Avalara Tax Changes 2023

Tax changes for retailers

Avalara Tax Changes 2023

Tax changes for retailers


Originally published January 2023
Updated April 2023

Resilience and creativity will be key to success for the retail industry as 2023 unfolds, due to persistent labor and supply challenges, inflation, and a possible recession. The outlook isn’t all bad: The United States added 4.5 million jobs in 2022 and the January 2023 jobs report exceeded expectations; China lifted its strict COVID-19 restrictions; 2022 ended with “impressive annual retail sales and a respectable holiday season”; and online retail sales in Europe are on the rise. Still, nothing can be taken for granted in 2023.

Almost all U.S. retail industry executives surveyed by Deloitte in October 2022 expect inflation to continue to squeeze profit margins and increase operating costs. And according to a Censuswide survey commissioned by Avalara, retail businesses in the U.K., U.S., and India foresee an economic downturn to be their biggest challenge in 2023.

Consumers are concerned too. In a McKinsey Europe Consumer Pulse Survey from October 2022, 58% of respondents cited inflation as their top worry, ahead of climate change, unemployment, and the war in Ukraine. Many retailers feel they can’t risk raising prices to offset input increases because consumers are experiencing similar economic pressures (and often don’t need what retailers sell). And customer retention is critical.

SOURCE: Deloitte

It typically costs businesses six to seven times more to acquire new customers than to retain existing customers. Furthermore, customer loyalty may be getting harder to achieve due to the growing demands of consumers: They want affordability, so they’ll shop for deals; they want convenience and immediate gratification; and they want to support retailers with strong diversity, equity, and inclusion (DEI) and environmental, social, and governance (ESG) standards (assuming the price is right and delivery isn’t delayed). 

The bar for brands is high.

Retailers are meeting customers where they are to build and retain their customer base, and increasingly, that’s on social media channels. According to the Avalara/Censuswide survey, retailers across the U.S., U.K., and India plan to prioritize social commerce sites like Facebook, Instagram, Twitter, and TikTok in 2023. These sites allow consumers to shop while they scroll, without having to leave their feed to visit a retailer’s website.

It’s a strategy that’s taking hold. Global social commerce sales reached $492 billion in 2021 and are expected to reach $1.2 trillion by 2025. More than half of respondents in a Global Payments survey say they plan to introduce social commerce as a new sales channel in 2023. 

Social commerce is also an ideal venue for augmented reality (AR), which allows consumers to gauge how well a dress would fit through a virtual try-on, or use 3D tools to see how a rug would look in their living room. These and similar immersive experiences can increase sales and decrease returns, translating to significant savings for retailers. And interest in AR is real: Half of U.S. adults have either already used AR or virtual reality (VR) while shopping, or are at least “somewhat interested” in doing so, while 50% of adult survey respondents across 29 countries feel positively about engaging with extended reality in daily life.

Of course for social commerce to succeed, retailers will need to build and maintain trust: An Accenture survey of 10,000+ consumers found many social buyers worry social commerce purchases won’t be authentic, good quality, protected, or easily exchanged or returned. Establishing and communicating which party is responsible for what task can help ensure 1) customers aren’t blindsided by unexpected policies, and 2) all business and tax obligations are met.

We’d be remiss if we didn’t mention the metaverse. While still largely unchartered territory, early adopters are capitalizing on consumer curiosity and connecting sales of non-fungible tokens (NFTs) with tangible personal property or experiences. The Avalara/Censuswide survey found that 31% of meta-aware companies are proactively prioritizing the new technology. In theory, at least, transacting business in the metaverse can boost sales in the real world, and vice versa, but there are still many unknowns. One of the biggest is how to tax transactions in the metaverse. 

As retailers rely on more channels to connect with new and returning customers, streamlining operations will become more critical than it already is. There needs to be a similar look and feel at the front of the house, whether it’s a real or virtual store, website, or social commerce feed. At the back end, businesses need to track inventory, manage retail shrink, protect against cyberattacks, and navigate a complex web of changing sales and use tax requirements. 

It’s a lot, and there’s even more to consider.


SOURCE: Accenture

What the numbers tell us

SOURCE: Retail Dive

SOURCE: Global Payments


The (un)avoidable impacts of inflation

With consumer prices jumping 6.5% from December 2021 to December 2022 , it’s not surprising U.S. retail sales dropped 1.1% in December 2022. Forced to spend more on essentials, consumers bought fewer extras.

Inflation seems to be moderating, and Moody’s Analytics believes the economy’s fundamentals are “sound.” Yet, the financial intelligence company expects the economy to have a “difficult 2023.”

Simply put, it’s hard for retailers to avoid the effects of inflation: Shipping and storage cost more; consumers are buying less. So, retailers need to find ways to get the most out of each dollar.


Technology and tools can help ease the pain of inflation

A solid inventory management system helps retailers ensure inventory is where it needs to be, something that’s become harder to accomplish with the troubled supply chain and the rise of BOPIS (click-and-collect). 

Streamlining sales tax collection, remittance, and reporting can save time and money, especially for businesses with a sales tax obligation in multiple states. A 2022 survey by Avalara and Potentiate found that retail businesses with less than 500 employees typically spend an average of 209 hours per month on tax management activities and approximately $24,000 per month on tax compliance activities.

SOURCE: Avalara and Potentiate


Retail shrink and cyberattacks

Another issue retailers can’t overlook is security. As anyone with a phone or email account well knows, phishing is out of control.

Retail shrink is also real. According to a 2022 Retail Security Survey, retailers are seeing more ecommerce, in-store, and omnichannel fraud. Many respondents also report an increase in organized retail crime and violence. To fight back, retailers are installing autonomous security robots, license plate recognition systems, and artificial intelligence–based video analytics at point-of-sale and self-checkout stations. It can be expensive: In December 2022, Walmart’s CEO said the company would have to raise prices or close stores to balance the cost of retail theft

Retailers may have a harder time combatting cargo theft, which often happens when cargo is at rest while in transit. About 47% of respondents in the Retail Security Survey said they’d experienced cargo theft when shipments were moving from distribution centers to stores.

So there’s that. And though having inventory stolen is bad, having customers’ personal and financial information stolen may be worse. Cybersecurity is a real and growing issue, and about 24% of cyberattacks in 2020 targeted retailers — more than any other industry. 

As if inflation and security crises aren’t enough, retailers also have to deal with product taxability changes.


Taxability changes happen

Tools and technology can help retailers manage taxability changes, which are abundant. In 2022, there were 122,974 updates to U.S. sales tax holiday rules, which were in addition to the 102,369 sales tax rate and taxability changes that occurred in the U.S. and Canada that year. 

2022 brought new sales tax holidays in several states, including Florida and New Jersey, and there will be at least 37 sales tax holidays in 2023.

Product taxability changes in 2023 include a new exemption for diapers and feminine hygiene products in Colorado (and perhaps also Arizona), a reduced rate for food and personal hygiene items in Virginia, and a decrease in the tax on food and food ingredients in Kansas. South Dakota may exempt groceries. And these are just the tip of the proverbial iceberg. 

According to a 2022 survey, small retailers spend about 42.2 hours per month on tax rates and calculations. Retail employees face numerous challenges finding and responding to product taxability changes manually. It’s far more practical to get tax answers from Avalara Tax Research. Automating sales tax collection and remittance can also help.

Of course, retailers that sell only through marketplaces are absolved of much of the burden of sales tax compliance (if not all).


The evolution of the marketplace

The number of third-party marketplaces operating globally has grown by more than 500% since 2007. Marketplaces today are increasingly tailored to specific products, services, or clienteles. There are marketplaces for groceries, parking spots, restaurant food, teaching materials, used bicycles, wine, and much, much more. If you can name it, there’s probably a marketplace for it. 

“Marketplaces continue to grow and disrupt the economy,” says George Trantas, senior director of Global Marketplaces at Avalara. “They’re changing the way we behave.” That goes for retailers just as much as consumers.

Retailers are breaking open the marketplace box

A growing number of large retailers, including REI, Target, and Urban Outfitters, now operate a marketplace in addition to their direct ecommerce sites. They’re onto something. Third-party marketplace sales are expected to account for 59% of all global ecommerce by 2027, and 38% of global retail sales growth. Retailers understandably want a piece of that action. 

But while operating a marketplace promises rewards, there are risks as well.

Risks vs. rewards

Three of the biggest challenges for retailers expanding into the marketplace facilitator space are:

  1. Mitigating the complexity of U.S. marketplace facilitator laws

  2. Navigating global requirements for marketplaces

  3. Providing a seamless customer experience

1. Mitigating the complexity of U.S. marketplace facilitator laws

Every state with a general sales tax has a marketplace facilitator law that shifts the obligation to collect and remit sales tax from the seller to the marketplace facilitating the sale. A retailer that becomes a marketplace therefore also becomes responsible for collecting, remitting, and reporting the tax due on third-party sales. 

It’s a big job.

Retailers taking on the responsibility of a marketplace need to determine where they have nexus, a connection that establishes a sales tax obligation. The two most common ways to create nexus are 1) physical presence in a state, including third-party inventory held in a marketplace facility and 2) sales activity in a state (economic nexus).

Marketplaces with many fulfillment centers often have both physical presence and economic nexus, as do the large retailers that increasingly are becoming marketplaces.

2. Navigating global requirements for marketplaces

Marketplaces entering the global market face even more complexity. The United Kingdom and European Union now require online marketplaces — as the deemed supplier — to collect, remit, and report value-added tax (VAT) on certain transactions. The U.K. further requires marketplaces to identify the value of each transaction, to report where each seller’s goods were at the time of sale, and to determine whether the seller is a U.K. or foreign business.

3. Providing a seamless customer experience

Whether buying directly from a retailer or from a third party, consumers want a seamless experience. This can be challenging for direct sellers to provide. For retailers operating a new marketplace, it can be even more complex.

Consumers today expect to be able to purchase, receive, and return items wherever is most convenient for them. They’re accustomed to the buy online, pickup in store (BOPIS) or click-and-collect options that many retailers now offer. However, retailers that operate a marketplace may not be able to provide that service for third-party sales.

The same is true on the returns side.

The new curated digital marketplace launched by Macy’s in September of 2022 gives customers access to more than 20 product categories and 400 new brands, and promises a “cohesive and integrated Macy’s digital experience.” However, Macy’s brick-and-mortar stores cannot accept returns or exchanges of items purchased from a third-party seller; Macy’s marketplace sales have to be returned directly to the actual seller within 30 days of purchase.

Managing expectations is key. Most consumers understand that their every wish can’t always be met. What rubs them wrong is false promises or unclear policies. 

That said, consumers typically expect their shopping experiences to be seamless.

“Most consumers understand that their every wish can't always be met. What rubs them wrong is false promises or unclear policies.”

Evolving role of the retail storefront

Many consumers take the time to visit brick-and-mortar stores precisely so they can see and touch products — one reason digital natives like Amazon and Warby Parker opened up physical stores. It’s in a retailer’s best interest to keep a wide variety of products in stock.

At the same time, most consumers understand that store shelves can’t fully replicate the endless online aisle, especially given the world’s well-publicized supply chain difficulties. So consumers are increasingly comfortable with placing an online order from a store. 

This can be done two ways: via a connected sales associate or from the consumer’s mobile device. Either way, the experience for consumers should be painless at worst, pleasurable at best. In-store sales systems (both at the register or on handheld mobile devices) should quickly identify and access shipping and billing information for loyal customers. Mobile sites should feel similar to the in-store and online experience, be easy to navigate, and integrate with sales systems.

Consistency across platforms is essential for sales tax compliance as well: According to a survey of more than 17,000 customers from 29 countries, 85% of shoppers expect interactions across departments to be consistent, if not seamless. For that to happen, in-store sales systems need to be able to apply the sales tax rate in effect at the point of sale, whether the sale is completed in the store or upon delivery. In most parts of the country, the sales tax rate for deliveries is based on the location where the consumer takes possession of the goods or services purchased.

Making sure critical systems have offline capabilities is also important, because spotty service and internet outages happen. Point-of-sale systems with an offline mode allow businesses to accept credit card transactions even while offline.

SOURCE: Salesforce

Other issues likely to affect the retail industry in 2023

Ongoing supply chain kinks

Before the COVID-19 pandemic threw a wrench in the global supply chain, average queues of ships waiting to unload at ports were in the single digits. It’s improving a bit — there were 59 container ships waiting for an open North American dock on November 23, 2022, and only about 25 container ships waiting offshore on January 6, 2023 — but the supply chain is still in deep water. 

Given that, and the fact that more than 6 out of 10 global organizations expect geopolitical instability to detrimentally impact supply chains over the next three years, governments and industry leaders are looking to build trade ties with geographically close and/or like-minded countries.

New emphasis in sustainability

Millennials and Gen Z have a combined spending power somewhere between $740 billion and $3 trillion, and they value sustainability. Retailers that keep this in mind when sourcing, packaging, and delivering products may win their respect (and dollars), and there can be tax benefits too. Colorado has a fee on taxable goods delivered by motor vehicle; Minnesota is considering a similar retail delivery fee, but with a higher rate. Numerous countries, including Italy, Spain, and the U.K., already ban or tax certain plastic packaging, or plan to.

New privacy laws

California consumers will have more control over the personal information businesses collect as of January 1, 2023, when the state’s expanded privacy rights law takes effect. Retailers will have to adjust their business practices accordingly.

New requirements for online marketplaces in the U.S.

Seeing that several states now require online marketplaces to monitor and vet certain high-volume sellers, Congress is raising the stakes. By late June 2023, online marketplaces will be required to comply with new federal notification and reporting requirements under the Integrity, Notification, and Fairness in Online Retail Marketplaces for Consumers Act (the INFORM Consumers Act). This requires marketplaces to collect and verify certain information from high-volume third-party sellers and disclose it to buyers, among other obligations. This is sure to have a big impact on both online marketplace and high-volume marketplace sellers.

Remote sales tax simplification?

There may be a movement afoot to simplify economic nexus thresholds. Many U.S. states require out-of-state businesses to collect and remit sales and use tax if they have $100,000 in sales or 200 transactions in the state in the current or prior calendar year. The transaction threshold has already been eliminated in California, Iowa, Maine, and several other states, and will be cut from South Dakota’s economic nexus law starting July 1, 2023. Other states may follow suit with the encouragement of the Streamlined Sales and Use Tax Governing Board, simplifying remote sales tax compliance for businesses.

A different simplification measure is on the table in Arizona. If Senate Bill 1325 is enacted, remote sellers would be able to collect and remit a single municipal rate for all sales into the state. They’d also have more time to register after crossing the state’s economic nexus threshold.

SOURCE: Avalara

Understanding retail trends and tax policy changes can help you navigate whatever challenges 2023 throws your way. Keep exploring what's happening in other industries.


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