Avalara Tax Changes 2023

Tax changes for retailers

Avalara Tax Changes 2023

Tax changes for retailers

Retail

Inflation, retail shrink, and cyberattacks are just a few of the challenges facing retail businesses as we move into 2023. On top of these very real issues that make day-to-day operations difficult at best, retailers must navigate a complex web of changing sales and use tax requirements.

The (un)avoidable impacts of inflation

Since consumer prices jumped 0.4% between August and September 2022, and inflation rose 8.2% year over year, retail spending in September 2022 was understandably flat. Forced to spend more on essentials, consumers bought fewer electronics, furniture, and other extras.

Maybe folks were just saving up for the holidays. In a survey of 2,000 consumers conducted in late September 2022 by the National Retail Federation, 43% of respondents said they don’t earn enough to cover the costs of gifts and other holiday items, but 62% said it’s important to spend on holiday gifts and celebrations.

Whatever the case, retailers are feeling 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.

SOURCE: CNBC

SOURCE: WSJ

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.

Retailers may have a harder time combatting cargo theft, which often happens when cargo is at rest while in transit. About 47% of respondents 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.

SOURCE: NRF and LPRC

Taxability changes happen

Tools and technology can help retailers manage taxability changes, which are abundant. In 2021, there were more than 131,000 updates to U.S. sales tax holiday rules, which were in addition to the more than 123,000 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.

Product taxability changes in 2023 include a new exemption for diapers and feminine hygiene products in Colorado, a reduced rate for food and personal hygiene items in Virginia, and a decrease in the tax on food and food ingredients in Kansas. And these are just the tip of the proverbial iceberg. You can find more on taxability changes in the sales tax section.

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).

SOURCE: NJ.GOV

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

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

  1. Mitigating the complexity of marketplace facilitator laws 

  2. Providing a seamless customer experience

1. Mitigating the complexity of 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.

Learn more about economic nexus and marketplace facilitator laws.

2. 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.

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 communications industry in 2023

Ongoing supply chain kinks

Before the COVID-19 pandemic threw a wrench in the supply chain, average queues of ships waiting to unload at ports were in the single digits. As of November 23, 2022, there were 59 container ships waiting for an open North American dock. While an improvement over the peak of the roughly 150 ships that were waiting to dock in January 2022 and again in July 2022, it shows the supply chain is still in deep water.

SOURCE: FreightWaves

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. 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.

SOURCE: YPulse

Stay tuned. We’ll share more insights in our upcoming comprehensive retail industry report coming your way in 2023.


Avalara Tax Changes 2023

A tax compliance guide for businesses

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