As you may have noticed at your grocery store or other retail outlet, in-house advertising platforms that enable retailers to sell ad space to third-party brands are becoming more and more popular. These retail media networks sell a variety of advertising formats and services; the ads may appear on the retailer's website, apps, circulars, in-store displays and more.
For example, retailers can offer digital ads on their website and app in a range of formats, including sponsored search, display and video. Stores get to pocket the advertising revenue, and brand marketers benefit from massive exposure to purchase-ready consumers. So, it’s not surprising that ad spend on retail media networks is growing at a rapid pace. Currently, it’s on track to reach $45.15 billion this year, and will more than double by 2027, according to this rundown.
This form of digital advertising raises some knotty questions for sales tax teams, including issues related to:
- Nexus: By selling advertising services, retailers may find that they are creating nexus in jurisdictions where they previously had none, triggering sales tax collection obligations. Determining nexus requirements for retail media can be complex.
- Taxability: Tax treatment of advertising services varies widely across States. Some exempt it entirely, while others only tax certain types. Retailers will need to evaluate taxability carefully.
- Exemption certificate management: Services purchased by qualified nonprofits or media companies may be exempt from sales tax. Properly documenting and managing sales tax exemption certificates is a must.
- Multiple tax rates: Tax rates for services often differ from the rates for physical goods. Keeping track of multiple rates can complicate compliance.
- Reporting challenges: Retailers may find that their current tax reporting systems are not well equipped to handle retail media sales tax obligations and may need to be upgraded.
- Audit risk: The complexity of retail media sales tax rules can escalate the risk of audit for retailers. Carefully documenting policies and procedures is crucial.
A trusted sales tax engine can help businesses capitalize on the opportunities presented by retail media networks while keeping their sales, use, and VAT calculations accurate and minimizing audit risk.
Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.