There’s that trope about how online shopping means you can get everything from groceries to furniture without ever having to leave your house. Whether you’re shopping on your smartphone or from your computer, the internet really has had a dramatic impact on the way consumers think about what and how they buy. Online businesses are even scratching the instant gratification itch with same-day (and even same-hour) shipping.
With a world of options literally at consumers’ fingertips, there’s an even bigger change the internet has enabled: global shopping. A click is a click, and whether a shopper is buying from down the road, across the country, or around the world, they expect a smooth, transparent transaction. While the exposure to billions of potential customers is wonderful for businesses of all sizes, the expanding market can present a huge challenge for those unprepared to deal with the tax implications of cross-border selling.
Global commerce is a double-edged sword: the customer base is huge — billions of people shop online worldwide — but adding additional cross-border markets presents three specific challenges:
1. More Countries, More Problems
For companies still wrangling with the implications of the United States Supreme Court decision in South Dakota vs. Wayfair, Inc., the tax challenges of expanding into global markets may seem insurmountable. Beyond knowing sales tax, a business must be adept at handling value-added tax (VAT), goods and services tax (GST), customs duties (also called tariffs), import fees, and the variations of each from country to country.
In addition to different tax systems, businesses need to properly assign Harmonized System (HS) codes to all their goods. The first six digits of the code are standardized across all participating countries; however, each country appends its own set of digits to classify a product based on specific parameters and regulations.
Each country also has its own laws governing what can be sold by whom. For example, tax rates applied to imports from Canada to China may be applied differently than those same products when coming from the United States.
2. Great Expectations
Success in launching global sales depends largely on a company’s ability to provide a good customer experience, regardless of where the customer is located. Shipping is a critical factor in the equation: both how long it takes and how much it costs. The “Prime-ification” of e-commerce means customers expect their order now, or tomorrow at the latest. For international transactions, setting up an efficient fulfillment system and clearly communicating shipping times is key to starting the experience on the right foot.
More complicated is setting expectations for price. Between assigning the correct HS code and properly applying the correct taxes, tariffs, shipping and import fees, transparency at the point of sale can be difficult. Some businesses are tempted to omit these fees at checkout, but surprising customers with costly fees upon delivery is never a good experience. In addition to creating unhappy customers, it can also result in rejected shipments, placing the cost of return on the business.
3. The Cost of Doing Business
Before embarking on cross-border expansion, businesses must consider international complexities and invest in ways to manage them. This can mean upfront investment in market analysis, product testing, localization, and tax compliance. Some businesses guess at HS codes, undervalue goods to avoid having to calculate or pay tariffs or import fees, or classify sales as gifts to avoid taxes altogether. When businesses get caught, they can be charged hefty fines or lose trade privileges altogether.
The Good News: No Business is an Island
For each of the challenges associated with global commerce, there are solutions to be had. In terms of tax compliance there are three common approaches:
- Hire a professional. Several accountants and firms work with companies expanding into international trade. They have the expertise needed to determine HS codes, correctly apply rates, abide by local laws, and so on. Third-party help can be a valuable asset, providing flexible services and on-demand support for smaller companies with limited product catalogs.
- Bring it in-house. Some businesses opt to hire their own compliance staff. The staffs often include subject matter experts on the various taxes and fees associated with imports and exports, as well as researchers who maintain HS libraries and monitor international laws, rules, regulations and trade.
- Automate the process. Automation solutions may make the most sense for businesses entering the global retail space. Depending on the number of countries, breadth of products, and staff available to handle rates and regulations, an automated tax solution may be the most efficient, cost-effective way to manage tax compliance. There are programs for item classification, rate calculations, reporting, and returns filing. Intelligent automation solutions can integrate with other business systems, including ERPs, ECMs, online retail platforms and bookkeeping software.
A World of Possibility
Despite the complexity of tax compliance on a global scale, expansion into international markets is often a sound business growth strategy. The more interconnected the world becomes, the more inevitable it is to sell beyond borders. Success requires proper planning and investing in the right sales process. And, of course, a lengthy discussion with a tax professional familiar with international taxes.
Liz Armbruester is senior vice president of global compliance operations at Avalara, automated tax compliance software.
Related story: The Future of Cross-Border E-Commerce