Three Retail Trends and their Tax Implications

Vertex regularly attends National Retail Federation (NRF) conferences, including the giant retail trade association’s annual “Big Show” event.  We also monitor NRF’s research and thought leadership, including this analysis of current retail trends. 

NRF VP of Education Strategy, Susan Reda posted her retail industry predictions earlier this year. It’s been fascinating to watch these dynamics and their indirect tax implications play out in real time during the past few months. Of the 10 predictions Susan made, here are the developments that I expect to pose the biggest challenges and opportunities to tax groups in the retail industry throughout this year and into 2024:

• Supply chain reorchestration: Pandemic, weather and war-driven sourcing shortages and disruptions along with new ESG-related regulations and restrictions are forcing retailers to fundamentally rethink traditional supply chain management approaches. This reset is stimulating some impressive innovations, including near-shoring, “friend-shoring,” the selling of logistics services, the chartering of cargo ships, and more. These types of adaptations can have major implications on maintaining tax compliance. As retailers pivot quickly to manage new supply chain risks, tax groups need to respond just as nimbly to manage related tax compliance changes. 
• The evolution of Web3 technologies: While the metaverse tends to attract the lion’s share of hype,  the Web3 technologies driving the metaverse’s evolution such as decentralized blockchain systems, digital currencies and tokens, virtual reality (VR), 5G, decentralized finance (DeFi) and more are also advancing. Many of these developments will deliver major benefits to retailers. “Among retailers, there continues to be an increase in the adoption of blockchain technology; it’s taking root in the supply chain realm, being used to create a data trail that can trace a product from its source to retail shelves,” Reda notes. “In addition, it’s surfacing as a tool for other processes including inventory management, authenticity verification and customer data and loyalty programs.” Transactions that take place in the metaverse and other Web3 technologies raise complex tax compliance questions that need to be addressed. Such as; who sold the digital offering? Which tax jurisdiction did the transaction take place in? and which tax rules apply to the transaction?
• Strides in artificial intelligence (AI): Reda deploys baseball lingo while forecasting that retail AI applications will “shift from singles and doubles to home runs” this year. She writes that “experts believe retailers will be able to deliver personalized and relevant digital marketing messages, enhanced by first-party data that not only cuts through digital noise but more importantly drives conversion.” These capabilities require “analytics for everyone, everywhere,” including tax groups. Which, by the way, possess some of the largest, most detailed and diverse data sets in the entire company. Tax groups that can harvest intelligence from their tax data will be well-positioned to manage emerging tax compliance risks while also sharing actionable insights with their finance colleagues, sales groups, and marketing teams. 

The near-term future of retail looks exciting thanks to this eclectic mix of risks and opportunities. To thrive amid this excitement, tax groups will need to continually mine their tax data for trends, indicators and variances.