For e-commerce businesses selling in multiple states, streamlined and error-free tax management is of existential importance.
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 the company's product specifics and government tax regulations;
- Real-time tax information: Real-time alerts informing users 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 new markets and sales channels; and,
- Speed and visibility: Streamlined tax transactions with instant tax rate calculations for overall cost transparency.
Below, we've unpacked the most critical tax challenges that online sellers face and worked out solutions to help organizations make their tax management system work for their unique business needs.
Unsurprisingly, tax automation doesn't work the same for all e-commerce business types. 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, multichannel sellers, and hybrid e-commerce businesses combining B2B and B2C sales.
Drop shippers
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
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 e-commerce businesses
For e-commerce businesses that sell both to consumers and to businesses, 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
Given the unique features of any e-commerce business, coupled with dynamic sales tax requirements, there are some limitations and nuances that tax automation can't account for. According to
Tax automation should not be implemented with a set-it-and-forget-it approach. It is most effective when the rules and the processes are clear-cut in advance. This primarily relates to correctly registering a seller's nexus before collecting taxes and ironing out all the details specific to their business, so the appropriate data is being collected and organized to provide accurate sales tax rates. Furthermore, as their customer reach expands, their sales nexus footprint will likely change, requiring them to adjust their sales tax software accordingly.
Scott Peterson, 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, COO of X-Cart, agrees with that: "As you scale, your e-commerce 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."
