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As a result of changing customer expectations, businesses have to refocus on digital efforts. Especially retailers must adopt a successful omnichannel strategy to create a seamless experience for customers across all the channels that they sell their products. Automating and simplifying complex compliance interactions are the pain points of digitalization. Every step of the compliance process should be solved with a unique suite of products built for the businesses’ needs. Avalara maintains its leading position in the industry by offering cutting-edge solutions to automate every step of businesses’ tax compliance journeys. Scott Peterson, President of Government Relations and U.S. Tax Policy at Avalara, talked about the primary tax challenges faced by businesses and how to reduce the complexity of tax compliance.
Could you tell ERP News readers about yourself and your role at Avalara?
I’m vice president of government relations and U.S. tax policy at Avalara. In this role, I work closely with all levels of government to assist our customers with their compliance obligations. I’m also Avalara’s go-to for all things U.S. tax policy. My day-to-day job is focused on understanding how the sales tax landscape is evolving in the U.S. and how it impacts Avalara and our customers.
The world went online overnight when the pandemic hit, and e-commerce adoption accelerated rapidly. What laws exist in the U.S. that made sales tax particularly challenging as e-commerce has accelerated?
Economic nexus laws, stemming from a 2018 Supreme Court decision, are the primary regulations that apply directly to e-commerce sales. The laws require remote sellers who sell goods and services in a state above an amount set by the state (called the state’s economic nexus threshold), to register for sales tax within the state. Before 2018 a business would have needed a physical presence in a state to owe sales tax, they now only must meet certain sales and/or transaction volumes.
Economic nexus laws were made possible by a June 2018 Supreme Court decision in South Dakota v. Wayfair, Inc. that granted states the ability to impose sales tax on remote sellers. Today, 45 states, parts of Alaska, Puerto Rico, and the District of Columbia have economic nexus laws.
Many businesses that went online for the first time or expanded their e-commerce operations at the beginning of the pandemic discovered because of economic nexus laws that they must start collecting sales tax everywhere for the first time. Because e-commerce sales can grow quickly across channels and jurisdictions, it’s possible for businesses to trigger new obligations unknowingly if they aren’t managing them closely.
Because e-commerce happens in real-time and tax rules are constantly changing, it’s nearly impossible to effectively manage sales tax manually. Automation is key to tax compliance in the digital age.
Could you talk about the primary tax challenges faced by businesses in SaaS/IT industries?
The SaaS/IT industry is particularly burdened by economic nexus laws for a couple of reasons. First, what is SaaS/IT can change very quickly, and much quicker than state laws change? That results in states finding it difficult to understand and attempting to fit new versions of Saas/IT into old laws. The Saas/IT industry often learns this during a state sales tax audit when it is impossible to pass the tax on to a customer. Second, many SaaS/IT products can be used simultaneously by multiple users in multiple states. It is very common for the buyer of a SaaS/IT product to expect the seller to collect the proper amount of sales tax based on the location of the multiple users. This increases the compliance complexity and forces the SaaS/IT seller to understand all the sales tax nuances across the country.
How does Avalara reduce the complexity of tax compliance and eliminate the time-consuming, repetitive work so that the businesses can focus on more strategic and value-added activities and grow their businesses?
Every business has tax compliance requirements for what it buys and sells. Avalara provides advanced technology solutions to automate nearly every step of the tax compliance journey. From registering your business and calculating the tax on transactions to managing exempt sales and filing returns – Avalara has solutions for it all.
Avalara can reduce complexity for our customers due to our leading tax content database. Through a combination of technology and a team of tax content researchers, we maintain an up-to-date database of tax rates, rules, forms, and more. This content not only makes our tax determinations more accurate but also removes the burden for our customers to stay on top of changing rules.
Automation also significantly reduces the time businesses have to spend on tax compliance. A survey from 2021 found that small and midsize businesses spend 163 hours per month on sales tax compliance when done manually – that’s a significant amount of time dedicated to a function that provides no value to a business.
By automating tax compliance, business owners, tax teams, and others involved in tax compliance for businesses can dedicate that time toward business requirements that impact the bottom line and their customers.
What does the future hold for sales tax policy? How should businesses prepare?
Sales tax is constantly changing. As we look to the future, there are a few things businesses should be mindful of and prepare for. The first is enforcement.
The passage of economic laws in recent years is indicative of the state tax authorities’ desire to capture as much revenue from commerce as they can. As such, we’re likely to see enforcement of these laws (and other sales tax requirements) increase over time as authorities look to close the tax gap between what should be collected and what gets collected.
Another trend in tax that businesses should be prepared for is the gradual shift to real-time compliance. While this is years away for the U.S., we’re seeing the adoption of near real-time tax compliance laws around the world. Today, 60 countries have enacted or announced the intent to move to an e-invoicing system, whereby businesses must validate transactions with governments. As tax authorities in the U.S. look to cut down on the tax gap and keep pace with emerging technologies, it’s likely we’ll see similar legislation make its way here.