How Tax Nexus Is Primed to Change.

Author:Schaffner, Adam

Retailers face internal and external challenges when it comes to properly managing indirect tax compliance (e.g., sales, use, and VAT-like taxes), and the many degrees of complexity are ever changing.

Internally, there are frequently too many cooks in the kitchen, and not by choice. Many people are involved in tax determination decisions inside even moderately large retailers because of system limitations and manual processes. Humans make mistakes when dealing with manual data, they grow tired of repetitive tasks, and they seek to advance their careers, eventually handing over these tedious tasks to other people. Automation is a hedge against these risks.

External drivers are equally significant, and companies simply cannot keep up with all the changes happening everywhere they do business. More than 15,000 tax jurisdictions exist in North America alone, according to Thomson Reuters ONESOURCE data. In 2016, there were more than 1,300 rate changes, including the introduction of new rates, and more than 2,500 product taxability rule changes.

While the vast majority of consumers are probably only vaguely aware of bits of weird tax law, the provisions reside largely outside the purview of consumers and don't drive their purchasing behavior. It is understandable, then, that when their online shopping cart returns a noncompliant tax rate because the data are wrong, they don't notice.

But eventually, someone does notice--someone who works on your tax team, or for an auditor, or for a tax authority. The best-case scenario in this instance is that an adjustment is made to the order, and the company pays for it directly. Many retailers will need to have fairly large pools of money to settle up on tax withholding mistakes for exactly this reason. This patchwork approach is generally not the most effective way to manage cash, and it can obscure risks that can become more serious over time.

A somewhat more tolerable outcome is leaving money on the table, a scenario that assumes an overpayment of tax. Underpayments are prevalent as well.

Worst-Case Scenario

The worst-case scenario is that the problem goes unaddressed until the tax authority discovers it, and the tax team is on the hook for various penalties and increased scrutiny from tax regulators, investors, and internal stakeholders.

Forty-five states have a sales tax, and each differs from the others, sometimes drastically. But one common thread is the concept of a sales tax nexus, generally defined...

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