The e-commerce business channel has come a long way from its infancy and has become a very relevant part of a retailer’s business. Not only does this channel extend the reach of your products and services from brick and mortar locations to the actual doorstep of prospective customers, but an Internet presence also provides your organization with key data points regarding clients’ search habits and browsing preferences, and offers an additional promotional vehicle to drive additional sales and a personalized experience to each buyer.
When e-commerce was in its infancy, jurisdictional regulations offered some organizations an opportunity to leverage their corporate structure and deliver goods and services to certain buyers without a sales tax imposition. By contrast, most retailers are viewed as having a substantial presence due to store locations or other measures of the law that require tax calculation as an integral part of the “checkout” process. Even those who don’t have the requirement to collect sales tax today most likely need to have a plan prepared should new legislation ultimately require sales tax collection, as states plan to beef up revenue and support government services as in-store sales are replaced by Internet orders.
E-commerce Sales — Tax Compliance
Considering the typical requirements of collecting the proper sales tax at several hundred or more retail locations, a retailer’s tax and financial experts need to track applicable rates, exceptions, exemptions, holidays and special rules solely relevant to their physical stores. Traditionally, organizations also needed to incorporate these changes into their POS (Point of Sale) systems to determine pricing and tender amounts at each store location. If a retailer operated in hundreds of locations then in effect, they needed to track the “Tax Area” or combination of jurisdictions that governed those locations.
Once an organization enters into the e-commerce channel, their requirements are compounded as they now must track, administer, collect and remit taxes and tax rules at each doorstep where obligated by law. If you are operating in all the states that levy a sales tax, you’ll need to comply with well over 8,000 jurisdictions and manage even more exceptions, product or jurisdictional-specific rules, and holidays. Compliance can be a daunting task for both the finance experts and also the technology team managing the infrastructure to support Internet sales. When not properly managed, it can be fairly costly in the form of audit support costs and penalties and even more damaging, a poor customer experience.
Fortunately, enterprise tax technology is available to help you manage jurisdictional compliance requirements for all of your BTC (Business-to-Consumer) channels. In fact, leveraging this technology will allow you to support your back office, brick and mortar locations, e-commerce sales and other channels as you scale your business. This will streamline your organization’s ability to stay on top of managing tax law changes and integrating those changes into your relevant systems.
Here are some thoughts to consider that are compiled from the experience of helping dozens of retailers solve this problem over the past few years.
Tips to Consider
When planning to leverage today’s tax technology solutions — software that tracks legislation, tax changes, holidays, exceptions and exemptions, as well as calculating tax on any of your transactions or powering your POS systems with the proper tax data for each location — consider a system that fits your organization’s two- to five-year business and technical goals. While you may start the project on the e-commerce side, you can more easily leverage the solution for all your channels of business when properly considering the future. In addition to making a smart decision beyond the here and now, you are ensuring that all users — tax accounting, finance and technology groups — can trust the same centralized system to meet the enterprise-tax needs. The end result for a retailer is saving a considerable amount and it prevents reliance on multiple individual experts managing disparate tax solutions.
Additional food for thought relative to the tax side of an e-commerce implementation:
- To calculate the most accurate tax, especially at the local level, it will be important to know a customer’s street address and nine-digit ZIP code. Those extra four digits will be the difference in determining whether the “ship to” location crosses a district boundary or lies in an unincorporated zone in a city. Choose a system that can provide this level of address cleansing.
- To collect the right tax amount during holidays, you’ll need to understand each state’s tax rules relative to applying the holiday on an order date versus a fulfillment date. Choose a system that has the capability to manage this for you.
- To ensure calculations are accurate and comply with both state and local rate charts and rounding rules select a system that tracks and applies the appropriate methods for you.
- To be certain that your organization can launch a solution into production and maintain the system in a cost-effective manner capable of scaling to your changes over time, use a technology provider with a rich network of retail tax-technology specialists — in the end it’s cheaper to rely on a team of experts that knows your industry and has years of experience implementing the solution at retailers like you.
- To meet the increased demand e-commerce brings to returns filing, payments, reconciliation and audit support, choose a tax technology solution that automates your entire compliance cycle.
Other considerations applicable for the technology side of an e-commerce implementation include:
- Choose a tax technology solution that supports your internal operations, including Web service application servers, hardware, database and scalability strategies so that you leverage technical expertise and skills already present in your organization.
- Make sure your tax technology provider is comfortable in providing technical solutions to support the reliability and redundancy needs of a retail operation in a cost effective manner.
- Be certain your provider’s solution can scale to meet peak demand volumes for both tax calculation, reporting and remittance needs.
- Consider using a firm that supplies technical expertise in the form of a highly skilled consulting network in the deployment of their solution inside a retail infrastructure.
Don’t hesitate to consider transaction tax software as a core part of your retail operational efficiency plan from both a business and technology perspective. In many cases, peer companies and your business network can help offer feedback on the various solutions available in assisting you to make enterprise tax automation an effective solution for your company.
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John Cowan has spent 17 years in the tax technology industry. He is employed by Vertex Inc. of Berwyn, PA — the leading provider of enterprise tax technology and services to retail operations. He has spent the last several years focused on implementing tax solutions within the world’s largest multichannel retail operations.