Sales tax planning for holiday 2021

5 steps to stay compliant

Introduction


For retailers, gearing up for what Amazon dubs the Turkey Five — the peak buying period from Thanksgiving through Cyber Monday — means serving up a plate of enticing offers with all the trimmings to swarms of deal-hungry shoppers.

The perfect recipe book for cooking up profits is forever evolving. To appeal to a variety of palates, more businesses are catering to shoppers where they gather and connect, discover and browse, but mostly where they buy. And, where we buy is expanding every day. According to McKinsey & Company, more than half of customers engage with three to five channels before making a purchase.

DISCLAIMER

While we hope you find this information valuable, it is not a substitute for tax advice from a certified tax professional. If you’re unsure of your tax liabilities, please contact a tax expert.

The 2021 holiday season is poised for growth with current trends pointing to increased sales both online and in physical stores. In 2020, U.S. consumers spent $729.3 billion in holiday retail sales, and ecommerce played a major role. According to an analysis by Adobe Digital Insights, ecommerce sales reached $188.2 billion, up 32% year over year.

Consumer fears around health and safety played a major role in determining how and where we shopped last year. With the vaccine rollout widely available in 2021, consumer confidence for in-person shopping is returning. A June 2021 Deloitte study shows that 72% of consumers feel safe going to the store

as of midyear. Shoppers will likely buy their holiday gifts at physical stores again this year. Brick-and-mortar locations will continue to play a critical role in getting products into consumers’ hands, with retailers still offering options like click and collect. And, the pandemic saw omnichannel retailers using stores as fulfillment centers, a trend that seems likely to continue as they explore creative strategies to meet increased demand.

At the same time, holiday ecommerce trends show that many of our online shopping habits are here to stay. In 2020, Cyber Monday alone delivered $10.78 billion in sales for more than a 15% increase over the previous year.

Why you should add sales tax compliance to your holiday readiness strategy


Today’s shopping behaviors are driving retailers to deliver a consistent, fast, and accurate omnichannel experience across all sales channels. Gone are the days when sales tax was a simple back-end process for your accounting team. A retailer’s ability to maintain sales tax compliance has become more complicated as shopping across multiple channels expands, consumer expectations evolve, and new sales tax regulations are passed.

An omnichannel sales tax compliance strategy can support your business’s revenue goals. An effective strategy accomplishes these four objectives:

1.

ENHANCE THE BUYER EXPERIENCE

Thanks to ecommerce shopping, we’ve grown accustomed to viewing tax and shipping in the shopping cart. These costs are key considerations during the purchase decision. According to the Baymard Institute, 49% of shoppers abandon their cart because they consider taxes, shipping, and fees to be too high. To avoid shopping cart abandonment, retailers need to provide speedy, accurate, and consistent sales tax calculations across all channels. You can achieve this with automation.

2.

ACHIEVE GREATER COMPLIANCE AND REDUCE RISK

The surge in ecommerce offers opportunities to enter new channels, sell to new locations, and expand your product catalog. Holiday shoppers spent $201.32 billion online in November and December 2020, up more than 45% from the prior season. Holiday sales could easily exceed this threshold in 2021. The ability to deliver a seamless experience requires consistent tax determination across multiple systems.

3.

DRIVE EFFICIENCY AND COST REDUCTION

As retailers grow and sell into additional states through more channels, more resources are required to keep up with multiple sales tax jurisdictions, differing tax regulations, and filing requirements. A well-executed compliance strategy can help you do more with less. Moreover, it can be the deciding factor between successfully defending an audit or facing penalties.

4.

ACCOMMODATE GROWTH AND CHANGE

During the holidays, retailers expand product lines, head count, and pop-up locations to meet increased consumer demand. In doing so, their sales and use tax obligations can quickly change because of rapid growth across multiple sales channels. States and local governments are swiftly passing diverse and complex sales tax laws to secure their share of the revenue. These rules tap sales and fulfillment approaches used by retailers. Staying current on regulations requires continual research on the latest legislation, including economic nexus thresholds.

It’s never too soon to start thinking about compliance. Retailers seem likely to push for an early start to the shopping season to avoid the shipping delays that occurred last year. Check out our holiday sales tax compliance tips. If your company is evolving in any of the ways described below, an early holiday gift to your business should be to start automating your omnichannel sales tax compliance or expand your compliance solution suite.

The acceleration of multichannel selling


More businesses are realizing they need to align their channel strategy with how customers want to research and buy products today. It’s paying off: Businesses that sell through multiple channels generate 190% more revenue than those that sell through a single channel.

Many private label manufacturers are also pivoting to multichannel selling. The Harvard Business Review found that some brands like PepsiCo are starting to sell directly to consumers while others like L.L. Bean are expanding into indirect channels through partnerships with retailers and marketplaces. Influencer channels such as social, affiliates, and partners are more prevalent as well; Forrester reports 70% of global revenue now comes from third-party channels.

Keep in mind that with the addition of new sales channels come new sales tax obligations. As you rethink sales channels and revamp operations to reach more customers, it’s critical to factor tax compliance into your strategy and planning.

Retailers who sell on two marketplaces see nearly

3x more revenue

than those who only sell on a single marketplace.

70% of global revenue comes from third-party channels.

Navigating nexus


When you add or expand sales channels, your customer base becomes larger and more geographically dispersed. This can impact how you manage tax compliance depending on where customers are located.

For U.S. sellers, that can mean changes to nexus — the connection to a state or local jurisdiction that obligates a business to collect and remit sales tax. Historically, nexus required having a physical presence in the state, such as a store or warehouse. Over time, states extended sales tax nexus to common business practices such as employing remote staff, attending trade shows, and using drop shippers or third-party fulfillment services.

In June 2018, a landmark decision by the United States Supreme Court in South Dakota v. Wayfair, Inc. gave states the right to enforce economic nexus, requiring remote sellers to collect and remit sales tax if sales into the state exceed certain sales volume or revenue thresholds. All states with a sales tax have passed economic nexus laws. (Missouri will begin to enforce its law as of January 1, 2023.) Nexus thresholds vary by state. Many states use $100,000 in sales or 200 transactions as the standard. However, some states have higher or lower thresholds. Several states including Alabama, California, and Massachusetts base economic nexus on sales revenue only. Some states include exempt sales and services in their thresholds.

Under these new rules, it’s easy for even a small retailer, or manufacturer new to selling direct, to exceed nexus thresholds in one or more states. The chart below illustrates how easy it is for a new sales tax obligation to be triggered by multichannel selling.

Examples of business activities that can trigger sales tax nexus

  • Sales revenue and transaction volume
  • Physical presence
  • Remote employees
  • Online advertising
  • Affiliate relationships

“Under these new rules, it’s easy for even a small retailer, or manufacturer new to selling direct, to exceed nexus thresholds in one or more states.” 


How multichannel selling can add up to economic nexus

Economic nexus is based on your total sales into a state. When you sell to buyers through multiple channels, you’re more likely to meet or exceed the thresholds in that state. Digital channels like ecommerce, online marketplaces, and social media are probable triggers because your customers could be located anywhere. So, it’s possible that even if you didn’t have to register to collect and remit sales tax in a state previously, growth in remote sales could mean that you do now. And this is true for every state where your sales give you economic nexus. 

The example below shows how aggregating your sales data from various channels could add up to economic nexus if total sales into the state now exceed revenue or transaction volume thresholds. You’ll need to determine if you’ve triggered economic nexus for every state where you’re now selling to customers through multiple channels.

SALES CHANNEL REVENUE TRANSACTIONS
Web sales
$40K 70
Store sales $20K 50
Marketplace* $50K 90
Social selling $5K 20
TOTAL $115K 230

*Only some states include sales made through a registered marketplace in their economic nexus thresholds.

Studies have shown that once your business has multistate nexus, managing sales tax gets significantly more complicated and difficult. Tax rates and rules can vary by state and even by jurisdiction. There are more than 13,000 sales and use tax jurisdictions in the U.S. This is further complicated by the ever-changing nature of nexus and sales tax laws and legislation. In 2020, there were 3,786 multi-tax rate updates and 41 international tax rate updates. Cross-border sales come with their own complex tax and trade compliance rules.

Understanding tax compliance as it relates to multichannel selling


Deciding to sell through new or additional sales channels can change tax compliance for your business. New obligations can result from one channel’s activities or, more likely, some combination of channel activities.

Consider the following examples:

MARKETPLACE SELLING

John owns a retail shop in Sunnyvale, California, that sells locally made, organic cleaning products. He also sells products on his website. Sales are modest, so John decides to try online marketplaces Etsy and Amazon to reach new customers.

Marketplaces may handle sales tax for you on sales through their platform. But you still need to consider how these additional sales impact total sales across all channels. It’s possible that the combination of online and marketplace sales could establish nexus for John’s business in more states and require him to register, remit, and file sales tax returns in those states even if his previous online sales didn’t meet those thresholds.

TAXABLE AND TAX-EXEMPT SALES

Mei manages finances for a manufacturing company in Dayton, Ohio. They recently started taking orders online and allowing customers to buy direct on their website.

Moving from a primarily tax-exempt sales model to one that includes taxable sales can be challenging. But it shouldn’t be a blocker to growth or multichannel selling. Just be clear on the rules and certain that your people and processes are up to the task. Mei’s company is now selling directly to consumers, which will likely mean a mix of both taxable and tax-exempt sales. Mei’s job will be to ensure her company’s ecommerce and billing systems can correctly apply sales tax or tax exemptions to each transaction. She’ll also need to pay attention to which states include tax-exempt sales in nexus thresholds. 

ECOMMERCE AND WEBSITE SALES

Lisa and Charles make and sell pottery in their studio in Charleston, South Carolina. With a recent drop in foot traffic, they decided to shift all their sales online and sell exclusively through their website. They currently ship to all 50 states.

Now that nearly every state with a sales tax requires remote sellers to charge sales tax on ecommerce sales, you need to consider how online sales impact nexus for your business. Sales tax rates and rules vary by state, so you also need to be sure you’re charging the correct sales tax to each customer depending on location. Lisa and Charles may need to register to collect and remit sales tax in more states if their online sales into those states exceed revenue or sales volume thresholds.

FULFILLMENT AND DROP SHIPPING

Frank oversees fulfillment for a large retailer based in Dallas, Texas. To keep up with online order demand, the company now keeps inventory in warehouses in Washington and Virginia as well as in Texas. In some cases, items ordered online are shipped directly to customers from the manufacturer.

It’s important to remember that physical nexus rules still apply. If you’re storing inventory, shipping directly from the manufacturer, or using third parties to drop ship to customers, be sure to check state rules and track those activities carefully to account for any new sales tax obligations that could result. It’s possible Frank’s company now has or could soon have nexus in Washington and Virginia and maybe even in other states depending on where his suppliers are located.  

AFFILIATES AND SOCIAL SELLING

Emma oversees marketing for a closet-remodeling company in Denver, Colorado. The consultation promo in their online ads on partner websites and social media channels is seeing high engagement, including several sales.

Digital sales channels are a great way to build brand awareness and attract new customers. But they can also add to a company’s sales tax obligations. Several states have affiliate nexus laws and click-through nexus laws, which could apply in Emma’s case. Selling through social sites is a form of ecommerce and could subject the company to economic nexus thresholds in some states.

PHYSICAL EXPANSION

Ramesh is the sales director for a specialty foods ecommerce company. Previously, all sales were online. But the company decided to open a few brick-and-mortar stores in key target markets in Seattle, Chicago, and New York.

Traditional sales channels are still part of the channel mix for many companies. And physical presence rules still hold true when it comes to establishing nexus. Anytime you expand the footprint of your business (virtual or physical), you need to consider how that impacts your sales tax obligations. It’s likely that even if Ramesh’s company’s online sales in Seattle, Chicago, and New York don’t trigger nexus, a physical location in those states will require charging sales tax according to state regulations.

REMOTE STAFF

Rebecca is the CEO of a software company based in Durham, North Carolina. She plans to grow her sales team considerably over the next six months. Most of her new hires will be remote, spread across the U.S. in various key markets where the company hopes to increase its customer base.

Hiring remote sales staff, contractors, installers, and other personnel that generate sales revenue for a company is considered a nexus-creating business activity by many states. Rebecca will need to consider how her expanded sales team will change where her software company is required to register to collect and remit sales tax based on the rules in each state where employees live and work. 

INTERNATIONAL SELLING

Thomas is the ecommerce director for a popular U.S. apparel brand. National online sales revenues are steady and the company is ready to expand and start selling and shipping its products to international customers.

The growth of ecommerce has made international selling an attractive and viable option for many companies. However, cross-border transactions come with their own set of trade and tax rules and regulations. Be sure you understand how value-added tax (VAT), goods and services tax (GST), customs duty, and import taxes apply. Managed Tariff Code Classification is also key. Thomas should also ensure shipping and duty costs and policies are clearly communicated to customers.

Aggregate sales data and streamline tax management


Once you have a clear understanding of how multichannel sales can change your sales tax obligations, you’ll want to set up your business to address them properly. How will you handle growth going forward without adding risk? You first need to have clear visibility into your sales operations. Aggregating sales data ensures you have a complete and accurate record of all your transactions. A “single source of truth” simplifies and streamlines compliance so you’re aware of where you have nexus and can determine what tax rates and rules apply to each transaction. This is where a tax automation solution like Avalara can make a difficult job easier by lessening the work and burden of getting sales tax right.

Avalara tax automation solutions are designed to integrate seamlessly with your existing business software and systems to give you a 360-degree view of your sales transactions and make it easier to stay on top of your tax obligations, even as your business changes. Avalara affords you the ability to automate the entire tax compliance process — from registration to rate calculation to returns filing — with one solution suite. This helps optimize the efficiency and profitability of your multichannel sales strategy.

A “single source of truth” simplifies and streamlines compliance so you’re aware of where you have nexus and can determine what tax rates and rules apply to each transaction.

Take the proper steps to be sales tax compliant


Channel sales are tightly tied to tax compliance, when one changes, it directly affects the other. So, the more adept you are in managing sales tax, the less likely you are to make costly missteps that could result in unfavorable audits or upset customers and supply chain partners. The list below shows the five basic steps involved in sales tax compliance, what you need to do for each step, and how a tax automation solution like Avalara can build efficiencies into each step to save you time and resources and reduce uncertainty.

STEP 1: KNOW WHERE YOUR BUSINESS MUST COLLECT AND REMIT SALES TAX

WHAT YOU NEED TO DO:
HOW AVALARA TAX AUTOMATION SOLUTIONS CAN HELP:
  • Stay informed of changes in legislation that may impact your business

  • Know how each state’s nexus laws apply to your sales channels

  • If you sell through marketplaces, affiliates, or social channels, or use third parties to fulfill orders, be clear on who’s responsible for collecting and remitting sales tax
HOW AVALARA TAX AUTOMATION SOLUTIONS CAN HELP:
  • Determines where you have nexus

  • Checks that you haven’t missed or overlooked obligations

  • Makes it easier to update your obligations as they change

STEP 2: REGISTER TO COLLECT AND REMIT SALES TAX

WHAT YOU NEED TO DO:
HOW AVALARA TAX AUTOMATION SOLUTIONS CAN HELP:
  • Register with state and local tax authorities to collect and remit tax in every state where your sales activities meet or exceed nexus thresholds.
HOW AVALARA TAX AUTOMATION SOLUTIONS CAN HELP:
  • Simplifies and expedites the process of getting you set up to collect and remit tax where you’re required to do so

STEP 3: CALCULATE THE CORRECT SALES TAX AMOUNT

WHAT YOU NEED TO DO:
HOW AVALARA TAX AUTOMATION SOLUTIONS CAN HELP:
  • Instantly calculate the correct sales tax in your shopping carts and point-of-sale systems

  • Ensure your ERP, ecommerce, POS, CRM, and accounting systems are set up properly to make these calculations
HOW AVALARA TAX AUTOMATION SOLUTIONS CAN HELP:
  • Calculates sales tax for every transaction in real time 

  • Verifies and assigns tax codes based on the products you sell and applies the appropriate tax rate for each jurisdiction

STEP 4: TRACK AND MANAGE EXEMPT SALES

WHAT YOU NEED TO DO:
HOW AVALARA TAX AUTOMATION SOLUTIONS CAN HELP:
  • Collect, track, and validate exemption certificates from your buyers 

  • See to it that your process doesn’t leave you open to risk by inaccurately charging sales tax when a sale should be exempt
HOW AVALARA TAX AUTOMATION SOLUTIONS CAN HELP:
  • Collects and manages certificates, and stores documents electronically so you can access them easily from your ecommerce and accounting systems

STEP 5: REMIT SALES TAX TO THE TAX AUTHORITY

WHAT YOU NEED TO DO:
HOW AVALARA TAX AUTOMATION SOLUTIONS CAN HELP:
  • Aggregate data from across your business systems to properly prepare sales tax returns 

  • Understand the filing requirements for each jurisdiction where you collect sales tax

  • Complete the correct sales tax returns and file on time according to schedules
HOW AVALARA TAX AUTOMATION SOLUTIONS CAN HELP:
  • Automates the sales tax return preparation process (paper and electronic)

  • Aggregates sales transaction data from your accounting, ecommerce, POS, CRM, and marketplace applications

  • Simplifies and streamlines preparing and filing returns

  • Creates a single repository for all your transaction data

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