Retailers face internal and external challenges when it comes to properly managing indirect tax compliance (e.g., sales, use, and VAT-like taxes), and the many degrees of complexity are ever changing.
Internally, there are frequently too many cooks in the kitchen, and not by choice. Many people are involved in tax determination decisions inside even moderately large retailers because of system limitations and manual processes. Humans make mistakes when dealing with manual data, they grow tired of repetitive tasks, and they seek to advance their careers, eventually handing over these tedious tasks to other people. Automation is a hedge against these risks.
External drivers are equally significant, and companies simply cannot keep up with all the changes happening everywhere they do business. More than 15,000 tax jurisdictions exist in North America alone, according to Thomson Reuters ONESOURCE data. In 2016, there were more than 1,300 rate changes, including the introduction of new rates, and more than 2,500 product taxability rule changes.
While the vast majority of consumers are probably only vaguely aware of bits of weird tax law, the provisions reside largely outside the purview of consumers and don’t drive their purchasing behavior. It is understandable, then, that when their online shopping cart returns a noncompliant tax rate because the data are wrong, they don’t notice.
But eventually, someone does notice—someone who works on your tax team, or for an auditor, or for a tax authority. The best-case scenario in this instance is that an adjustment is made to the order, and the company pays for it directly. Many retailers will need to have fairly large pools of money to settle up on tax withholding mistakes for exactly this reason. This patchwork approach is generally not the most effective way to manage cash, and it can obscure risks that can become more serious over time.
A somewhat more tolerable outcome is leaving money on the table, a scenario that assumes an overpayment of tax. Underpayments are prevalent as well.
The worst-case scenario is that the problem goes unaddressed until the tax authority discovers it, and the tax team is on the hook for various penalties and increased scrutiny from tax regulators, investors, and internal stakeholders.
Forty-five states have a sales tax, and each differs from the others, sometimes drastically. But one common thread is the concept of a sales tax nexus, generally defined as a physical presence in the state. Nexus is what retailers must have before they are made to collect sales taxes at the state or regional level, depending on the language of the relevant tax regulation.
What Will Amazon Become?
This question matters now because of trends in the retail industry. No piece of news exemplifies them more than Amazon’s acquisition of Whole Foods this summer, and no time of year exemplifies these trends more than the one-two punch of Black Friday and Cyber Monday in late November.
While it still isn’t obvious what Amazon will become, it’s fairly clear why Whole Foods was an attractive acquisition target. This deal, and more generally the high likelihood that Amazon will snatch up other struggling retailers to compound existing network effects and achieve even greater dominance over basic commerce, will extend Amazon’s nexus.
With Amazon’s nexus extended and taxes applying where they generally have not applied before, the door will be open, even if ever so slightly, for other retailers to once again compete, both online and offline, particularly during high-volume retail periods when customers are most malleable. Portions of market share may come down to which company can best interpret the complex web of indirect tax regulations and strategize most quickly using that information, and customers could find a positive in-store experience enough to lure them out of their homes and become less dependent on Amazon Prime.
A landmark United States Supreme Court decision, Quill Corp. v. North Dakota, established the concept of nexus, so it will remain a major element of indirect tax compliance unless the Court decides to revisit the matter or Congress makes a new law to deal differently with the revenue side of the equation—which some lawmakers are already trying to do through the Marketplace Fairness Act. This bill, which has lingered on the legislative agenda since being introduced in both chambers in February 2013, would require online and out-of-state retailers to collect sales and use taxes for all transactions, effectively changing the concept of nexus.
The bottom line is that the concept of nexus is in flux because of industry trends as well as potential legislation, and market consolidation will brighten the spotlight on the over- or underpayment of tax. Companies can’t exert much control over how these variables play out.
What companies can control is keeping their own houses clean, orderly, and up-to-date. Automation platforms that handle retail-specific content, work in real time, and support other tax types remove the potential for human error and the need for manual tax research and system maintenance. With the agility afforded by intelligent automation, retailers can react more quickly to external changes and not be held hostage by broken internal processes.
Indirect tax needs to be done right the first time, particularly as nexus evolves, to ensure that companies comply fully without leaving money on the table.
Adam Schaffner is senior proposition manager, indirect tax, for the tax and accounting business of Thomson Reuters.