For any retail enterprise, from the smallest mom-and-pop store to the biggest multinational chain, managing sales and use tax can present formidable challenges. It’s tough for small- to medium-size business (SMB) retailers that are taking advantage of expansion opportunities but don’t yet have the manpower or the sophisticated financial systems to handle the expanded tax responsibilities that go along with their growth. These retailers may find that in a race between rapidly increasing complexities of sales and use tax management and limited available internal resources, falling behind can have serious consequences — from incorrect collection or payment of tax to the very real possibility of an audit assessment by state or local tax agencies. For companies that rely on consumers’ trust, such as SMB retailers that are well-known in their communities, these actions can do a lot of damage to the brand’s reputation.
These issues are particularly acute for SMB retailers for three major reasons:
- Consequences of Growth: Expanding into new product offerings can quickly multiply the complexities of sales and use tax management. Taxation rules can vary widely even for similar product types; for example, when an apparel item is identified as a luxury item versus essential, or if food and beverage are sold by an eating establishment instead of a grocery store.
- State-by-State Nuances: Ecommerce and the use of third-party warehouse and fulfillment services simplify expansion to new markets but they can quickly complicate tax calculations, making it difficult to clarify exactly where nexus exists.
- Audit by Automation: States are more actively pursuing sales tax collections, using big data-style analytics and automated solutions, as well as employing third-party companies that are paid a percentage of taxes and fees collected.
To help SMB retailers face these challenges, we identified five steps companies can take to simplify their sales and use tax processes.
- Navigate Sales Tax Rules Across Jurisdictions, State Lines, and International Borders
- Simplify Calculations Even as Product Categories Multiply
- Use an Automated Solution for Sales and Use Tax Returns
- Integrate Tax Data and Documentation
- Access Analytics to Understand the Tax Implications of Business Decisions
Sales and use tax complexity can change significantly even as a result of a relatively minor business decision. Adding a new product category, making an ecommerce sales to customer in a new state, or just using a third-party common carrier delivery service instead of its own trucks to fulfill orders can affect a retailer’s responsibilities. That is why it is vital to establish a baseline of your current tax complexity and to revisit it on a regular basis.
At a time when states are eagerly pursuing every penny of tax revenue and ecommerce has vastly enhanced the ability of even a small retailer to sell to customers in new markets, the need for a solid sales and use tax management strategy has never been greater. SMB retailers want to pursue new avenues of growth, whether that involves reaching new consumers, expanding their product offerings, selling through new marketplaces, or some combination of all three. Yet each of these growth paths is accompanied by sales and use tax implications that an SMB retailer may not be equipped to handle. Automated solutions that provide clear, easily accessible data about what is taxable (and where); what the specific rates are; and which types of returns need to be filed can dramatically streamline tax calculation, preparation, and record-keeping for a growing company. Centralization and automation can also consolidate the data and records required if a company is subject to an audit.
In addition to saving time and making the most of what are sometimes limited internal resources, sales tax automation also provides SMB retailers with valuable business insights such as taxability reports, transaction details, and exemption certificate management. The tax implications of selling in a new state or country, or choosing whether to fulfill via Amazon, can become key factors in the decision-making process — helping companies find the route that will best serve them and their customers.
For more information read 5 Steps to Simplify Sales and Use Tax for Retailers.