For ecommerce businesses selling in multiple states, streamlined and error-free tax management is of existential importance. Papa John’s, Whole Foods, and Hertz are vivid illustrations of how inaccurate tax collection can result in high penalties and lead to class actions initiated by customers.
This is where tax automation makes a big difference, easing the tax pains and promising a lot of perks to online businesses:
- Accuracy – automated tax calculations in line with your product specifics and government tax regulations
- Real Time Tax Information – real-time alerts informing you about nexus thresholds and tax regulation updates across specific regions
- Efficiency – reduced costs and time spent managing tax compliance
- Risk management – decreased risk of audits due to accurate sales tax calculation and on time filing
- Business growth – automated tax compliance for the new markets and sales channels
- Customer loyalty – streamlined tax transactions with instant tax rate calculations for the overall cost transparency
In our talk with Avalara, a leading tax compliance software provider, and X-Cart, an eCommerce platform with 20+ years of experience, we’ve unpacked the most critical tax challenges that online sellers face and worked out solutions to help you make your tax management system work for your unique business needs.
Does tax automation work the same for All ecommerce business types?
Unsurprisingly, the answer is no. Although the basic steps are pretty much the same, tons of nuances specific to each business model can make tax management confusing and challenging. This especially rings true for businesses with complex tax scenarios, such as drop shippers, multi-channel sellers, and hybrid ecommerce businesses combining B2B and B2C sales.
Drop shipments involve a customer and two businesses, which means two sales transactions in more than one state. In most cases, the customer pays sales tax to the seller, who then remits the tax to the state and provides a resale exemption certificate to the supplier. Taxation nuances depend on such factors as the locations of all three parties, the taxability of the goods, and their economic nexus in a particular state.
How automation resolves the challenge: Automated solutions validate and store exemption certificates to calculate sales tax accurately, applying the latest rules and regulations.
Online merchants selling on marketplaces
Marketplace facilitator laws shift the responsibility for handling sales tax from the merchant to the marketplace, making it collect and remit taxes on the items sold through the platform on the seller’s behalf. The trickiest thing is that these laws aren’t in place across all states and differ for each marketplace. This is why multi-channel sellers should discuss all tax details with each marketplace in advance to stay compliant with the various jurisdictions and avoid overpaying.
How automation resolves the challenge: With the proper tax software, sellers can collect data from all their sales channels, monitor filing schedules in a single dashboard, track the approaching nexus threshold, and receive alerts for potential errors, ultimately getting a complete picture of their tax liability.
Hybrid ecommerce businesses
For ecommerce businesses that sell both B2C and B2B, the main challenge while managing their taxes is obtaining an exemption or resale certificate from the buyer and validating tax-free sales of taxable goods to exclude those transactions from tax calculations.
How automation resolves the challenge: The automated solution determines whether the transaction is B2B or B2C and calculates the tax based on the type of product and location where you are selling. It also validates exemption certificates at checkout to maintain them and automatically charges no tax, provided that a valid tax exemption certificate is on file.
Recurring revenue businesses
Recurring billing can translate into a source of sales tax risk. For example, in some states, the economic nexus is determined by 200 transactions per calendar year. With a business selling subscriptions, a state may consider a subscription that’s billed monthly to be 12 separate transactions in one year, which may result in hitting that 200 transactions threshold very fast.
In addition, for subscription-based businesses, sales tax can be determined based on the transaction’s origin or the item’s destination, but a few states use a combination of rules.
How automation resolves the challenge: Given so many nuances, subscription-based businesses may need to automate their tax compliance to understand where their companies have a sales tax liability (nexus) and know exactly what tax rate to apply while keeping an eye out for sales tax holidays, tax-exempt transactions, and more. It may also be helpful to hire an expert to break down all the subtleties of sales taxation in specific regions and help set up the automation tool. .
What tax automation systems can’t do for your ecommerce business
Given the unique features of any ecommerce business coupled with dynamic sales tax requirements, there are some limitations and nuances that tax automation can’t account for. According to online sellers’ feedback on tax software, the most frustrating thing about tax tools is a cookie-cutter approach to tax management. While sales tax automation helps reduce tax risk and manual work, it’s essential to accurately set up the inventory, locations, and checkout process to collect appropriate data and determine accurate sales tax rates.
Tax automation is NOT implemented with a set-it-and-forget-it approach
Sales tax automation is most effective when the rules and the processes are clear-cut in advance. This primarily relates to correctly registering your nexus before collecting taxes and ironing out all the details specific to your business, so the appropriate data is being collected and organized to provide accurate sales tax rates. Furthermore, as your customer reach expands, your sales nexus footprint will likely change, requiring you to adjust your sales tax software accordingly.
Scott Petereson, Vice President of U.S. Tax Policy and Government Relations at Avalara is sure that automation can be a real time saver: “For a small business, figuring out the requirements and carrying them out can be a lot of work that takes resources away from the core of your business. Sales tax automation software, which integrates seamlessly into popular ecommerce or accounting systems, can help.”
Jordan Checketts, CCO of X-Cart, also agrees on that: “As you scale, your ecommerce processes get more demanding, be it product catalog management, fulfillment or tax minutiae. This is where automation can save you lots of time and effort.”