The COVID-19 pandemic caused an immediate and massive uptick in ecommerce and online sales as people around the globe shop from the safety of their homes. This created opportunities for online retailers, as well as a slew of new tax challenges expected to surmount in the coming year.
The U.S. Census Bureau found that consumers spent $211.5 billion in online purchases during the second quarter of 2020 alone, with a steady increase quarter over quarter. Additionally, Deloitte projects that nearly 65% of shoppers will opt for online purchases this holiday season as a result of the pandemic.
While business may be booming, ecommerce companies — especially those selling across state lines — may face overwhelming tax complexity into 2021 and beyond.
The Pace of Change
Our world is increasingly digital, but technology serves to connect buyers and sellers in ways that were previously not possible. However, with opportunities come challenges. Retailers are selling in more places, to more customers across state and country lines. Subsequently, they’re subject to an increasing number of tax regulations—more than 11,000 different jurisdictions in the U.S. alone, constituting nearly 700,000 unique taxability rules. Just when sellers feel like they have a handle on all of the requirements and regulations, they change.
Today’s tax regulations can be influenced by contributing factors, including environmental impacts, business changes that require merchants to pivot, the continuously evolving pandemic and, of course, technology advancements. We’re seeing a massive shift to the cloud, mobile commerce and handheld devices, not only in customers’ hands, but also in stores.
It remains to be seen how states will react to the effects that the pandemic has had on their revenues. Will tax rates go up to recoup lost tax revenue? Or will they be reduced to encourage spending during the time of economic uncertainty? Could those changes be product specific, i.e., increased taxes on luxury items or reduced rates on items deemed as necessities like masks and cleaning supplies?
The pace at which commerce is changing requires retailers to strategically unify brands and offerings. Mergers and acquisitions and store closures mean new challenges. Evolving cross-channel scenarios, such as buy online, pickup in store or return in store require retailers to interact with customers in different ways for the same transaction.
The lines between purchases may be blurred internally as well. With stores closed or operating at limited capacity, retailers realize the amount of inventory sitting at each brick and mortar location. This has led some of them to start fulfilling online orders from stores, as it’s where the inventory is located and is also closer to the customer (source-from-store).
All of these changes come with tax consequences, as sales tax rules and rates vary across transaction types, location, timing and many other factors.
Complexities of Marketplace Facilitators
The use of online marketplaces is also on the rise. As mom-and-pop shops continue selling via marketplace facilitators like Amazon and eBay, they’re exposed to a new level of complexity. Who’s responsible for filing what tax?
Since the South Dakota v. Wayfair ruling, which forces ecommerce sellers and marketplaces to keep track of constantly changing regulations within thousands of U.S. jurisdictions, retailers need to determine the number of states they must collect and remit sales tax to based on revenue and transaction count. While a state might have a certain set of rules, the county, city and local districts might have different ones.
Challenges From a Customer Perspective
By its nature, selling through omnichannel imposes more tax complexity on retailers. Regardless if something is purchased in a store, online or potentially a hybrid version of both — such as curbside or home delivery — tax must be calculated consistently across the board.
This isn’t always an easy task when different systems handle different channels: POS, a website or a mobile app. Customers expect fast, accurate sales tax calculations, but current processes often introduce delays, confusion or even inconsistencies. Omnichannel retailers must align processes to fix potential issues as we move into 2021.
Audit Risks in 2021
With some states seeing as much as a 30% decrease in sales tax revenue from last year, they could start auditing with a finer-toothed comb in an attempt to close substantial revenue gaps. Faced with ever-increasing tax complexities, ecommerce sellers could be in over their heads, especially as holiday sales continue to spike.
It’s challenging enough to provide fast, accurate and consistent tax calculations to the customer, let alone maintain the detailed transaction information to defend against an audit. Given that there have been 3,713 sales and use tax changes since 2010, an average of 353 per year, this is a task that simply cannot be done manually.
As we gear up for 2021 and the 2020 tax season, ecommerce and retail CIOs should look to use automation to ensure that the right forms are filed with up-to-date rates and product tax codes for each jurisdiction, and tax is validated for each ship-to address.
As complexity increases exponentially, new situations arising from the pandemic and additional compliance requirements require system evaluation to ensure they continue to meet compliance requirements and maintain a seamless, uninterrupted customer experience.
Pete Olanday is Retail Practice Lead at Vertex Inc.