While shoppers that took Black Friday seriously now have an opportunity to rest from their efforts before venturing back out to the malls, tax professionals who are responsible for businesses' sales taxes may find it hard to keep up with the demands of the holiday season.
"The complexity during Black Friday, Small Business Saturday and Cyber Monday into the holiday season is due to the serious uptick in transactions that happen during the holiday time," said Charles Maniace, vice president of regulatory analysis and design at indirect tax software solution provider Sovos. "It's a crucible in which a retailer's tax systems and processes are put to their maximum test. If there's a weakness or vulnerability, it's going to be revealed and become a problem during the holiday."
Retailers need systems that keep up with the latest tax rates, rules and requirement changes. If they apply the wrong tax rates, that could lead to customer service problems.
"The last thing you need during the holiday season is people flooding your customer support line with questions about why you're applying incorrect sales tax," said Maniace. "It's a customer service disaster. And it creates the greatest audit exposure because that's where the highest volume is."
Retailers may encounter problems with their auditors as well.
"People are buying a large volume of goods at this time, and if a retailer is applying the wrong tax rate, it's a recipe for a future audit liability that's going to sit on your books for a couple of years until the auditors come knocking and then it will reveal itself in a very painful way," said Maniace. "The other issue is scalability and whether your solution can handle the increased volume. If you have an automated solution, is that solution capable of supporting you in your most challenging time? Can it handle the increased volume without doing something incorrect or inaccurate?"
There is also a potential issue in the interplay with economic nexus, according to Maniace.
"There's still a whole bunch of states, including California, that say your obligation to collect and remit sales tax occurs during the next transaction after you cross an economic nexus threshold," he explained. "For smaller sellers, it means that if they experience a holiday spike, if they cross the threshold during the holiday, then they become obligated to collect and remit sales and use tax on the next sale. So let's say a state has a $100,000-in-gross-sales threshold, and they cross that threshold after Black Friday but before Cyber Monday. Technically they have an obligation to collect and remit a tax on Cyber Monday."
The only way a company can turn around on a dime and go from being not compliant to being compliant is by having a solution in place that allows you to effectively turn on your compliance with the flip of a switch or a phone call, Maniace observed.
"You have to be able to work with your provider on an immediate basis, flip a couple of switches in your solution, and start collecting and remitting on a timely manner," he said. "This is where technology providers prove their mettle — are they truly up all of the time, and will that uptime persist when all of their clients are pinging the system for transactions that are happening in real time."
Retail delivery fees: The next big trend?
Colorado introduced a retail delivery fee several years ago, and Minnesota followed with its own version in July 2024. Maniace foresees other states developing such a fee in coming years, with each one differing from the other.
"It's a 50 cent fee applied to orders over $100 that include either a taxable item or non-taxable clothing," he explained. "There's a mechanism in Minnesota law that allows a seller to either pass this on to their customer directly as a charge on their invoice or absorb the cost. A seller may choose to absorb that cost, and that may work for them for a period of a few months, but when they do that, it comes out of their bottom line. Unless they're overtly raising their costs to account for something like the retail delivery fee, it's coming out of their profits. It's a relatively recent law change, and if you haven't adopted it or accounted for it on an automated basis, it's going to really cut into your profits come this Christmas."
The fees may become more widespread in the years ahead.
"A number of other states have expressed interest in it," Maniace noted. "Washington commissioned a study on it, and Nebraska considered it in their last special session, but ultimately chose not to adopt it. I suspect that this coming legislative session, and future ones, we could see a number of other states adopting something like the retail delivery fee. When you pyramid one on top of another, with each one working differently, you're adding a great deal of complexity."
