2022 Predictions: Tax Challenges Will Take Center Stage for Retailers

Retail has rapidly evolved since the start of the pandemic. Over the past two years, we watched as e-commerce adoption soared throughout 2020 in response to restrictions around in-person shopping. More recently, we’ve witnessed a surge in omnichannel retail as consumers returned to stores, but held on tightly to online shopping. All of these changes have been for the most part positive for retailers — with total U.S. retail sales expected to rise 7.9 percent in 2021.

Despite growth in e-commerce and retail overall, the industry has had to navigate numerous challenges. From supply chain shortages and inflation to operating businesses across multiple channels, retailers have had to be quick on their feet to stay ahead of the curve. As we move into 2022, these impacts will continue to influence the retail industry. In fact, retailers should be prepared for the long-tail impacts of the changes that have occurred in recent years, including expanded tax obligations.

Here are some ways tax will impact retailers in 2022.

Expanding Channels Will Expand Tax Liability

Retailers can no longer deny that omnichannel is here to stay. With additional channels comes additional opportunities to reach more customers, but it also creates more tax liability. If you sell in-store or online or offer services like buy online, pick up in-store (BOPIS) and buy now, pay later, your tax obligations will likely change — and do so frequently.

One of the biggest challenges facing retailers that sell across multiple channels are remote sales tax laws. Economic nexus and marketplace facilitator laws have been adopted by 45 states, the District of Columbia, and parts of Alaska, which require remote sellers and marketplaces to collect and remit sales tax based on where a customer is located. Because each state has varying rules for what triggers an obligation to collect and who is responsible for collection and remittance, retailers selling into multiple states across numerous channels face a myriad of complexity.

If a retailer went online for the first time or expanded its online presence due to the pandemic, it’s likely that it has already triggered new remote sales tax obligations. In 2022, enforcement of these laws will likely increase after tax authorities pulled back due to the pandemic.

Tax Rate and Rule Changes Will Increase Complexity

Changes to sales tax rates are guaranteed. At the state and local level, sales tax rates and tax boundaries are always changing. Simply put, keeping up with sales tax is like aiming for a target on a moving train.

In addition to changes to rates and boundaries, the way specific products are taxed is also subject to change. For example, plastic carryout bags in Washington became taxable in October 2021, while Louisiana is making diapers and feminine hygiene products tax-exempt starting this July. Some states announce changes to rates, rules, and boundaries to give businesses ample time to comply, but that’s not always the case.

Similar to rate and rule changes that impact the calculation of sales tax, state and local governments will also change filing requirements periodically. For example, certain business activities in Phoenix, Arizona must be reported under new codes beginning in 2022. Preparing and filing tax returns is an onerous process for retailers, especially if they have obligations in multiple states. On top of the time and money needed to accurately file on-time across jurisdictions, changes to filing obligations can create additional challenges.

There’s a laundry list of trends that will impact retail in 2022, but tax shouldn’t be overlooked. The rapid acceleration of e-commerce and multichannel selling has expanded the tax footprint of many retailers, as well as the risk associated with it. As tax challenges take center stage for retailers, technology will be needed to manage and mitigate risk without spending ample hours and money trying to get and remain compliant.

George Trantas is senior director of global marketplaces at Avalara, a provider of tax compliance software and automated solutions.