Navigating the Compliance Challenges of an Online-First Holiday Season

The holiday shopping season is upon us and many retailers have shifted their focus to building up inventory and staffing in preparation for a longer-than-usual online shopping season. While retailers go through this process every year, preparing for holiday shoppers this year comes with an added layer of uncertainty as the COVID-19 pandemic continues and consumers flock to online shopping channels. Concerns over the health and safety of patrons and employees, combined with an increased emphasis on convenience among consumers has driven up e-commerce sales leading up to the holiday season.

E-commerce during the holidays isn’t a brand-new concept for retailers, as they've been selling online for more than two decades. However, what is different about this year’s holiday season is the amount of traffic and reliance being placed on e-commerce channels. Retailers are preparing their systems, distribution channels and employees for a season heavy on online orders and light on in-person interactions. And while many businesses are focused on serving their customers effectively and strategizing ways to differentiate themselves online, a primarily online holiday season also increases the need for retailers to understand and manage their compliance obligations. Ensuring that your business has the technology in place to manage expanding compliance obligations will be key to reducing risk, maintaining customer experience, and scaling your online operations this holiday season.

Expanding Sales Tax Obligations Through Economic Nexus 

Many online retailers could experience a boost in sales this holiday season, which could cause them to unknowingly trigger new sales and use tax obligations that they may be unfamiliar with. In June 2018, the Supreme Court decision in South Dakota v. Wayfair, Inc. granted states the ability to impose sales tax obligations on remote sellers even if the business has no physical presence in the state. Today, more than 40 states have enacted economic nexus laws and require remote sellers to register, collect and remit sales tax if they meet the state’s established sales revenue threshold. With each new state that a business must collect and remit sales tax, businesses face the onerous process of manually extracting sales tax calculation data from multiple sales channels, as well as navigating individual state Department of Revenue websites for filing and remittance.

A surge in online sales due to holiday shopping means that retailers will be more likely to attract customers in new states. As such, retailers will need to understand the sales tax laws in each jurisdiction they sell into as each will likely have different sales tax rates, rules and processes. Whether a retailer is selling through one e-commerce platform or multiple online channels, manually tracking sales tax obligations and accurately complying all while trying to stay on top of the surge of online sales could quickly turn into a nearly impossible task.

Understanding Remittance Obligations With Marketplace Facilitator Laws

Due to the prevalence and popularity of major online marketplaces, many e-commerce sellers also include a marketplace storefront in their online strategy. Similar to economic nexus laws, marketplace facilitator laws add another layer of complexity for retailers to consider. These laws impose an obligation on the marketplace facilitator to collect and remit sales tax on behalf of marketplace sellers. Staying true to the nature of sales tax, marketplace facilitator laws vary by state in their application and definition, which makes staying compliant even more difficult. Today, more than 43 states and the District of Columbia have adopted individual versions of the marketplace facilitator law to capture revenue from marketplace sales.

What makes marketplace facilitator laws tricky for individual sellers is the complexity around who has to remit the sales tax and how those sales impact economic nexus obligations. While these laws relieve third-party sellers from having to remit the tax on sales made through the marketplace, some states count marketplace sales as part of economic nexus thresholds. As the seller, the onus is on you to determine whether you’ve reached a nexus threshold and who is responsible for collecting and remitting in order to remain compliant.

Conquering Tax Compliance With Automation Technology 

An online-first holiday season opens up numerous opportunities for retailers of all sizes to reach more customers and increase sales. At the same time, the added tax complexity that comes with a successful online sales strategy can place a detrimental burden on retailers. For sellers that don’t have the processes and technology in place to manage changing sales tax obligations in real time, a boost in e-commerce sales can make this task extremely time consuming and costly to manage, while also putting their business at risk for future audits.

As this year’s holiday season picks up speed, retailers should consider enlisting the help of tax technology to alleviate the burden of tracking every tax policy change, trying to get every tax calculation right, and instead focus on creating a seamless online shopping experience for your customers. Failing to comply with online sales tax obligations brought on by an increase in e-commerce sales and rapidly changing tax laws could have a long-lasting financial impact on retailers as customers face inaccurate checkout totals and tax authorities come looking for the sales tax that's owed.

Liz Armbruester is senior vice president of global compliance operations at Avalara, automated tax compliance software.