IDC Analyst Connection: E-Commerce Explosion Makes Sales Tax Compliance Even More Difficult

The rise of online sales makes automating sales tax compliance an imperative for small and medium-sized businesses, says Kevin Permenter, director of research at IDC.

We recently asked Permenter five questions about the changes he’s seeing as more shoppers turn to online shopping. Here are his expert opinions and recommendations.

How has the shift to omnichannel commerce caused by the pandemic affected corporate tax obligations?

The number of people and businesses selling online and moving towards a digital business model is exploding. At IDC, we’ve seen even traditional companies add digital products and services to take advantage of the rising digital tide. As a result, many other businesses are subject to online tax compliance.

At the same time, digital tax compliance laws are increasing at a rate we’ve never seen before. The tax compliance landscape is changing rapidly, and it’s happening all over the world. In the United States, the rules of economic nexus emerge and change at both the state and city levels. In Europe, rules and standards such as Making Tax Digital (MTD) in the UK and Standard Audit File for Tax (SAF-T) in the European Union. Italy, Norway, Germany, Belgium and Hungary implement slightly different versions of SAF-T.

Businesses must also consider the rise of Market Facilitator laws that require facilitators to collect and remit sales tax. This is an added layer of complexity when doing business in the digital economy. Marketplace laws will continue to expand as more countries recognize marketplaces as potential sources of tax revenue, especially as the growth of online shopping makes it easier for even small merchants to meet thresholds. requiring them to collect and remit taxes.

The complexity of maintaining compliance — maintaining registrations and licenses, meeting reporting deadlines — is simply overwhelming. This is especially true for companies that lack the tools to deal with the enormous complexity.

Omnichannel sales are making tax compliance more difficult and complex than at any other time in human history, and no matter how you look at it, the complexity will only increase over the next few years.

What are generally the main tax compliance steps for businesses?

Generally speaking, companies should do these things:

  • Understand where they have tax obligations or a connection

  • Registration and license to collect tax in these places

  • Determine the correct taxation and rates in each jurisdiction for all their different products

  • Manage documentation for exempt sales

  • Prepare and file returns that meet all appropriate deadlines

  • Retain documentation for any potential future audits

There are many confusing points for small businesses at every stage. Determining the link, for example, can be confusing and can really feel overwhelming. Nexus laws can vary widely from state to state in the United States, as can a company’s obligations to comply with them. This is true whether you are a US company or a foreign company trying to sell in the US market.

Then, once you have determined your nexus and the taxability of your products, you need to accurately calculate the amount of tax to collect and remit. Software tools can be helpful throughout the compliance process, but it’s in sales tax calculations that indirect tax tools really make their money.

It would simply be impossible for the typical small e-commerce seller to do accurate calculations without the help of sales tax software. These tools leverage collective sales tax rate data for more than 13,000 U.S. sales and use tax jurisdictions and enable omnichannel retailers to give customers accurate, real-time views of sales tax. sale associated with a product at the point of sale.

How should businesses integrate tax into their checkout and payment processes?

The regulatory landscape for individual online sellers is constantly changing, with state and local jurisdictions changing their requirements and procedures, as well as businesses themselves gaining new customers in remote areas. The heaviest part of this burden falls on small and medium-sized retailers, as typically their tax management resources – in terms of time, money and staff – are more limited.

Quick and accurate tax calculation is an important aspect of the overall customer experience. This gives buyers confidence that they are getting the right price and dealing with a professional, detail-oriented organization. This trust is essential as online sellers look for ways to differentiate themselves in a crowded e-commerce marketplace.

An additional aspect of the customer experience relates to product returns. Software that can handle invoicing the correct tax across a wide variety of return scenarios can also impact customer experience and build brand loyalty.

One last thing: the amount of data that tax managers are faced with can be a major hurdle. Moving data quickly and easily between business applications is critical. To ensure proper tax compliance, omnichannel businesses need tax technology that integrates with every system that creates an invoice. When businesses explore tax management software, the depth and maturity of their API strategy should be a primary consideration.

How can businesses apply artificial intelligence and machine learning to improve tax compliance?

Tax software vendors are working to embed intelligence into tax compliance workflows, for things like managing exemptions, product codes, tax calculations, and reporting. They also use robotic process automation and more advanced technologies such as artificial intelligence (AI) and machine learning (ML) to automate lower-level tasks:

  • Businesses are already using AI to perform lower-level repetitive tasks, such as calculating the appropriate sales tax rate for the appropriate jurisdiction.

  • Software companies are experimenting with chatbots and virtual assistants to help users determine the link or collect and/or remit the correct amount of tax

  • Some software companies are making great strides in using AI/ML to address the product classification challenges faced by many e-commerce merchants.

At IDC, we expect these trends to continue and become key factors in determining market positioning among corporate tax software vendors.

What are the main areas of innovation in tax automation?

The adoption of cloud technology is reshaping the corporate tax management function and the pace of this evolution will only accelerate.

The cloud enables anywhere, anytime access, enabling businesses to be flexible and agile to deal with rapidly changing business dynamics. In the future, businesses will require extensive automation capabilities to cope with the massive data load generated during the sales tax management process.

Data management is another factor. The volume of data and the increasing pace of commerce put immense pressure on tax managers. As a result, strong API-based integrations have become a focal point among tax professionals. APIs allow developers and managers to quickly add or change data flows in and out of the software application, allowing tax management systems to be more flexible as business needs grow. evolve. Tax data can be shared seamlessly between related systems – your CRM, ERP and e-commerce systems – adding a layer of process efficiency.

Automation will also play an important role in breaking down the walls of traditionally siled activities such as tax compliance, inventory management, and accounts payable. It will form the backbone of a data management framework, enabling greater coordination, collaboration and communication.

Businesses demand a single view of their company’s financial condition, and the rise of automation has finally made that possible.

One more thing: AI/ML is rapidly evolving to become an essential part of tax management. Our research at IDC found that over 76% of tax managers would be willing to pay extra for software with AI/ML technology. As digital commerce continues to grow, the demand for AI/ML will also increase. It will be a “must have” feature of tax management software in 2022 and beyond.

For more on this topic, read our guide for online sellers to sales tax compliance.

This article is taken from an IDC Analyst Connection report, sponsored by Avalara and published in February 2022.

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