multiparty transactions, tax responsibility can be difficult to determine. Depending on the jurisdictions involved, the supplier, the retailer, or both may have an obligation to collect or remit tax. When roles aren't clearly defined or documented, retailers may either remit tax unnecessarily or miss required collections.

Managing these obligations manually across suppliers and fulfillment partners adds operational friction. Inconsistent exemption handling, incomplete documentation, or misaligned assumptions between parties can increase the likelihood of errors, including double taxation or corrections after a sale.

How Avalara Agentic Tax and Compliance supports retail at scale

Built on decades of experience and industry expertise, Avalara supports retailers across the full tax compliance workflow. Avalara helps retailers manage the practical realities of selling across channels, jurisdictions, and fulfillment models as tax rules and business operations continue to change.

Avalara solutions are designed to work within the systems retailers already rely on, including ecommerce and POS platforms, marketplaces, and financial applications. With more than 1,400 signed partner integrations, Avalara helps connect tax compliance processes directly to day-to-day operations, reducing manual effort and improving consistency across the business.

Agentic Tax and Compliance builds on this foundation by changing how compliance work gets done. At the center of this approach is Avi, the Avalara agent that helps automate compliance across the business ecosystem. Avi is designed to go beyond assisting by actively doing the work — observing activity, applying policy and rules, and executing compliance actions within the systems where work happens.

Regularly updated tax content and AI-powered tax research help retailers apply tax logic more consistently as rules change. This foundation supports greater accuracy, clearer visibility into evolving requirements, and fewer downstream corrections.

Learn how Avalara supports tax compliance for modern retail operations.

FAQ

What tax compliance challenges do retail businesses face across their operations?

Retail businesses manage tax compliance across sales, fulfillment, returns, procurement, and reporting operations. Varying rules by jurisdiction and transaction type make it difficult to apply consistent treatment as business models and regulations evolve.

Why is consistency across systems critical for tax compliance?

Inconsistent tax logic across ecommerce platforms, POS systems, marketplaces, and financial applications increases reconciliation efforts and reduces visibility into reporting accuracy. Consistency limits manual reviews and corrections.

How does agentic AI change the tax compliance model for retailers?

Agentic AI supports tax compliance as a continuous process rather than periodic tasks. By observing activity and executing actions within workflows, it helps retailers manage change more consistently and reduce rework.