Omnichannel Retail: Automating Your US Sales Tax
According to Statista online retail sales worldwide account for 19.6% of the eCommerce sales. This number is expected to reach 22% by 2023. As you can see from the above numbers, selling online through multiple channels comes with its benefits, such as boosting company growth, exposure to new markets and audiences, higher sales volume, and so forth. Nowadays, thanks to eCommerce platforms like Shopify, Magneto, and PosBytz, retailers can quickly set up a personalized online store that reflects their brand. Choosing the right partner is important for an online store as it can help optimize resources and increase profits in the long run. The best eCommerce platform helps retailers to centralize their inventory and simplify their back-end operations. They also offer more flexibility when compared to traditional eCommerce marketplaces like Amazon and eBay.
The perfect partner can also help you build an omnichannel retail strategy which is essential to stay competitive and increase your audience base in the long run.
Let us understand omnichannel retail and its effect on online sales tax.
What Is The Deal About Omnichannel Retail?
While globalization and the online boom have drastically changed the face of retail operations in the last few years, the COVID-19 pandemic has thrust forward commerce with the shift from physical shopping to online shopping experiences. With the flexibility and the ability to meet consumer demand faster, the face of doing business has now become omnichannel.
According to Invesp, companies with a strong omnichannel retail strategy have the ability to retain 89% of their customers. Customers of today, value convenience over affordability, this change in consumer behavior has led retailers to provide a seamless interconnected shopping experience. Whether it's electronics, cosmetics, or apparel, omnichannel retail creates an integrated, multi-touch shopping experience for your customers. The need to achieve constant interconnectedness also helps provide real-time and up-to-date information. This information helps in more efficient and streamlined transactions across channels. A critical slice of the transaction that is often left unnoticed, i.e., sales tax
Challenges Of Sales Tax In Omnichannel Retail
Indian businesses looking to expand their businesses in the US face unique tax challenges. This complex nature of sales tax laws and regulations can be overwhelming and can lead to businesses hiring intermediaries to help them comply easily and accurately. However, this can lead to added costs for the business in the long run.
The three primary factors that add burden to sales tax compliance are
- Multiple U.S. jurisdictions:
In the US, sales tax is applicable in 44 states, 2211 countries, 7,776 cities/towns/villages, and 2,039 special taxing districts. This gives rise to around 12,062 likely tax rate combinations.
- Constant updates to sales tax laws and obligations
With around 2,200 pending or enacted sales tax bills (as of July 2020), retailers are required to constantly keep pace with evolving legal and regulatory requirements affecting sales tax.
- Intricacies of multiple channels
Having multiple channels involved brings in unique opportunities. However, it also increases the challenges when it comes to sales tax compliance. Avalara’s automated solution helps increase the efficiency of your business by consolidating all your sales information from different channels into a single combined statement.
Understandably, the need to understand the different rates, their applications, and exemptions across channels and geographies is often overwhelming. With retailers looking to drive positive customer experiences both at physical and digital stores, the challenges just grew exponentially. The need for accurate, up-to-date, and consistent sales tax content is essential and requires continuous tax management.
The Sales Tax Nexus in Omnichannel Retail
We have already spoken about the vulnerabilities companies face with the differential sales tax laws in each state. Further, the integration of additional channels and increasing opportunities that omnichannel presents to businesses an additional challenge - economic nexus obligations.
If the sales made by a retailer to a customer in another state or country breaches a certain threshold, it is considered an “out-of-state business”. In most states, this now creates an obligation to register, collect, and remit sales tax in another jurisdiction. The situation is a double-edged sword. While retailers look to increase sales volumes, the downside is that more sales in a state mean more likelihood of developing a sales tax nexus.
What does this mean for omnichannel retailers? It implies that despite a company not having any physical presence in a state (be it office premises or employees), it can still establish a nexus in that state. To explain further, an economic nexus may be triggered if a state’s economic threshold for total revenue or number of transactions is breached. In such a case, the retailer will need to collect and remit sales tax on behalf of the state.
Further, the economic nexus threshold is unique to each state. For instance, if an Indian online travel booking agency makes a sale value of USD 100,000 in Washington, D.C., and Alabama, the implications differ. While an economic nexus is established in Washington, D.C., it would be triggered in Alabama only if the sales value would be USD 250,000 or more. You can read more about the economic nexus thresholds in this state-by-state guide.
Many businesses may even unknowingly expose themselves to the nexus laws without understanding the ramifications. This is bound to raise more compilations as most retailers are moving towards a hybrid business model in order to create better customer reach.
Considering the worldwide rise in online transactions, companies are often overburdened with multiple collections, reporting, and filings. Hence, it is important to understand certain considerations with respect to online sales tax.
The Retail Industry: Sales Tax Considerations In An Omnichannel Environment
The U.S. government and auditors are likely to use a much finer tooth comb to investigate taxes. Even companies recouping from Covid-19 related revenue losses are not being spared. Today, the retail industry losses account for nearly 30 to 35% of their revenue as commission to online intermediaries.
The three aspects that omnichannel retailers need to understand are as follows:
- Appropriate And Consistent Tax Collection From All Channels
With the more channels that your business deals with, the chances of errors in sales tax collections also increase. Thus, it is critical to ensure that the right amount of tax is collected at the right time from all your sales channels.
- Accurate Reporting Of Tax Collection On All Portals And Systems
Earlier, retailers’ sales were limited to either one location or one channel, making it easier to assess sales tax collections from buyers, generate reports and undertake the relevant filings. However, with businesses opting for multiple channels, the number of reports generated, combined and analyzed also multiply.
- Clear Bifurcation Of Tax Collections For Error-Free Tax Filings
Most states often require a location-by-location break-up of sales tax collections to assess sales tax filings accurately. This also includes special taxing districts. While this may seem doable if the business uses a single channel, it becomes difficult to manage in an omnichannel scenario. Hence, the process becomes highly time-consuming and cumbersome.
Hence, the only respite for retailers to keep pace with compliance is technology-backed online sales tax processes.
Benefits Of Automating Sales Tax Processes
Omnichannel retail may be the new kid on the block, but it is here to stay. Hence, retailers need to be aware of the multiple tax obligations and cumbersome procedures that come with it. In fact, sales tax management has become just as vital as the other business operations in a company. With retail brands having multiple stores, systems and channels, in addition to developing a seamless customer experience, they need to ensure efficient sharing of tax information, accurate tax calculations, keep track of product returns, and so forth.
As the omnichannel environment relies heavily on technology, integrating and automating your entire sales tax processes makes good business sense.
Let’s look at some benefits you can derive from moving to sales tax automation:
- Better Compliance and Tax Management
If you are an Indian headquartered company with US-based sister companies or branches, then trying to understand the relevant tax obligations would definitely be overwhelming. Managing and keeping track of the compliance requirements can be tedious, and one will constantly need to look out for audit-inducing errors. With so many different sets of regulations, inconsistencies and inaccuracies in sales tax reporting are the most common reason for Small And Midsize Business (SMB) to get audited.
Interestingly, as per an IDC study, more than 50% of companies still use spreadsheets and maintain paper records while undertaking their tax compliance procedures. This gives rise to time-consuming and research-heavy processes that may drain your resources and reduce efficiency.
Even if tax compliance is done with the help of technology, each location may be using a different software or tracking system. By integrating your existing software into a sales tax platform, you can maintain a single source for all your sales tax needs. Further, the tax automation software is accessible at any time regardless of the customer’s location, allowing you to pull real-time data for conducting tax evaluations.
- Audit Ready
In 2021, the IRS indicated that it is planning to conduct 50% more audits on SMBs. Ideally, you should have robust strategies to eliminate tax errors and avoid tax audits. However, if you do not have the records in place, being audited is time-consuming, expensive, and arduous.
By automating your sales tax process, you can generate accurate and up-to-date reports and document the precise collection, remittance, and sales taxes. The error-free processes even prevent you from making mistakes in reporting gross revenue receipts and tax-deductible expenses. However, in the event of an audit, responses can be made in a matter of a few clicks.
The audit trail feature helps in the speedy sharing of sales transaction details with internal and external auditors, as well as helps present the information in a comprehensible, reconcilable, and consistent format. Further, by automating the manual process, the resources being used for the tedious audit process can be reassigned to projects with more strategic needs. Moreover, sales tax automation helps reduce the number of potential audits and the errors that occur in them, thereby providing you with considerable cost savings.
- Deployment options
Sales tax automation provides two deployment options, a real-time tax determination and a batch process. Let’s understand how the two are beneficial:
Real-Time Tax Determination
In this scenario, tax is calculated as an order is taken and invoices are received. For instance, if a customer places an order online for cooking appliances, a tax calculation is determined precisely when the order is placed. Not only is the tax payable by the merchant determined, but it is also immediately transferred to the federal government account, net of the transaction fee. This makes the process simpler, with the retailer not having to retain the owed taxes and file the return with the government.
This involves collecting orders made during the day, week, or month (based on your convenience) and creating a batch to run against a tax determination engine. Here, the core ERP system remains the same as the real-time integration approach. The tax automation software captures the nexus profiles of each transaction to ensure that the tax rates are applied accurately.
- Stay abreast of constantly changing rates and rules
The business tax codes in the U.S. are constantly being modified and revised. Thus, being updated with the sale tax regulations is difficult single-handedly. Here the burden clearly lies on retailers to understand and comply with the tax collection and reporting requirements.
With more than 13,000 tax jurisdictions, automation helps U.S. retailers keep track of unique and constantly altering tax codes. The tax automation software's live and up-to-date insights with respect to any data changes bring with it more adaptability and governance of business transitions. Importantly, factors like expansion, amalgamation, take-overs, or extension of products or services can be managed more swiftly and effortlessly through embedded process controls in the tax automation system.
- Error-Free Processes
Errors in any business line can be costly. Manual calculations and sales tax payments create a breeding ground for errors and omissions. However, errors in tax compliance on account of miscalculation or misinterpretation can be disastrous. Further, automation of your tax compliance processes helps improve accuracy and saves time and money. Considering the multiple touchpoints involved in the sales tax determination process, you will need better control and derive better insights into the transaction data. It is also essential to comprehend the tax liabilities involved.
As your business develops, so do the intricacies of your business model. For instance, if you foray into new territories as a retailer, the back-end team will need to be updated with relevant information such as regulatory standards and tax policies. With sales tax automation, your organization can seamlessly adapt to changes and create a sustainable and scalable business.
Through the use of automated tools, you can automate your tax processes, plan financial events, reduce capital expenditures, be aware of changing regulations, and respond quickly to your customers and market. By capitalizing on the existing IT infrastructure, investments like billing, financial, and e-commerce payment platforms are all taken care of. Thus, it is necessary to integrate your existing system seamlessly with the tax automation software to achieve the best results.
How Can Avalara Help?
Retailers often wish to concentrate on business processes rather than spending unproductive hours understanding the sales tax laws and regulations.
With Avalara AvaTax, a sales tax automation tool, you can spend more time in your company's strategic activities rather than trying to figure out the procedure involved in more than 13,000 U.S. sales tax jurisdictions.
Learn how to gain more from your e-commerce setup with Avalara tax automation software. Contact us today!