As more consumers embrace online purchases, e-commerce sellers should increase their knowledge of tax compliance requirements in what promises to be a hypercompetitive holiday season.
A survey conducted by McKinsey finds that the volume of e-commerce adoption across all retail segments that occurred in 2020 would have taken a decade to produce without a global pandemic and its shelter-in-place requirements. The consulting firm also projects that the widespread shift to online channels will continue after the pandemic concludes. The portion of all retail sales conducted online increased by 49% from the second quarter of 2019 to Q2 2020, according to the U.S. Commerce Department.
While this represents great news for retailers with e-commerce capabilities, it also means that their tax compliance burdens are rapidly increasing. Online retailers, especially those selling across state lines, confront growing complexity when it comes to managing transaction taxes.
This complexity stems from several sources including:
- Constant changes to tax rules and rates: More than 3,700 sales and use tax changes, an average of 353 per year, have occurred since 2010. These jurisdiction-specific changes often include specific taxability for certain types of products, such as clothing or food and beverages.
- Wayfair’s ongoing wake: The U.S. Supreme Court’s 2018 South Dakota vs. Wayfair ruling equipped states with the authority to impose sales tax on out-of-state transactions if certain economic nexus thresholds (based on specified transaction volumes or revenue amounts) are met. States also started requiring marketplace facilitators (MPFs), online platforms that facilitate remote sales, to collect and remit on behalf of the sellers. Nearly every state that imposes sales tax now has marketplace facilitator provisions in place, so it’s critical to understand and comply with states’ various MPF laws, rules and rates.
- Looming COVID-driven audits and tax policy changes: Tax authorities at the state, city and local level are all but certain to intensify transaction tax audits to help them address painful budget shortfalls caused by the soaring health costs and dwindling sales tax revenue as a result of the pandemic. States in particular will be scrutinizing compliance with their new Wayfair and MPF requirements. Once a post-pandemic recovery takes firm hold, states are also likely to increase various tax rates to address budget gaps.
These trends increase the need for tax technology that ensures the right forms are filed with up-to-date rates and product tax codes for each jurisdiction, and that tax is validated for each ship-to address. The most effective forms of tax automation smoothly integrate with enterprise resource planning (ERP) and point-of-sale (POS) systems to make tax calculations a more accurate and seamless part of each transaction — and invisible to customers whose massive shift to online channels is likely to sustain well into the future.
Vertex Consulting Retail Practice Leader - responsible for the integration of Vertex's Indirect Tax solutions in the retail space, specifically with Point-of-Sale systems and e-commerce platforms. Prior to joining Vertex, Pete worked for IKEA and EY. Pete has a B.S. in information and decision sciences from Carnegie Mellon University.