What Retailers Don’t Know About Sales Tax Could Hurt Them
In the world of retail, nothing is constant — not even death or taxes. In fact, tax law is one of the most fluid and evolving issues that online merchants face daily. What taxes are required to be collected by retailers? What counts as nexus? How in the world can you always know which taxes are applicable to a specific address? And right when you think you’ve got taxes figured out, here comes a tax-free weekend somewhere.
Since sales taxes vary between states, counties and municipalities, keeping up with every tax law is impossible for any retailer. Tax rates change, new cities are formed, land gets incorporated into existing cities ... the fluidity is practically endless. And since ZIP codes are merely representative of what U.S. post office services a specific address, they're poor indicators of what sales tax rates are applicable. In many regions of the country, houses that are literally right next door to one another can have different tax liabilities.
Tax Collection Responsibility is Increasingly on Retailers
At the dawn of e-commerce, sales tax liability rested almost entirely with customers. The law was that customers were to pay sales taxes on online purchases when filing personal tax returns at the end of the year. However, this was a requirement that authorities routinely turned a blind eye to. The federal Due Process clause gives state government teeth to force retailers to collect sales tax on e-commerce transactions, and the number of states enforcing that law continues to grow.
However, the same law only requires merchants to collect sales tax in states where they have a physical presence, or “nexus.” How is nexus defined? Does it have to be an actual storefront, or could it be a warehouse or even a single salesperson or IT staffer that works remotely? The answer is unfortunately extremely blurry, and differs from state to state. Before a retailer can even begin to navigate the more than 11,000 different tax jurisdictions in the United States, they have to determine where they do and do not have tax collection responsibilities.
Paperland: Navigating the Bureaucracy
Imagine for a moment that a retailer was actually capable of navigating this tax minefield to accurately determine what jurisdictions it's required to collect sales taxes for and what each rate was. That solves the problem of collection, but remitting the appropriate revenue to each jurisdiction still represents a logistical nightmare. Properly addressing this issue internally without an army of accountants on payroll is simply impossible.
Today, there are a number of tax automation solutions that take this function out of the hands of retailers and do all the heavy lifting for them. For most retailers, it's preferable to consider tax automation services that are cloud based, therefore changes to tax laws are reflected immediately when they're enacted. However, it's also vital that merchants interested in using these services are operating on retail management software that supports them and integrates seamlessly.
At Celerant Technology, we recommend that all of our clients consider automating tax collection and remittance. Not only does it take the guesswork out of deciphering complex tax laws and applying the rates to orders, it buys back time for retailers to concentrate on their core competencies.
Zeke Hamdani is director of web services for Celerant Technology, where he's responsible for the development of e-commerce modules that seamlessly integrate with the Celerant Command retail software platform.