Tax compliance in commerce media

If Retail CEO Rip Van Winkle awoke from a 20-year slumber in 2024, his first, flabbergasted words might be, “Where am I?!” 

The retail and e-commerce environment looks radically different today than it did in 2004. Yet, a few years from now, our own eyes might not recognize what we see.  

By 2028, McKinsey projects that retail and commerce media spending will exceed all television and streaming advertising. This has big implications on sales tax compliance in retail and e-commerce companies (and, soon, other industries as well). These advertising innovations will lead to a flurry of purchasing activities via new channels, (often difficult-to-pin-down) locations and payment mechanisms.  

I’ve written about retail media networks and their tax implications. The model consists of retailers selling ad space on their platforms, which opens up potentially substantial revenue opportunities (“massive” in the case of the world’s larger e-commerce platforms). Retail media networks also present significant tax compliance challenges, such as uncertain nexus, state-by-state variations in the tax treatment of advertising services (partly due to evolving digital services taxes), difficulties in managing exemption certificates, reporting complexities and risks of sales tax audits. 

Similar indirect tax compliance challenges arise with commerce media, which is generally defined as similar to, but broader than, retail commerce. The terms are often used interchangeably, according to Retail TouchPoints: “While they are essentially the same thing, many industry experts believe the term ‘commerce media’ offers a more accurate definition of what these new advertising platforms are able to do… some feel the term “commerce” more accurately describes the full scope of retail media capabilities. This is because, in these and other instances, while a campaign may be based on retailer’s data and functionalities, the actual consumer connection, and even the transaction, takes place in a non-traditional commerce environment. Therefore, ‘commerce’ is a more encompassing term to describe this new set of advertising capabilities.” 

McKinsey notes that commerce media is expanding beyond retailers and e-commerce companies to rideshare, hotel, airline companies and other industries. Companies with apps that track a consumer’s location can insert timely, relevant ads that are more likely to result in purchasing transactions. 

For indirect tax groups in those organizations, these transactions will raise questions like: Where are we? Where is the purchaser? What jurisdiction did the transaction take place in? What tax rules is the transaction subject to? What tax rates correspond to those rules? By selling advertising services, retailers and other companies may create nexus in jurisdictions where they previously had none, triggering sales tax collection obligations.  

Again, the potential value of commerce media is enormous. McKinsey reports that some commerce media lines of business (in large enterprises, I suspect) “are worth tens of billions of dollars, with margins that can exceed 20 times traditional retail margins.” This is attracting investor interest, McKinsey notes. This development also warrants the attention of tax groups, which definitely shouldn’t sleep on commerce media. 

The evolving landscape of retail and commerce media offers vast opportunities and significant tax compliance challenges. As advertising innovations reshape revenue streams, businesses must stay vigilant in managing tax obligations. The expansion of commerce media across industries complicates compliance, raising crucial questions about nexus, jurisdiction, and tax rates. Tax professionals must stay informed and proactive to navigate these complexities and capitalize on the substantial potential value of commerce media.