The 12 Days of Sales Tax Compliance
Holiday Preparations for Ecommerce Merchants
Not five golden rings, but five billion dollars—that’s what’s at stake for retailers during the holidays. More of those dollars are increasingly earned online. Shoppers made at least 50% of their holiday purchases online in 2013.1,2
Ecommerce is one of the fastest growing sectors of the retail economy. It offers consumers everything from hand-made birdhouses to mountain-climbing adventures to last-minute deals on luxury cruises. According to Internet Retailer, global ecommerce is expected to top $1.5 trillion in 2013.
Dollars are there for the taking, but with greater opportunity comes greater risk of sales tax audits—and associated fines, penalties and fees. Even if holiday shopping blitzes blow out your revenue expectations, what good is it if you find yourself on the wrong side of an expensive, time consuming audit?
Here are 12 days of holiday shopping tips to keep you and your customers in seasonal good spirits.
1st Day: Online shopping carts are more than just a pretty face.
Attractive product display and overall usability are necessary for shopping cart success, but the cart must also exhibit speed, accuracy, sales tax calculations and usability. Without these, the prevalent problem of abandoned shopping carts undercuts revenue gains. When shoppers are fickle and commerce speed picks up, core functions matter.
Sales tax tip: Decrease shopping cart abandonment by increasing core functionality such as order accuracy, speed, and usability. Read: Beyond the Shopping Cart
2nd Day: Changing product catalogs increases risk of sales tax errors.
Product catalog database failures can undercut profitability, especially during flux times like the holidays, when new products are added, featured, discounted or discontinued.
Keeping track of product taxability can be challenging. The sheer volume of items can strain existing tax determination processes—not to mention your staff—and drive up costs.
Sales tax tip: Ensure the product catalog is automated within the cart wherever possible. Read: The SKU’d world of retail product taxability
3rd Day: Inventory accuracy, inventory accuracy, inventory accuracy.
Catalog maintenance and integration into your inventory control system can have a dramatic impact on customer satisfaction. Sales can easily be lost when a customer orders a product online that is listed as available but is really back-ordered for two months.
Sales tax tip: Be sure your inventory tool is integrated with your ordering system and that both can scale as your business grows.Read: Sales Tax and the Internet Merchant
4th Day: Shipping can increase your sales tax responsibilities.
In some states, use of an in-state third-party shipper by an out-of-state retailer is considered a nexus-creating relationship. In CA, NY, TX, and FL for example, if a drop shipper delivers goods on a remote seller’s behalf, that seller could be obligated to collect sales tax on the taxable sale.
As if all of the above weren’t confusing enough, the valuation of the taxable amount (the tax basis) also varies between states. For example, in some states, the full retail price of $50,000 for large equipment would be taxable. In others, only the $45,000 wholesale price is taxable.
Sales Tax Tip: Understand the rules on shipping (your own and third-party) in each state in which you do business.Read: Sales Tax Implications of Drop Shipping
5th Day: Fulfillment and delivery can trigger nexus.
Ecommerce merchants with warehouses or distribution centers have an obvious obligation (nexus) to collect sales tax on transactions in that state. But when it comes to out-of-state or Internet transactions, especially with digital goods, determining nexus is trickier.
Sales Tax Tip: Track which states consider use of third party shippers as a nexus-creating activity. Read: Sales and Use Tax Challenges Facing Manufacturers and Distributors
6th Day: Customer loyalty hinges on order accuracy—including accurate sales tax.
Today’s savvy online customer expects shipment tracking, viewable order history, free shipping, and even referral bonus programs. Companies use a variety of methods to communicate with customers via these mechanisms, sometimes at the expense of the basics. Without order accuracy, customer loyalty is impossible to build.
Ever come across a customer who is disgruntled because they’ve been over-charged? Sales tax rate mistakes are a common cause of errors at checkout. If enough customers get angry, retailers risk everything from damaged reputations to class action lawsuits.
Sales tax tip: Ensure sales tax accuracy in your shopping cart to build customer loyalty.Read: Customer Loyalty, Brand Building, and Growth
7th Day: Inventory management is more than just matching product catalog to demand.
Ecommerce merchants rely on their shopping carts to manage critical business tasks—particularly the data embedded in product catalogs and inventory databases. To ensure inventory ordered is available and deliverable by holiday-related deadlines, use an inventory system that backs up the online catalog. Part of that inventory management process should be identifying fulfillment center-related nexus. If you manage inventory with fulfillment by Amazon (FBA) or a similar arrangement, you could have more sales tax responsibilities than you think.
Sales tax tip: Integrate inventory management within your shopping cart and/ point-of-sale systems so spikes (or decreases) in demand can be flexed when necessary. Read: FBA Seller’s Guide to Sales Tax
8th Day: Know the sales tax holidays.
Sales tax holidays are popular with consumers and are often used by states to increase consumer spending. Although themes like back-to-school or hunting season are common, states rarely follow a uniform pattern of holidays. Nonetheless, e-tailers are responsible for tracking state tax-free periods and adjusting their product taxability accordingly.
Sales tax tip: Knowing the dates and details about sales tax holidays can be an onerous tax. Utilize Department of Revenue notifications, or follow the constantly updated TaxRates blog.View: Sales Tax Holiday Map
9th Day: Exempt sales.
Certain businesses and individuals may be exempt from paying sales tax in your taxing jurisdiction. It is incumbent on you, the seller, to collect and keep on file a valid exemption certificate for each business, organization, or individual with an exemption. It is also up to you to ensure that exemption certificates are valid for each sales transaction. This requires keeping a copy of each exemption certificate and ensuring that they are renewed when they expire. For easier accounting, a database or spreadsheet of exemption certificates should be readily accessible.
Sales Tax Tip: Find a certificate management system that ties directly into your shopping cart and can verify that your certificates are current, valid, and accounted for. Read: Exemption Certificate Survival Guide
10th Day: Increase revenue, not risk.
By virtue of its success, many auditors view ecommerce as fertile ground for capturing additional revenue—much needed during a time of state budget gaps. Increased sales volume during the holidays brings risk; as transaction volumes increase, risk of error increases right along with it. Minimize this risk with a transactional tax solution that integrates with your shopping cart and scales to handle increases and decreases in sales volume. Cloud products are the most affordable and flexible.
Sales tax tip: Understand the risks engendered by holiday shopping and higher sales volume and equip your business to handle them.Read: Sales Tax for Online Sellers
11th Day: Don’t assume online sales are sales tax-free.
As more and more states collect online sales tax, more and more ecommerce businesses will be required to remit it. Shopping carts should support rather than detract from core business functions such as marketing and IT, accounting and order processing.
Sales tax tip: Online sales tax: coming to a state near you. Read: Trending Now: Ecommerce
12th Day: Address compliance challenges by automating.
Every time your company introduces a new product or service, sells into a new state, or moves operations into a state via remote salespeople, distribution centers, or contracts with drop shippers, you increase your obligation to collect sales tax. States that require out-of-state or remote sellers to collect sales tax include California, New York, Texas, and Vermont.
Let’s be real, here: sales tax collection and remittance is not a profit center. It doesn’t make money for your business. Therefore, your bottom line is to minimize audit risk while maximizing efficiency. This will 1) save significant time and resources in the event of an audit, and 2) allow you to redeploy resources to business areas that actually increase revenue.
Don’t fall prey to the misconception that sales tax is easy. Nowhere is this more apparent than during high sales volume seasons like the holidays. Sales tax will never be the mistletoe in the doorway, but it doesn’t have to Scrooge your revenue either.
Developing an effective sales tax management strategy can really pay off for ecommerce companies. Getting ahead in a fast-moving Internet world often comes down to better choices about compliance. Sales tax is no exception. When you separate fact from fiction, it’s easier to streamline processes, protect your business and improve your bottom line.
More and more businesses are turning to sales tax automation to help them accomplish these goals. Our cloud-based sales tax software, Avalara AvaTax, reduces audit risk with sales tax services that calculate rates, manage exemption certificates, file forms and remit payments.
Sales tax tip: Automate with Avalara AvaTaxCall us today (877) 780-4848.