Retail Tax and E-Commerce: A Complex Plot Thickens

A lot has changed since Vertex published our Retail Tax and E-Commerce: What You Need to Know white paper a few years ago. Some important tax challenges have remained exactly the same.

What's different? The volume of online sales has increased in staggering fashion. In 2011 Cyber Monday sales had risen 22 per cent over 2010 to hit an all-time high of $1.25 billion. Black Friday online sales a few days earlier had also hit a record of $816 million.

Today’s online and mobile sales numbers dwarf those 2011 figures. Last year’s Cyber Monday sales topped $2 billion; and online sales during 2014’s Black Friday surpassed $1.5 billion, according to comScore. Here’s another change regarding internet tax: In recent years “...revenue hungry states have pushed ahead---using new laws, reinvigorated old ones, and audits to pressure sellers to collect their levies,” according to Forbes.

What’s has stayed the same? Well, major revisions to federal internet tax laws are still possibly headed our way, and the collection of sales tax continues to become more complex for many U.S. retailers. We emphasised both of these points in the Retail and E-Commerce paper, and they remain just as relevant today.

The rising complexity of Internet sales tax collection is why our paper’s guidance, including the following steps, remains applicable today:

1. Research and Fully Understand What You Are Obliged To Do: Numerous factors (store locations, distribution center locations, certain affiliations, etc.) can cause nexus in various tax jurisdictions. Effectively monitoring these factors and all relevant situs laws often requires external expertise.
2. Register in States Where You Will Take Online Orders: When necessary, retailers need to adhere to the steps outlined by the jurisdictions to complete the registration process (typically, with guidance from a tax advisor).
3. Tax-sensitise your Merchandise for a Multi-state Environment: Invest the time to fully understand situs – the important ‘tax where’s’ for any given retail transaction – and create a product and merchandising tree that tax-sensitises your merchandise so you can accurately collect sales tax across all states.
4. Automate Sales Tax Calculations: Shipping any item to any U.S. doorstep subjects a retailer to some 77,000 possible combinations of state and local tax requirements. And online buyers fully expect their retailers to know exactly how to address the unique requirements of their individual tax jurisdictions. Tax automation tools use shipping locations along with tax-sensitised merchandising and product hierarchy among other data to accurately determine sales tax for a specific order. The best of these tools also recognise if the customer is tax exempt (and validates the exemption before the transaction is completed), apply tax holidays consistently and accurately, and address other state-specific nuances.

As online and mobile sales continue their exponential growth, the above actions can help retailers and their tax functions manage growing tax complexity.