The adjective “seamless” now goes hand-in-hand with the phrase “customer experience” for a good reason: these capabilities deliver a competitive advantage to most business-to-consumer (B2C) and business-to-business (B2B) companies across all industries, and particularly in the retail industry.
Top-notch customer experience proficiencies can be difficult to achieve in the omnichannel era, however. New complexities make it challenging to accurately calculate and report sales tax and value added tax (VAT) in compliance with a dizzying number of constantly changing indirect tax rates and rules in the US and throughout the world. 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 customer experience problems and potentially costly compliance risks.
As a result, it is vital for e-commerce systems to include streamlined tax calculation, reporting, and compliance functionality. This need has intensified over the past year due to a sweeping legal change concerning the taxation of e-commerce in the US, as well as new digital taxation rules in the European Union (EU) — with many more such changes all but guaranteed to follow.
Although chief marketing officers (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 systems must help address if retailers and other companies are to attain and sustain customer experience excellence.
Wayfair and Other Drivers of E-Commerce Complexity
In June 2018, the US 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. Since that decision was finalized, numerous states have been busily updating their sales tax rules. Under these new and emerging 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 for 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.”
Of course, managing B2C e-commerce transactions from a tax compliance standpoint involves a number of complexities beyond Wayfair-related rules changes, including:
- Rapidly changing US sales tax rules and rates: The onslaught of post-Wayfair changes to state tax laws is causing high levels of confusion, in part, because so many changes to state, municipal, and local sales tax rates occur each year. In 2018, 619 standard sales tax rate changes occurred throughout the US. During the past decade, there were a total of 5,886 standard new and changed sales tax rates — with an average of 588 changes annually during that stretch. Determining the correct sales tax on a product in accordance with the many tax jurisdictions whose rules apply to each online transaction, depending on where the buyer and seller are located, is a non-trivial matter. Depending on where, say, a candy bar is purchased, it may be designated by tax authorities as a standard grocery item, a sugar item, or even a nutritional food; each of those product categories may 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 must 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. Increasing numbers of countries in Europe and Asia have either implemented new tax rules targeting digital activities or are considering doing so. The UK’s digital tax rules take effect in 2020, for example, while approval of France’s new digital taxation proposal is expected in the spring of 2019. Additionally, the Organization for Economic Co-operation and Development (OECD) has invested several years in developing digital taxation rules it intends to finalize by 2020. Other global regulatory changes also affect the processes through which organizations calculate tax and protect customer data — which explains why Gartner recently identified regulatory pressure as one of four hidden forces that will shape marketing activities and influence the customer experience in 2019.
- Large product mixes and customer expectations: Retailers that offer thousands of products through their storefronts also face the ongoing challenge of categorizing and managing those products to ensure taxes are accurately calculated on each product depending on a range of factors, including product types, transaction locations, and tax exemption status. As most B2C companies are well aware, customers expect these calculations to occur accurately and invisibly regardless of where and how — via mobile phone, in a physical store, or through a marketplace facilitator, for instance — they buy, return, or service their purchases.
4 Questions That Quell Complexity
Ideally, an e-commerce system should contain functionality that mitigates those areas of complexity while also improving sales tax capabilities — without costly custom integration development. When assessing the degree to which a current e-commerce system delivers that capability, or when considering a new solution, it helps to ask the following tax-related questions:
- 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 for tax functions to manually update this “tax content” in response to constantly changing rules and rates, tax professionals have more time to invest in more strategic planning and analysis activities.
- How much custom work is needed to integrate sales tax functionality and the e-commerce system? Answers to this question 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.
- Regardless of the online storefronts a company uses, is tax accurately calculated on all products the first time? Every transaction that moves through the e-commerce system needs to be taxed appropriately. Ensuring the accuracy of these tax calculations should not require manual work by the tax function.
- How does the sales tax functionality handle the proper identification and assignment of jurisdictional rules? This is a crucial question. With any e-commerce solution, the single most critical aspect of tax calculation is jurisdiction identification. That process should be automated to ensure that every single 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 US transactions) return full 9-digit ZIP codes and the relevant tax area identifications.
Given the staggering complexity confronting retailers and most other companies, it should come as welcome news that combining Vertex and SAP technology enables a seamless solution for automated sales and use tax calculations.The combined solution — where Vertex tax calculation functionality integrates with SAP Commerce Cloud provides best-in-class tax automation, either in the cloud or on premise. To learn more, visit our website or the SAP App Center.