Some of the statistics about consumption in the United States are truly jarring.
There are more than three shopping centers for every high school, according to industry data and the Department of Education. For each person, forty-eight square feet of retail capacity exists, CNBC reported earlier this year. The average home contained more than 300,000 items in 2014, according to a professional organizer quoted in the Los Angeles Times. And, Psychology Today reports, in 2012 Americans spent more money on shoes, jewelry, and watches than on higher education.
More recently, society is pushing back against some of this excess, a pushback that is one driver of the current transformation of the retail industry. The traditional, enclosed shopping mall is on its way out, giving way to the open-air communal spaces with no traditional anchor tenants that shoppers now prefer. The consumers that many retailers covet most—young people with active social networks and disposable income—increasingly prefer independent merchants, craft coffee, and curated experiences over brand familiarity. Houses are becoming smaller, and decluttering is no longer a niche lifestyle choice.
This shift is causing the wealthy to turn away from the practice of using expensive goods and comically large homes to signal their wealth. “[T]he democratisation of consumer goods has made them far less useful as a means of displaying status,” Elizabeth Currid-Halkett, a professor of public policy at the Price School, University of Southern California, recently wrote in an essay for Aeon. Parsing government data on consumer consumption, she argues that the “new elite cements its status through prizing knowledge and building cultural capital, not to mention the spending habits that go with it—preferring to spend on services, education and human-capital investments over purely material goods.”1
Direct-to-consumer brands accommodate modern shopping preferences by offering high-quality goods at affordable prices that consumers can experience and purchase on their own terms.
Changing Shape of Retail
The changing shape of retail means that substantial changes to business models, supply chains, distribution strategies, and, at a macro level, entire brands are happening with increased urgency. It is quicker and cheaper for retailers to bring new products to market, but this ironically adds up to more complexities, not fewer, for everyone involved. While opportunities are plentiful in retail today, competition is fierce and margins are low.
For an example of retail disruption, look to the direct-to-consumer business model, which has become significantly more popular in the past five years as online commerce has continued to gain on brick-and-mortar retail. These companies have an inherent advantage over established brands, because it is easier to develop from nothing an omnichannel retail strategy, which fuses new digital marketing techniques with classic brick-and-mortar retail to make commerce faster, more convenient, and more of an experience for shoppers, than it is to build omnichannel capability into an existing large retailer.
Direct-to-consumer brands accommodate modern shopping preferences by offering high-quality goods at affordable prices that consumers can experience and purchase on their own terms. Warby Parker sells for $95 glasses produced in the same Chinese factory as those from luxury eyewear maker Luxottica, which have a $700 price tag. Direct-to-consumer mattress companies like Casper and Leesa have managed to make upgrading one’s bedding into a memorable experience. Ralph Lauren, long a department store staple, in 2015 committed to investing sixty percent of its revenue in direct-to-consumer strategies.
Amid the fierce competition, retailers today must focus on scaling their business and reducing the friction required to get goods into the hands of consumers. This matters to tax because scaling a business can be deceptively costly if the right systems and processes are not in place for tax to accommodate that growth.
Adobe, for example, was paying one million dollars more than it needed annually for indirect tax processes because its global sales, use, and VAT processes were insufficiently in sync, according to a case study published by Thomson Reuters ONESOURCE. A standardized process and centralized system, however, made the tax process more efficient and recaptured those funds.
Value of Implementation
The immediate value of implementations such as Adobe’s is twofold.
First, intelligent automation reduces basic rates of error. Adobe had millions of line items, and manual data entry was still necessary to keep the VAT rates accurate. As a result, tax returns took two weeks to complete. When an incorrect rate exists in an ERP system, it is typically IT, not tax, that fixes it. Inaccurate rates mean that IT has to do things that tax should own, and those inaccuracies lead to poor cash management at the corporate treasury level.
Moreover, rates and regulations change so frequently and sometimes so dramatically that it can be a struggle to react. Adobe encountered complexity when the European Union’s tax jurisdiction changes for e-commerce companies, effective January 1, 2015, hit. Instead of VAT being levied in the supplier country, the tax became payable where the customer resided. That meant Adobe had to apply the local VAT rate in any of the twenty-eight EU countries based on where its customers were located.
An automated and centralized approach simply keeps the tax engine up to date with the new rate and rules content when new rates come into force. An approach that lacks automation has people doing the work, which exacts a high opportunity cost and leads to basic rates of error and a lot of tinkering with a patchwork system. It also introduces inconsistencies that auditors love to zero in on to justify increased penalties.
This is particularly important today because jurisdictions are increasingly sniffing out revenue sources. Many U.S. states are encountering budget shortfalls, and overseas tax jurisdictions are becoming more methodical in staking claim to tax revenue. These bodies view sales, use, and VAT-like taxes as a stable revenue stream when compared to the alternatives.
While companies may relocate based on a state’s creative use of federalism or a country’s tolerance for tax inversion deals, thereby lowering the income their former jurisdictions would receive from direct taxes, consumer spending patterns generally don’t behave erratically over the course of a year. For obvious reasons, low- and middle-income families, which are reliable sources of consumer spending, are rarely able to migrate to other tax jurisdictions. And raising income taxes to fund political promises is a risk for incumbents.
Poor fiscal management by legislatures leads to legitimate tragedies for human beings, thus legislators are squeezing the indirect tax turnip. This truth is unlikely to be overturned anytime soon.
Broadly, as the retail landscape continues to shift, and as jurisdictions continue to change sales, use, and VAT rates or create new ones, the tax departments that automate the processes associated with selling goods and services will be better positioned to help management make strategic decisions—and there are many strategic decisions for retailers to make today.
Andrew Graham is founding partner of Clear (www.agencyclear.com), a media agency in New York City. He advises the retail business unit of Thomson Reuters ONESOURCE.
- Elizabeth Currid-Halkett, “Conspicuous Consumption Is Over. It’s All About Intangibles Now,” Aeon (June 7, 2017), https://aeon.co/ideas/conspicuous-consumption-is-over-its-all-about-intangibles-now.