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Ecommerce retailers have been amazingly successful competing against their brick-and-mortar brethren, but a competitive advantage in the online world is razor-thin when an alternative is as close as a few clicks away. In this world, even the smallest missteps can lead to substantial losses. One example: tax collection.

In today’s world of modern tax, where jurisdictions are adopting technology as an enforcement tool, and compliance requirements are quickly becoming global in scope, opportunities for missteps abound. Fortunately, as with so many other routine tasks, the path forward exists in the form of automation.

The same modern cloud and API-enabled technology that your organization uses to reach a global market is also being adopted by taxing authorities to improve the efficiency and reach of their compliance efforts. National and state governments are increasingly turning to modern software and big data to close ballooning tax gaps that reach tens of billions of dollars, and are transforming how tax works. We are quickly moving from a periodic, audit-driven process to a continuous compliance standard. In this world, a vice president of ecommerce must not only worry about website experience and performance but also the ability of systems to manage this added complexity brought on by government’s transaction-level tax compliance requirements. Both requirements are equally important and one cannot suffer for the other.

 

How did we get here?

The path toward modern tax began in 2007 when Brazil adopted a technical solution that allowed all business invoices be reviewed and approved by the government in real time as a prerequisite to shipment. In so doing, Brazil closed its tax gap by approximately $58 billion, a significant figure that caught the attention of the rest of the world. Soon thereafter, the “e-invoicing” model was adopted throughout Latin America and is now spreading to Europe. When coupled with the Making Tax Digital initiative in the UK and a proposed e-invoicing mandate in Greece, global compliance is growing increasingly complex.

In the United States, things have shifted into high gear. While states have spent the last decade or so searching for any avenue possible to effectively tax ecommerce (e.g., affiliate and click-through nexus, cookie nexus, and taxpayer notice provisions), the seismic shift necessary to open the ecommerce taxation floodgates didn’t happen until June of this year. Specifically, with the stroke of a pen, the United States Supreme Court, in the South Dakota v. Wayfair decision, wiped away the primary barrier to ecommerce taxation: the requirement that sellers be “physically present” in a state before that state be allowed to impose a sales tax collection and remittance obligation on them.

While the Wayfair decision is only months old, more than 30 states have already moved to enact or enforce economic nexus rules that have required or will require ecommerce sellers to collect sales tax regardless of their physical presence. If this is news to you, you have likely missed the fact that Hawaii announced a plan to apply virtual nexus as of last July, as have Maine and Vermont. Likewise, Mississippi began extending its sales tax to e-retailers on September 1. However, all these preliminary steps paled in comparison to October 1, when no fewer than 11 states went live with new economic nexus collection requirements. This is just the tip of the iceberg. Additional states are planning similar action later this year. At this rate, most every state will have a rule in place by early 2019.

 

What retailers need to know

Whether or not your organization must collect tax in these states is often based on the volume of business you transact, with most states looking to the following two criteria:

  • The total dollar value of sales to in-state customers

  • The total number of sales into a given state

Since the South Dakota standard applied tax to sellers with more than $100,000 in sales in the prior or current year (or 200 or more separate transactions), states have viewed these numbers as sort of a safe harbor, and are enacting facially similar requirements. However, not every state is clear on how to determine either figure. For example, should sales to exempt entities or sales for an exempt purpose (e.g., resale transactions) count towards these totals? The answers, to the extent they even exist, vary from state to state.

Ecommerce retailers will not be surprised to hear that technology is squarely the solution. While a small internal accounting and tax team can effectively handle limited sales tax compliance requirements, the scalability required in this new compliance environment requires automation. After all, most retailers don’t have an army of tax experts in their employ. Any number of providers occupy the indirect tax compliance space, each with differentiated offerings and organizational strengths. However, properly evaluating which solution is best for your business is a critically important step that must address several vital concerns:

  1. Is it accurate? Does it have processes in place that ensure every sales tax rate and rule change is identified and accounted for?

  2. Is it adaptable? Does it support your compliance needs today? Will it support your compliance needs as you (and compliance requirements) expand geographically and offer newer and more innovative products and services?

  3. Is it reliable? Has the provider invested in infrastructure and platforms that ensure constant uptime and accuracy?

  4. Is it seamless? Can it be deployed across multiple channels but then bring the data back, creating a single source of tax truth?

  5. Is it connected? Sales tax calculation is only the first step in compliance, and it’s important to know whether your solution will also support seamless reporting, remittance, and customer exemption certificate management.

  6. Is it secure? Today, data privacy and security is an organizational imperative, and it’s important to know whether your provider deploys carefully considered internal controls and holds the necessary third-party certifications to ensure your data is properly protected.

 

For larger or growing ecommerce retailers, scalability cannot be overlooked; retailers must ensure fast and accurate tax calculation.

Sovos provides Salesforce Commerce Cloud clients complete and accurate tax rules and rates, helping Commerce Cloud customers grow their businesses online without introducing sales tax and value added tax (VAT) compliance risks, and enabling them to accelerate time to market with new products, improve consumer engagement and grow their business into new geographies faster than ever before. Our certified Commerce Cloud integration gives retailers and brands the accuracy, stability, and security needed to run a global ecommerce business in a dynamic indirect tax environment that is placing increased pressure on retailers to be the tax collector for local regulators.