Managing sales tax manually

The Silent Retail Spender – Manual Sales Tax Management

According to eMarketer, US consumers will spend $933 billion on ecommerce this year – signaling the continued growth of digital and omnichannel commerce. The growth in ecommerce has opened new doors for retailers looking to reach new customers and better serve their existing customers. As a result, many retailers are managing a myriad of “storefronts” that span brick-and-mortar locations, ecommerce stores, online marketplaces, and more. While each of these added channels have created additional opportunities, it has also increased complexity for retailers when it comes to their sales tax obligations.

Sales tax for retailers has always been a complex business function to manage for several reasons. Often, retailers carry expansive and dynamic product catalogs, which creates tax complexity because each product has its own taxability definitions – something that can vary widely by location.

Beyond product taxability, the digitalization of commerce has prompted tax authorities to adapt their tax requirements. The Wayfair Supreme Court decision in 2018 made it possible for states to impose sales tax obligations on remote sales. Fast forward to today, all 45 states with sales tax have chosen to adopt some form of remote sales tax laws. For many retailers, these laws created an explosion of tax complexity as the number of tax registrations, rates, and returns they had to manage grew seemingly overnight. When you put all these pieces together, it creates an intertwined web of complexity for retailers.

For example, let’s say a women’s clothing retailer has a brick-and-mortar storefront in Kentucky but sells online through an ecommerce store and online marketplace to customers in 15 other states. To get sales tax right, this retailer would have to do all the following (and more):

  • Register in each state where they’ve triggered an obligation to collect sales tax, otherwise known as nexus.
  • Understand the tax rates in each jurisdiction they sell into, as well as the rules around product taxability (both vary widely).
  • Prepare and file returns in every jurisdiction they’ve registered and collected tax in.

In the above example, if the retailer is managing all of this on their own, they would be responsible for managing every step while keeping on top of rules and rates as they change – something that costs both time and money.

Survey Says Manual Compliance Costs Retailers Greatly

Avalara commissioned NetReflector/Potentiate to survey hundreds of small and midsize US businesses, including retailers, to understand the true cost of manually managing sales tax compliance. Chief among the findings is that retailers spend the most on sales tax compliance of any other industry. 

According to the survey, retailers spend an average of 209 hours and $24,032 per month on sales tax compliance. Further, the amount of time retailers spend on manually managing sales tax each month is 40% more than manufacturers and 72% more than software companies. The survey also found that retailers spend the most time and money on managing tax rates and calculations, as well as tax returns when it comes to managing their obligations. In addition to the cost of internal management, the survey also looked at the cost for retailers that sought out external help to manage sales tax – costing retailers more than $2,000 per month.

Technology as an Alternative to Manual Compliance

In recent years, and even more so due to the pandemic, many retailers focused on increasing efficiency in their operations to save time and money. The result of this focus on ROI has been widespread digital transformation and technology adoption to automate and offload time-consuming, low-value tasks. Combining these trends with the cost of manual compliance and the evolving nature of tax complexity, tax has become a prime business function ripe for automation.

Ben Scrivens, president and CEO of Fright-Rags saw value in automating tax. He noted that he pays Avalara just over $1,600 per year for tax automation services, which he says is “totally worth it because they’re dealing with the brunt of everything. Hiring a person to do that would cost more than $1,600 a year.” Aside from costs, tax technology can also help retailers focus their resources on other tasks, like how to best serve customers, instead of managing changing tax rates and rules.

Looking forward, two things are certain: retail will continue to evolve, and sales tax requirements will change. As retailers look to scale their operations in our omnichannel world, tackling sales tax early on will reduce compliance barriers to growth and reduce risk. And, because tax management in a digital world happens in real-time, manual tax management sets retailers up for more costs and risks that could have significant impacts on their business. More findings from the survey can be found here.

About the Author: Liz Armbruester is the SVP, global compliance at Avalara. his guest post was provided by Avalara and the views expressed herein are the authors’ alone.

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