Industry Focus: Retail Tax Challenges, Part 1

 “Unprecedented disruption and change” is the phrase that a Deloitte report uses to describe the current state of the retail industry. This extraordinary period of retail-industry disturbance is giving rise to new tax challenges, which in turn are motivating more tax functions to invest in automation to achieve greater efficiencies and free up tax professionals to engage in more valuable activities.

As this occurs, there is a growing sense among retailers that not all tax automation solutions are created equal. To find the right tax automation solution, it helps to understand the nature of the industry’s tax challenges as well as the types of questions that enable tax and information technology (IT) executives to identify a solution that can help meet their needs.  I’ll cover several of the challenges in the first of this two-part post and then identify specific questions in the second part.   

The retail industry’s ongoing transformation is driven by many interconnected forces, including:  

M&A activity: The number of consolidations in the industry has increased significantly in each of the past three years.  In the United States alone, the $27 billion of retail M&A activity occurred in January through October of last year – considerably more than the $23 billion that occurred in the U.S. throughout all of 2012, according to the commercial real estate services firm Cassidy/Turley. These consolidations often bring with them new tax compliance and/or calculations requirements.  

Global expansion: Retailers increasingly seek new markets, especially among emerging economies with rapidly growing populations of middle-class consumers. This expansion exposes companies to new tax jurisdictions, tax calculations, compliance challenges and risks.  

Regulatory complexity: In addition to the significant tax challenges posed by global expansion, retailers face extreme challenges domestically in their efforts to comply with increasingly complex state and local tax regulations. These challenges include difficulties inherent in managing the taxability of multi-channel transactions; exposure to audits often experienced by high-volume transaction businesses; coverage for unique compliance requirements associated with jurisdictional special tax rates and rules; and ongoing – and often changing – compliance requirements.

E-commerce and multi-channel growth: As the growth of e-commerce continues, retailers now must adapt to the rapidly growing use of mobile devices by shoppers. And these consumers are not exclusive to any channel as multiple channels often are used to complete a single transaction. For example, a shopper can buy a product on his or her smartphone and later that day pick up the purchase from a nearby retail outlet. This type of behaviour could have complex tax implications. 

Technological complexity: Many retailers manage numerous information systems, including multiple point-of-sale (POS) systems, e-commerce systems, enterprise resource planning (ERP) systems and much more. Tax data flows through many of these systems and applications – and onto a growing number of mobile, handheld devices and related technology (e.g., radio frequency identification, 3D printing and even biometrics) as well. 

These challenges complicate the management of all forms of tax for retailers today, which is why choosing major tax management solutions for automation is becoming increasingly more important. I’ll cover more on technology solutions for retail in my next post.