Four Tax Questions E-Commerce Solutions Should Answer

Last June, the U.S. Supreme Court’s South Dakota v. Wayfair ruling determined that individual states can require online sellers, regardless of where they are based globally, to collect sales tax on out-of-state transactions. While the decision sparked numerous state sales tax rules changes, it is not the only tax complication retailers must consider when evaluating an e-commerce system purchase or upgrade.

I discussed those complexities in a previous post. Now, I want to run through four tax-related criteria project teams should weigh when considering a new e-commerce system solution.

An e-commerce system should contain functionality that mitigates sales tax complexity while also improving tax management capabilities. When assessing the degree to which a current e-commerce system delivers that capability, or when considering a new solution, it helps to ask the following questions:

1. QUESTION 1: Are all relevant tax rules and rates continually and automatically updated? All domestic and global rates and rules required for accurate calculation of sales and use tax, as well as product taxability, should reside in the system in a centralized manner. By avoiding the need for tax functions to manually update this “tax content” in response to constantly changing rules and rates, tax professionals have additional time to invest in more strategic planning and analysis activities.
2. QUESTION 2: How much custom work is needed to integrate sales tax functionality and the e-commerce system? Answers to this question should range from “not much” to “barely any.” Complicated, time-consuming integrations between sales tax applications and e-commerce systems can, and should, be avoided.
3. QUESTION 3: Regardless of the online storefronts a company uses, is tax accurately calculated on all products the first time? Every transaction that moves through the e-commerce system needs to be taxed appropriately. Ensuring the accuracy of these tax calculations should not require manual work by the tax function.
4. QUESTION 4: How does the sales tax functionality handle the proper identification and assignment of jurisdictional rules? This is a crucial question. With any e-commerce solution, the single most critical aspect of tax calculation is jurisdiction identification. That process should be automated to ensure every single transaction has the proper jurisdiction assignment to trigger the accurate tax calculation rules. When a new customer address is entered into the e-commerce system, the tax functionality should examine that information, flag and correct any inaccuracies, and (for U.S. transactions) return full 9-digit ZIP codes and the relevant tax area identifications.

If you’d like to see a more comprehensive take on ways to prevent tax complexity from compromising the customer experience, an article I wrote on the topic for “The Future of Customer Engagement and Commerce” is available here.