Helping Online Retail Clients Become Sales Tax Compliant
IMGCAP(1)]Selling products online (“e-tailing”) is a potential goldmine of opportunity, and technology has made it easier than ever via dynamic software platforms, intelligent fulfillment solutions, and ubiquitous mobile devices. The ease of entry into the virtual marketplace, however, does not limit the potential sales tax compliance obligations of your e-tailing clients. In fact, many states are specifically targeting e-tailers as states seek to grow their own sales tax collections.
The Shopping Cart
Before we talk about sales taxes, let’s first admit that in 2016, e-tailing operations of all sizes have access to some incredible, affordable and flexible automation tools, especially the core software basis for a web-based presence: the virtual “shopping cart.” There are several shopping cart software solutions available; choosing the right one can solve many key business challenges for both e-tailing-focused firms and for businesses at the beginning of their e-tailing journey.
The shopping cart software your client chooses should support how to address customer acquisition, customer management, catalog management, customer communication and business systems. Each core business function or task should integrate with key departments within an organization by manually providing required information, or allowing integration and automation with business systems.
When it comes time for helping your clients choose a shopping cart, make sure the IT department is involved to ease integration and flow of information; make sure the marketing department is involved to ensure consistency and integration with existing marketing methods and channels; and ultimately make sure the shopping cart integrates with all business functions. Believe me, exploring all these possible elements during the choosing stage can save some major headaches down the road in the implementation stage.
Sales Tax Compliance
One critical element to consider at the outset is the ability of a shopping cart solution to conquer an important business obligation for any e-tailer: how to accurately calculate, collect, file and remit sales taxes. In the United States, there are more than 12,000 unique taxing jurisdictions, many of which apply their own sales tax rates or rules about what is or is not taxable, and even require unique forms and filing conventions.
If your clients happen to run a business with only one physical storefront, who only make sales across their counter, and who never, ever, ever make sales in other locations … then collecting sales tax can be relatively straightforward: they charge their customers the sales tax rate required by the jurisdiction where their business is located, and they file only with their local or state government.
However, whether your clients are ruling the e-tailing world through sheer web dominance, or they are an established brick-and-mortar just dipping their toe into the e-tailing pond, sales tax obligations and complexity are compounded when sales are made across a broader geographic area.
Once your clients have established the obligation to collect sales taxes on sales they are making (we can cover nexus on another day), having a proper automated solution mated to a shopping cart can be transformational. Here is a brief run-down of some sales tax compliance challenges that can be met effectively with the right automated solution:
Taxability of the Objects Sold
It probably goes without saying, but among those 12,000 jurisdictions, there is a great deal of variance as to how particular goods and services are treated for sales tax purposes. Most state and local sales tax regimes started life based on a fairly simple proposition: sales of tangible items are taxable. However, almost from the very first day, politicians and regulators have tinkered with that basic starting point. Exemptions, exclusions, deductions and other specific rules that apply to the things your clients are selling can be captured and maintained via an automated sales tax solution.
The management of the exemption certificates you receive from your customers is another critical compliance obligation. An automated transaction tax solution can help manage these certificates, reducing risk by ensuring that certificates are accurate, complete and applicable to the purchases a customer is making.
When it comes to rates, what I said about what is or is not taxable applies here too: there is a lot of policy and political influence on rates. The ability of policy makers to alter sales tax compliance obligations is boundless. Rates constantly change based on the policies, politics and relative revenue concerns of sales tax jurisdictions. In addition, there are scores of special rates applicable to specific goods or services, specific customers, specific sellers and even specific transaction types. Capturing these shifting rates and more importantly, their timely maintenance, is a major advantage of an automated sales tax software solution.
Perhaps even more critical to keeping rates straight is the proper determination of geographic location of your sales. As technology has improved in the way of geographic information systems (GIS) available to vendors to determine proper tax jurisdictions, the same data has become available to auditors and regulators. One result is that zip-code based locating solutions are no longer up to the task of accuracy. An automated sales tax solution properly integrated with a functioning shopping cart can eliminate the geographic locating challenge by using proprietary GIS systems to get the specific location of your sales right.
Note: It is essential to ensure your clients implement an online shopping cart solution that calculates in real-time, showing the buyer precisely how much sales tax will be collected, and the resulting “all-in” price. This capability is now the industry standard; anything less is an invitation for abandoned shopping carts.
Getting it on a Form
Once you’ve got your rules and rates working, proper reporting and record-keeping are the last hurdle. A properly set-up and integrated sales tax solution can take a lot of the pain out of regular sales tax reporting. From a fully automated filing and remittance solution, to the production of useful reports to support manual reporting—no matter the level of filing automation your client prefers—getting the shopping cart/sales tax solution working together is critical for success.
The trend for the last few decades has been for states to recognize the growth of e-tailing and respond by expanding the number of vendors obligated to collect and remit their sales taxes. While all these efforts are cabined by some powerful U.S. Supreme Court cases, those decisions have not prevented the states from pursuing occasionally elegant, sometimes sublime, and usually successful workarounds to incrementally increase the number of sellers caught in the sales tax net.
From “click-through nexus” laws that focus on web-based advertising, to strong rules that look at business affiliations, to mandatory reporting of use tax obligations, the states are working hard to expand current nexus limitations. The overall result is an environment where states are actively searching for new revenue game.
Finally, remember that one big reason your clients are e-tailing is the ability of their web-based storefronts to reach customers across all borders. An automated sales tax solution in concert with a functional shopping cart can make your client’s forays into foreign markets seamless. EU, South American, Asian and even Aussie and Canadian VAT regimes present similar challenges as the U.S. sales tax system (rules, rates and boundaries, filing and remittance), each of which can be met by the best automated transactional tax solutions.
A shopping cart does more than sell products and services quickly and securely. It is also the best place to solve the challenges of sales and transaction tax compliance. For e-tailers, it is imperative they find a shopping cart solution that integrates tax calculation and address verification, applies accurate rules and rates, manages exemption certificates, gets info on the forms and gets them filed on time, and provides a consistent, repeatable transaction tax compliance result for years to come.
Marshal Kushniruk is executive vice president of global business development at Avalara, a provider of cloud-based software delivering compliance solutions related to sales tax, VAT and other transactional taxes. Contact him at firstname.lastname@example.org.