Prevent eCommerce Taxation from Taxing the Customer Experience
“Seamless” now goes hand-in-hand with the phrase “customer experience” for good reason: It delivers a competitive advantage to most B2C and B2B companies across all industries, particularly retail.
Most businesses and organizations recognize the need to put customer experience first, but there’s some compelling reasons why top-notch CX proficiencies can be difficult to achieve in the omnichannel era.
One of the big challenges has to do with e-commerce taxation.
Don’t tax the customer experience
New complexities make accurate calculation and reporting of sales tax and value added tax (VAT) incredibly difficult. Add to that a dizzying number of constantly changing indirect tax rates and rules in the U.S. and throughout the world, and you’ve got a perfect storm of confusion.
While the term “seamless” refers to qualities like “unified,” “smooth,” and “continuous” when describing the customer experience across multiple channels and touchpoints, the term translates to “accurate” and “invisible” when applied to a company’s tax management capabilities.
When tax calculations for online transactions are inaccurate – or so noticeable as to be disruptive – they can give rise to CX problems and potentially costly compliance risks.
As a result, it’s vital for e-commerce systems to include streamlined tax calculation, reporting, and compliance functionality. This need has intensified due to sweeping legal changes concerning the taxation of e-commerce in the U.S., as well as new digital taxation rules in the European Union (with many more changes guaranteed to follow).
It’s a team effort: Everyone is responsible for CX
Although CMOs and their marketing teams are primarily responsible for designing and delivering customer experience, the execution of this strategy requires the involvement and support of the entire organization, including the tax function.
Right now, most tax functions are contending with a volatile combination of compliance issues that e-commerce platforms must help address if retailers want to attain and sustain CX excellence.
The Wayfair decision and other drivers of e-commerce complexity
Last June, the U.S. Supreme Court’s South Dakota v. Wayfair ruling determined that individual states can now require online sellers – regardless of where they are based globally – to collect sales tax on out-of-state transactions.
As you can imagine, states have been busy updating their sales tax rules. Under these post-Wayfair rules, online sellers and “marketplace facilitators” – online platforms through which transactions are conducted – that surpass specified revenue and transaction-volume thresholds must collect and remit sales tax.
The confusion surrounding changing state tax rules when it comes to online sales has become so intense that one state tax agency, the Pennsylvania Department of Revenue (DOR), recently turned to social media to make an important clarification: “If you receive a letter from a business letting you know that you may owe Pennsylvania use tax,” according to the tax agency’s Facebook post, “it is not a scam.”
B2C e-commerce taxation: Hold on to your hats
Managing B2C e-commerce transactions from a tax compliance standpoint poses a number of complexities beyond Wayfair-related rules change, including:
Rapidly changing U.S. sales tax rules and rates: Part of the confusion post-Wayfair is because so many changes to state, municipal, and local sales tax rates occur each year.
In 2018, 619 standard sales tax rate changes occurred in the U.S. During the past decade, there were a total of 5,886 changed sales tax rates – an average of 588 changes annually.
Determining the correct sales tax on a product so it’s in accordance with the many tax jurisdictions – whose rules apply to each online transaction, depending on where the buyer and seller are located – is not a trivial matter.
A candy bar may be designated by tax authorities as a standard grocery item, a sugar item, or even a nutritional food; each of those product categories could have a different sales tax rate, and those rates vary across different states, cities, and local jurisdictions.
This complexity increases exponentially when companies have customers in multiple countries.
New global tax rules: Tax functions in global companies also contend with new VAT rules in Europe and a surging movement among global tax authorities to tax e-commerce transactions within the jurisdiction where the customer resides.
More countries in Europe and Asia have either implemented new tax rules targeting digital activities, or are considering it. The U.K.’s digital tax rules take effect in 2020, while France’s digital taxation proposal is expected to be approved this spring.
Additionally, the Organization for Economic Co-operation and Development (OECD) has invested several years developing digital taxation rules it plans to finalize by next year.
Other global regulatory changes also affect the processes by which organizations calculate tax and protect customer data – which explains why Gartner identified regulatory pressure as one of four hidden forces that will shape marketing activities and influence customer experience in 2019.
Large product mixes and customer expectations: Retailers offering thousands of products via storefronts also face the ongoing challenge of categorizing and managing those products to ensure taxes are accurately calculated. This depends on a range of factors, including product types, transaction locations, tax exemption status, and more.
As most B2C companies are aware, customers expect these calculations to occur accurately and invisibly, regardless of where and how (i.e., via mobile phone, in a physical store, through a marketplace facilitator, etc.) they buy, return, and/or service their purchases.
4 questions that can help simplify e-commerce taxation issues
An e-commerce system should contain functionality that mitigates areas of complexity, while also improving sales tax capabilities—without costly custom integration development.
When assessing whether a current e-commerce system delivers that capability and/or when considering a new solution, it helps to ask the following tax-related questions:
1.) Are all relevant tax rules and rates continually and automatically updated? All domestic and global rates and rules required for accurate calculation of sales and use tax ,as well as product taxability, should reside in the system in a centralized manner. By avoiding the need to manually update this “tax content” in response to constantly changing rules and rates, tax professionals have more time to invest in strategic planning and analysis activities.
2.) How much custom work is needed to integrate sales tax functionality and an e-commerce system? Answers to this should range from “not much” to “barely any.” Complicated, time-consuming integrations between sales tax applications and e-commerce systems can – and should – be avoided.
3.) Regardless of the online storefronts a company uses, is tax accurately calculated on all products the first time? Every transaction moving through the e-commerce system must be taxed appropriately. Ensuring the accuracy of these tax calculations shouldn’t require manual work.
4.) How does sales tax functionality handle the proper identification and assignment of jurisdictional rules? This is a crucial question. With any e-commerce solution, the most critical aspect of tax calculation is jurisdiction identification. That process should be automated to ensure that every transaction has the proper jurisdiction assignment to trigger the accurate tax calculation rules.
When a new customer address is entered into the e-commerce system, the tax functionality should examine that information, flag and correct any inaccuracies, and (for U.S. transactions) return full 9-digit zip codes and relevant tax area identifications.
Given the staggering complexity confronting retailers and most other companies, retailers should assure that their e-commerce platform solutions can provide a seamless solution for automated sales and use tax calculations.
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